Category Archives: evidence-based management

Executive Pay And Risk-Taking

The financial meltdown of 2008-2009 brought the attention of both the media and regulators back to the failure of corporate governance practices in general, but specifically on executive incentive systems which encourage risky investments. One of the most controversial issues is how executives are compensated and whether that impacted their risk-taking behaviors.

The outrage about executive pay was caused by the large pay-packages of some banking firms which eventually received bailout money from the federal government in the form of TARP money. CNN money has listed 2007 pay-packages of top executives from nine such banks. For example, in 2007 the total compensation for Kenneth Lewis of Bank of America was $24.8 million.

The role of incentives in risk-taking is even greater in the banking industry where the amount of debt is larger when compared with industrial firms. This is highlighted by the following article from Financial Times:

“The problem with this is that bankers are incentivised to seek bigger and riskier bets because volatility increases upside return without affecting downside risk. They are similarly encouraged to increase balance sheet leverage since this further magnifies the pay-off. And this incentive has been greatly reinforced by bonus targets related to return on equity – a classic inducement to short-term risk-taking.” By: John Plender, Financial Times, 25th Oct., 2011.

Critics of incentivized executive pay systems have proposed many ideas to curtail executive incentives in order to control the risk-taking behaviors. Such demands recur after every major economic crisis. For example, New York Times reported on March5, 1934 that Sen. Burton Wheeler complained about “Corporations in the red paying excessive salaries.” Recently, these proposals have been discussed across many countries. For example, in June 2010, U.S. regulatory agencies jointly issued the Final Guidance on Banking Incentive Compensation, designed to ensure that incentive compensation policies do not encourage imprudent risk taking in financial institutions. In last 3-4 years, countries like Canada, Germany and Holland have seen similar proposals. However, one needs to also consider other factors which have led to the growth in executive compensation and risk taking simultaneously. For example, the role of corporate boards which decide on how much to pay in what form to pay?

Corporate scandals of the last two decades or so have pushed board structures towards more independence from the management. The enactment of Sarbanes-Oxley Act (2002) and subsequent adoption of listing requirements by the national stock exchanges have made it mandatory to have a majority of independent directors. A push towards smaller and outsider dominated boards from the proponents of corporate governance reforms have significantly reduced the managerial representation on boards. These changes might have had impacted the quality of managerial evaluation and monitoring effectiveness of boards as outside board members rely on the insider directors for valuable information about a firm and its investments. In the absence of managerial inputs, outside board members could find it difficult to evaluate the quality of managerial decision making and may not design a compensation scheme that balances growth with risk taking.

We really need to understand whether the absence of these executive directors from the board room exacerbated the CEO power and hence the CEO pay-package and excessive risk taking. Without understanding these issues, we might end up adopting yet another defective system of executive incentives which almost certainly could expose us to the risk of another financial crisis.

Dr. Arun Upadhyay teaches finance courses in the College of Business at University of Nevada Reno. His primary teaching area is corporate finance. Before moving to academic world, Dr. Upadhyay worked for several years with a commercial bank in the area of credit analysis and international banking. He received Ph.D. in finance from Temple University. Prior to moving to University of Reno, he worked at University of Alaska Anchorage where he was awarded College of Business and Public Policy Best Teacher award. Dr. Upadhyay also served on the Investment Advisory Commission of Municipality of Anchorage.

Dr. Upadhyay’s research focuses on corporate governance issues. He studies corporate leadership structure and executive compensation. He has published articles on board structure in high quality finance journals such as Financial Management, Journal of Corporate Finance and Journal of Business Finance and Accounting. His work has been presented at various national and international conferences.

Seven Personal Qualities That Help And One That Hinders Influence

Want to get ahead in your career? I hope so! If you do, you need to realize that success requires more than superior job performance – it also requires the ability to influence others. Part of becoming more influence requires understanding the most important qualities that make people influential, objectively assessing your strengths and weaknesses with respect to those qualities, and believing that you can change and continually improve.

