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Archive for December, 2009

There has been a lot written recently about executive compensation. What got me thinking about it most recently is an article in the WSJ.

Compensation should serve to 1) attract, 2) retain and 3) motivate talent. The third point I’ll save for another posting. Satisfying the first two requires firms to benchmark against the other firms that are competing for the same talent (note: firms that compete for talent may not necessarily compete for sales). There is an entire industry of HR consulting and executive recruiting firms that earn their fees helping companies with this benchmarking.

Remaining wage competitive is the reason so many banks and auto manufacturers are worried about government imposed caps on compensation. The logic goes that if they can’t offer competitive compensation, they won’t be able to attract the talent necessary to salvage their companies. What’s missing is any acknowledgement of the winner’s curse. Compensation is a great example of how imperfect, private information can cause a bidder to overpay.

There’s no doubt in my mind that some people are paid more than the actual value they add to a company – at every level. Junior analysts at investment banks are Excel monkey. I don’t care if they live in the office.  Over time, through the absurdities of corporate promotion policies, people advance and their earnings become ever more disconnected from the value they add.  A sense of entitlement seems to have been derived in part from unreasonable wage expectations  that leaves illegal labor filling in the jobs Americans don’t want.

There is reason to believe the wage difference between highly developed economies such as the US and the rest of world is not sustainable. A readjustment of our wage expectations may be in order as economies such as China, India and Brazil realize their potential. While I’m skeptical about a flight of valuable services jobs oversees akin to the offshoring/outsourcing trend of recent memory, I do believe competition from foreign labor markets will exert a downward pressure on wages.

Along the way, there will be corollary lifestyle adjustments in order: smaller houses, fewer cars, maybe even less consumer debt and more savings. I think that’s the kind of slow recovery we are in for after this last bubble’s burst, which isn’t necessarily a bad thing. There’s substantial evidence that income inequality leads to instability, and in a digital, wired world images abound of how much better the haves have it. The manifestation is anti-western sentiment, couched in other issues. The transition to lower wages and consumption habits won’t be painless but managed well, it will help us get to a better place.

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There’s a great article this month in Wired magazine on the actual science behind what makes an outsider’s perspective valuable. Considering the issue’s theme, the article’s title seems to suggest that there is something in the way screw ups effect the brain that increases the chances of success in the future.

In actuality, the article discusses the physiological explanations for phenomenon such as “the burden of knowledge” and “confirmation bias.” Functional magnetic resonance imaging (fMRI) has revealed that our brains edit signals from our senses to fit into a mental model of reality that we have constructed over time. (If you think about it, our senses don’t actually paint a full picture of “reality” anyway, e.g. the visible spectrum of humans does not extend into ultraviolet but it does for bees.)

Our mind has evolved in this way to allow us to quickly make sense of a lot of information at one time. The trade off is that sometimes our mind will simply overlook important information in the interest of expediency. Other times, we’ll misinterpret the information. Think about it: have you ever been working on a paper when at some point you ceased to really see the words on the page, instead almost reading from memory, so that you really couldn’t catch typos?

The article makes a compelling argument for bringing a new perspective in on an issue to help turn a perceived failure into a win. Insiders tend to be operating under similar assumptions so they’ll tend to mishandle information that doesn’t fit well into their mental model in the same. An outsider will have a different mental model, enabling that person to make connections and recognize opportunities that might otherwise be overlooked. While an insider might preemptively eliminate a possible solution from consideration, an outsider who doesn’t know what he doesn’t know is likely to experiment more and look further afield for possible solutions.

Methods such as brainstorming (or ideation, depending on the zeitgeist) have evolved to help disrupt mental models – to color outside of the lines, if you will.  Breaking free of the constraints of mental models is also part of what makes open innovation work so well. Open innovation incorporates a much larger, more diverse set of mental models, increasing the chances of uncovering something that was previously overlooked. It is hard to predict where the aha moment is going to come from so open innovation deals with this by spreading its bets. Insiders still play an important role; it’s the combination of insider and outsider perspectives that make open innovation such an effective model though.

I especially enjoyed this article because it validates what I am trying to do with this blog. Most [popular] business bloggers are career coaches, successful entrepreneurs, best selling authors or otherwise have done something to establish their credentials as thought leaders. I do not pretend to be any of those things. I’ve got a good though fairly common resume. MBA from what I consider the best business school in the US, a stint on Wall Street, a stint in management consulting. Enough to have something of an insider’s perspective, but I still consider myself outside the corporate establishment. We’ve stopped questioning some of the standard operating models in business, either because change seems too daunting or because we’ve lost the ability to see a better way. I think there is a better way.

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Let the air in

Business needs a breath of fresh air.

There’s a better way to organize than highly political, hierarchical silos and overly complex matrices.

There’s a better way to compensate than inflated bonuses, golden parachutes and exaggerate long right-tailed income distributions.

And there are voices worth listening to other than just the tired voice of experience that becomes  laden with confirmation bias, group think, cynicism and risk aversion.

That’s what this blog aspires to be.  It’s  an exploration of what’s possible – a better way.  Better ways of collaborating.  Better ways of innovating.  Better ways of doing business.

I myself am a business professional, not an academic, so I will build my cases anecdotally more often than empirically.  My intent is to irreverantly question convention with no particular claim to authority. I’m not pretending to have any definitive answers here.  I’m just trying to develop my own thinking, and I invite you to join me in the conversation. The floor is now Open.

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