Leadership Strategies Blog

My Vote on November 4th will be for Entrepreneurship

These days, the presidential race hangs like a 45 pound weight around the neck of the collective American psyche.  Whether you’re a ‘bleeding heart’ liberal, a ‘staunch’ conservative or somewhere in between, there are likely a handful of issues that are legitimately salient to you.  There may be another 20 or so issues that you either don’t completely understand, or that you understand but do not feel strongly one way or the other.  This is the essence of our two party system—millions of citizens voting either A or B (in our case, McC(A)in or O(B)ama) on a test question that involves 25 subscales, each of which offers multiple subjective solutions. 

 

The reality is that few, if any, of the many and profound domestic challenges confronting our next president are fully resolvable by a single term in office.  The issues of ensuring greater access to and affordability of healthcare, addressing our looming entitlements crisis, making significant headway against poverty, and restraining man-made climate change will take much more than four or eight years under one president.

 

Above these important issues, improving the economy is of utmost importance and the policies our future presidents champion will have a dramatic impact on how rapidly our economy grows.  Continued growth in per capita incomes, generated through ongoing improvements in productivity, is what will drive improvements in living standards.  This faster growth is what will give us the requisite, sustainable resources to address each of our major domestic and foreign policy challenges.

 

Of course, government does not directly generate growth.  However, the private sector’s success, and thus the pace at which the economy advances, depends heavily on the rules, incentives, and basic infrastructure that government sets and provides.  None of our long-term challenges, or the opportunities afforded by faster growth, will be achieved in the future without continued innovation—new products, services, technologies, and ways of doing things.

 

American history reveals that many of the most important radical innovations—the telegraph, telephone, radio, television, automobiles, airplanes, computers and the software that operates them, and many of our current Internet-based successes (Google, Amazon, eBay)—have been introduced and commercialized first by entrepreneurs.  What we all should demand, regardless of our political affiliation, in our next president and governmental officials, therefore, is their deep understanding and promotion of policies that will best foster the entrepreneurial spirit that drives radical innovation.

 

For two decades from 1973-1993 the economy grew at only 2.5 percent.  However, from 1994 to 2000, annual growth jumped to about 4 percent.  Even after the 2000–2001 ‘recession’, and until the downturn this year, the economy still grew at roughly a 3 percent annual rate.  So what happened?

 

The conventional wisdom is that, beginning in the mid-1990s, growth surged because of the information technology (IT) revolution.  This revolution featured new technology, as well as the freedom for and support of entrepreneurs to take that technology to market.  Think for a moment about which firms made all this IT so easy to use.  The answers that immediately come to mind are companies like Microsoft, Apple, Sun Microsystems, Intel, Oracle, and Google.  The success of these entrepreneurial enterprises made it possible for the rest of us to change the way we live and for the firms we work for, or run, to churn out more products and services with ever fewer resources.  The days of large, established firms (Big Steel, Big 3 automakers, the old AT&T, etc.) driving the economy are over.

 

Looking ahead, rapid growth could not be more important.  30 years from now, per capita income will be roughly 35 percent higher if we can grow at the 4 percent annual rate we achieved in the last half of the 1990s, rather than the 3 percent annual rate that many now project for the future.  Further, over the next century the economy would be three times larger if it grew by 4 percent annually instead of 3 percent.

What can be done to maximize our chances of growing at the more rapid clip?  A few answers are apparent to me: improve education to build a more skilled workforce, reduce poverty through incentives, address our energy dependence, welcome high-skilled legal immigrants, and continue to open global markets.

 

The clear lesson from our recent past is that the central task for U.S. policymakers is to ensure that our entrepreneurial revolution continues, and that we do not slip back into anything like the Big Firm economy we once had.  Without entrepreneurs, economic growth stagnates.  Without economic growth, most of our country’s social problems will worsen.  Growth is life; stagnation is death.  In November when I walk into the voting booth and carefully choose between candidates A or B, above all else, my vote will be for entrepreneurship.

 

The entrepreneur in us sees opportunities everywhere we look, but many people see only problems everywhere they look. The entrepreneur in us is more concerned with discriminating between opportunities than he or she is with failing to see the opportunities.
-Michael Gerber

Pay for Performance?

The goal of organizational architecture is to create an organization which will be able to continuously create value for present and future customers—essentially creating systems that will optimize and organize themselves.  Organizational Architecture involves three important aspects:  the assignment of decision rights (who makes what decisions), the methods of rewarding individuals, and the structure of systems to evaluate the performance of both individuals and business units.  Corporate America has re-engineered decision rights fairly well over the last 15 years by flattening out organizations and shifting manager responsibilities.  However, most companies are falling painfully short when it comes to administering rewards and evaluating performance.

 

Rewards are extremely important in corporate America.  Rewards can be anything from receiving a restaurant gift card for finishing a project, to getting a 100-inch plasma TV for being the best sales person in the nation that year.  In order to make a reward system successful three things must be true (expectancy theory).  The first is that employees must feel that if they put in the requisite effort, that they will be able to achieve the desired performance level.  Second, they need to trust that if they achieve the desired performance level, they will receive the reward from the company.  Third, the valence of the reward must be such to motivate the employee to put in the effort in the first place.   

   

Increased emphasis in American corporations is being placed on incentive pay, or performance-based pay, in an attempt to incent workers to achieve maximum results (or at least perform above the minimum level required).   One of the problems with performance-based pay is that in order to institute a policy of rewards, the company has to put some of each employees’ pay at risk—money is taken right off the top of their salary, and now they have to earn it by performing, in many cases, at a higher level than they have in the past.  This problem is often alleviated by the company building in the ability for the employees to earn more than they used to earn by achieving the highest performance threshold.  However, this system is suboptimal for employees who will never be able to perform up to the highest level, no matter how hard they try.  Although some degree of turnover is beneficial and necessary, most organizations can’t afford to lose up to 50% of their workforce at one time.  For this reason, sometimes companies will implement an incentive program without putting any of its employees’ money at risk all—simply by adding the incentive on top of regular compensation. 

 

So why doesn’t every organization use a pay for performance system?  Critics of incentive pay have two arguments: the first argument is that money does not necessarily motivate employees; and the second is that it is difficult to design an effective compensation plan that truly rewards the highest performers.  To me, the second argument is a lot closer to reality than the first. With increasing reliance on teamwork in companies today, the already vague line between acceptable and poor performance is getting evermore hazy.  For this reason a system for performance appraisal is vital to organizational architecture.  In order for a performance appraisal system to work, the employee or team output must be observable at low cost and difficult to manipulate by employees or the company.  In addition, when evaluating teams of employees, a measure of team performance is required while still recognizing individual contributions to the team.  For example, giving individual bonuses for work toward the team goal, and then giving a separate team bonus if the team reaches its goal.

 

Where most incentive programs fall short is in the expectancy link between achieving performance and being rewarded.  That is, when a company asserts that high performance is necessary to stay in business, but does not reward high performers, what does that say to those high performers who could go to another company and perform at the same level and be rewarded for it?  The opportunity costs for high performers to work at companies that do not adequately compensate for performance are the rewards (money, recognition, job security) they could be receiving elsewhere for the same effort.  To me, the extreme disconnect between performance measures and rewards is what will drive these companies out of business.

 

It all comes back to operant conditioning: why would the mouse keep trying to learn how to get out of the maze if she never got cheese when she found her way out?  Business leaders need to invest the requisite time and resources needed to design a maze that truly separates the high performing mice from the poorer performing ones.  Then, give your mice the cheese they deserve!