In his evidence-based management book entitled “Power: Why some people have it and others don’t,” Jeffery Pfeffer identifies seven personal qualities that can help you build power:

The two fundamental dimensions that distinguish people who rise to great heights and accomplish amazing things are will, the drive to take on big challenges, and skill, the capabilities required to turn ambition into accomplishment. The three personal qualities embodied in will are ambition, energy, and focus. The four skills useful in acquiring power are self-knowledge and a reflective mindset, confidence and the ability to project self-assurance, the ability to read others and empathize with their point of view, and a capacity to tolerate conflict. (p. 43).

Intelligence is probably the single best predictor of job performance, but Pfeffer believes it is overrated as a quality for building personal power. While studies have shown a statistically significant correlation between intelligence and income, the effect size is very small.

Intelligence might even hinder your ability to influence others. People that think they are really smart can be seen by others as arrogant and aloof. People with an inflated view of their intelligence think they can do things better than everyone else, so they often don’t bother including others as they make decisions and develop strategies. Intelligence can also be intimidating, and “although intimidation can work for a while, it is not a strategy that brings much enduring loyalty.” (p. 56)

Obtaining influence is a worthy goal if you intend to use your power to help those you’ve been given the privilege to lead accomplish a shared purpose. If you understand what it takes to become more influential, and you are willing to put forth the effort and persevere and learn from setbacks, then you have a power reason to be hopeful for the future of your career.

What do you think? Please share your thoughts in the comment section below!

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Success Takes More Than Performance

We have an amazing group of students in our Executive MBA program at UNR. They all have a strong desire to advance their careers by becoming better leaders in their organizations.

Is superior job performance enough to succeed and advance in your organization? The truth is performance alone is probably not enough. Even if you perform well, it’s going to be tough for you to get ahead if your supervisor does not like you; however, if you perform with distinction, you are more likely to strengthen your supervisor’s relationship with and commitment to you. Keep in mind that if your supervisor does not like you, it will have a negative impact on how she or he perceives and evaluates your performance in the first place.

In his brilliant evidence-based management book entitled “Power: Why some people have it and others don’t,” Jeffrey Pfeffer argues that you are going to need to acquire power to get ahead at work, and “one of the biggest mistakes people make is thinking that good performance – job accomplishments – is sufficient to acquire power” (p. 22). According to Pfeffer:

The people responsible for your success are those above you, with the power to either promote you or to block your rise up the organization chart. And there are always people above you, regardless of your position. Therefore, your job is to ensure that those influential others have a strong desire to make you successful. That may entail doing a good job. But it may also entail ensuring that those in power notice the good work that you do, remember you, and think well of you because you make them feel good about themselves. It is performance, coupled with political skill that will help you rise through the ranks. Performance by itself is seldom sufficient, and in some instances, may not even be necessary. (p. 35).

If you want to succeed, you are going to have to develop your understanding of the principles of power and be willing to use them with political prowess. Performance matters, but if you aspire to be an effective executive, you are going to need more than performance.

What do you think? Please share your thoughts in the comment section below!

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Eight Activities For Self-Development Of Leadership Skills

Leadership development requires a combination of formal training (e.g. obtaining an Executive MBA), developmental activities within your organization (e.g. coaching, job rotation, and performance evaluation), and self-development activities. In his book entitled “Leadership In Organizations,” Gary Yukl identifies the following eight suggestions for how we can develop ourselves as leaders (p. 482):

  1. Develop a personal vision of career objectives
  2. Seek appropriate mentors
  3. Seek challenging assignments
  4. Improve self-monitoring
  5. Seek relevant feedback
  6. Learn from mistakes
  7. Learn to view events from multiple perspectives
  8. Be skeptical of easy answers

Leadership requires the ability to form influential relationships with others in order to consistently achieve changes that matter to the shared purpose of the organization (not just yourself). Lots of folks have the formal training and are exposed to great developmental activities, but never make the transition to becoming truly effective leaders. The discipline of self-development is what distinguishes truly great leaders from the rest.

