“Less Countable Rewards Can Be More Satisfying”

That’s the take-away from some research on compensation, the perception of fairness and the realities of satisfaction that comes to us from Kellogg School of Management Professor Neal Roese (who I was lucky enough to work with on a case study during my last quarter there). 

An excerpt from the Kellogg Insight article on the research (emphasis, as usual, is mine):

In the popular ABC television drama “Nashville,” a young country music artist is discovered by a famous producer and offered a signing bonus. But the bonus is not cash—instead, it is a gorgeously restored, classic convertible sports car. The musician happily accepts this gleaming prize over the protestations of his manager, who reminds him that the car is worth much less than standard signing bonuses. But the advice falls on deaf ears. The young musician jumps behind the wheel of the convertible and speeds blissfully away, his hair blowing in the wind.

Why would someone be satisfied—happy even—with an obviously inferior reward? According to Neal J. Roese, a professor of marketing at the Kellogg School of Management, and Jingjing Ma, a doctoral student at Kellogg, it all comes down to how “countable” the reward is. The two argue that presenting rewards or bonuses in less quantifiable terms decreases the likelihood that recipients will compare rewards, which in turn increases their satisfaction.

Compensation specialists and managers everywhere should take note.

Read the rest of the very interesting article here. 

Bill Marriott – On Not Choosing His Son As CEO

A fascinating, long read from Bill Marriott on not choosing his son to succeed him as CEO, comes to us from HBR.

An excerpt:

…my son John, who is 52. Like all family members who have joined the company (including me), John started at the bottom, as a cook in the kitchen. He went on to work in nearly every part of the business over the next 30 years. He spent most of his adult life preparing to succeed me as CEO. He devoted his heart and soul to learning the business. If I’d followed my own heart, I probably would have chosen John as my successor.

But as time went on, I realized that it wasn’t the right fit—not for John, and not for Marriott. As personally disappointing as that was to both of us, I had to make the right decision for the company.

Read the full piece here. 

It is as much a chronicle of Mr Marriott’s thinking, as it is an account of how Arne Sorenson became CEO.

Executive Compensation, As A Competitive Tool

In an increasingly competitive world, companies wield compensation to give themselves an edge. 

With impressive margins, an ever expanding pie (of untapped markets and un-converted customers) and growing piles of cash on the books, Apple is proving to be exceptionally good at doing so.

As Adam Satariano and Hideki Suzuki write on Bloomberg, 

Last year was the second in a row that payouts at Cupertino, California-based Apple ranked among the most generous. Apple directors, who put CEO Tim Cook at the top of the heap last year, are using compensation to keep the team that transformed the iPhone maker into the most valuable technology company under co-founder Steve Jobs, who died in 2011. The urgency has increased in recent months as Samsung Electronics Co. and Google Inc. challenge Apple.

“It’s a retention strategy to keep the key executives who were present in the Steve Jobs era,” said Greg Sterling, an analyst at San Francisco-based Opus Research. “They want to be sure the actual talents that they bring to the company are retained, and also from a perception standpoint to retain confidence in the leadership.”

Since most of this compensation is (I think) in the form of restricted stock units that either vest this year and in 2016, or between this year and 2016, Apple should benefit from the execs’ expertise and experience over the next couple of years. In fact, based on their receiving more such grants every year, over the next few years, it is possible that Apple may be able to keep them around for the next several years. 

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Some additional thoughts, while we are on the subject of executive compensation:

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Jeff Bezos Writes To Amazon’s Shareholders

“Amazon exists to serve customers. Serve customers well and profits – in the long-run, revenues in the short-run – will follow”.

That seems to be the summary of Amazon CEO Jeff Bezos’ most recent letter to shareholders.

One excerpt from the letter that illustrates Amazon’s customer-specific philosophy at work, that I liked:

When you pre-order something from Amazon, we guarantee you the lowest price offered by us between your order time and the end of the day of the release date. “I just received notice of a $5 refund to my credit card for pre-order price protection. . . What a great way to do business! Thank you very much for your fair and honest dealings.” Most customers are too busy themselves to monitor the price of an item after they pre-order it, and our policy could be to require the customer to contact us and ask for the refund. Doing it proactively is more expensive for us, but it also surprises, delights, and earns trust.

Another excerpt, this time about investments in businesses that may only pay-off in the future, is also worth reading:

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Tim Cook – A Values-Based Leader

Apple and Tim Cook have been in the news of late.

In response to an unusual state-orchestrated campaign against Apple, CEO Tim Cook offered Chinese consumers an unusual apology. 

Naturally, some are surprised that Mr Cook did what he did and think that, in the good old days of Steve Jobs, this kind of “weak” behavior would never have been on display. 

But Professor Harry Kraemer, a professor of Strategy and Management at the Kellogg School of Management (and the former Chairman and CEO of Baxter International and a current executive partner at private equity firm Madison Dearborn Partners), who probably knows a thing or two about running companies thinks that Mr Cook is on to something here:

A value-based leader is self-reflective, someone who looks at a situation from all perspectives; who seeks to understand before being understood; who is willing to admit when he is wrong or when he doesn’t know; who has genuine humility and a belief that he can always get better.

Look at Tim Cook’s actions and you’ll see he was doing all these things in addressing Apple’s customer service issues in China; that is, he’s not being nice, he’s being savvy.

As to the question of whether companies can afford to operate with a value-based leader—they can’t afford not to. Customers want to buy from companies that stand behind their products and deliver them through ethical means. Employees at all levels want to be valued as contributing partners. Companies that understand these concepts will do well and generate shareholder value.

And that’s something Tim Cook certainly understands.

Bad Company Directors Just Linger On And On

What does the Board of Directors do in a company?

Ideally, in a company that is functioning well, the group of people that sit on the Board function as wise elders of the tribe that advise the CEO on running the company, but without interfering on a day to day basis. 

The CEO, ideally again, consults with the Board on the regular basis and benefits from their wisdom. Taking the ideal situation a bit further, since the company’s shareholders elect the Board (in theory), the Board is answerable to shareholders and must always keep the company’s interests at heart. The CEO, who is appointed by the board and is responsible for maximizing stakeholder (and shareholder) value, is therefore answerable to the board. Taken together, these corporate governance checks and balances ensure that the interests of the company’s owners, the shareholders, are represented effectively and adequately.

But unfortunately, that is theory.

To understand corporate governance, as it is practiced, turn to James Stewart’s disturbing article in the NYT, where, using HP as an example, Mr Stewart shines light on the many ways in which corporate governance breaks down. He also lays the blame for the repeated ways in which HP stumbled along (until Meg Whitman was brought onboard) at the feet of the company’s directors – who seem to linger on and on – and are seemingly not displaceable. 

Fascinating window into another universe, that article.