Bob Sutton and Jeff Pfeffer argue that the gap between knowing and doing is more important than the gap between ignorance and knowledge. Without a system of self-development you can’t effectively translate what you know about leadership into habitual behaviors that help others accomplish purposeful change. Self-development is a personal responsibility that will help you master and leverage the knowledge and skills you acquire in a formal training program like the Executive MBA from UNR.

What do you think? Please share your thoughts in the comment section below!

Bret L. Simmons, Ph.D.

Bret Simmons is associate professor of management in the College of Business where he teaches courses in organizational behavior, leadership, and personal branding to both undergraduate and MBA students.

Simmons earned a master’s degree in international management from Whitworth College in Spokane, Washington, and a Ph.D. in business administration/management from Oklahoma State University, Stillwater. Simmons blogs about leadership, followership, and social business and teaches organizational behavior, management and organization science, international management and entrepreneurial psychology at the University.

 

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Focusing On Performance Enhances Employee Motivation

Does improving employee motivation require improving job satisfaction? Not necessarily. We all know people that love their jobs because they have a great salary and supportive co-workers, but at work do only enough to get by. By the same token, many of us have had jobs that for one reason or another were less than stellar (e.g. budget cuts, poor leadership), but we still gave a good-faith effort to perform on a daily basis.

In his book “Becoming The Evidence-Based Manager,” Gary Latham states “if you want motivated employees, you should focus on ways your employees can be high performers, rather than focusing on ways to increase their job satisfaction per se” (p. 85). Productive employees are often very satisfied employees; consequently, Latham believes that the ability to be productive is the real heart of motivation.

Partner with your employees to continually improve the systems (e.g. staffing, training, policies) that keep them from being as productive as they know they can be. Help them make daily progress doing work they find meaningful and watch as their motivation, performance, and satisfaction flourishes.

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Encouraging Dissent Helps Inspire Your Employees To Execute Strategy

Far too few leaders understand the value of employees that tell us what we need to know instead of what they think we want to hear. Many leaders view a lack of dissent as a good sign, but it is actually a very bad sign. In his book “Becoming The Evidence-Based Manager,” Gary Latham says the following:

An absence of complaints is often an indicator of an absence of hope. By embracing and welcoming criticism, you send your people a strong signal that you care about their concerns. They may have discovered that the vision and goals that were bang-on in the fall are no longer on target this winter. Dissent is an antidote to groupthink, which occurs when people agree with that they know to be wrong. (p. 53).

Hope thrives when people are willing to put forth effort to accomplish goals they value and understand how to achieve. You need to know immediately when people begin to lose confidence in the vision or no longer clearly understand how to make daily progress in work they find meaningful.

Encouraging dissent will help ensure that both the content and process of your leadership is relevant and effective. Your role as a leader is to not to control but rather to convene the conversation about how to best execute the strategy.

What do you think? Please share your thoughts in the comment section below!

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Avoid Demotivating Your Employees With These Five Points

Perceptions of unfairness inhibit the inner work life of your employees, which makes unfairness a powerful demotivator.  Evidence-based managers understand the power of negative events and assume responsibility for making their workplace as fair as possible.

In his book “Becoming the Evidence-Based Manager,” Gary Latham states “failure on your part to put principles of justice front and center will kill worker motivation as feelings sweep through your team that some people are getting a better deal than others.” (p. 92). Latham provides the following five-point checklist that we can use to help ensure that our employees perceive that our decisions and actions are fair (pp. 92-93):

  1. How will resources – salary, bonuses, office space – be distributed?
  2. Do you have agreed-upon processes or systems for determining who gets what (for example, a salary increase, a bigger office) and why?
  3. Have you explained to your people the logic of your decisions as to who gets what?
  4. Are the agreed-upon processes for making decisions applied consistently?
  5. Have you taken your employees’ viewpoints into account before you make your decisions?

Make sure your employees know their voice counts. Make it a matter of processes and policy to consult employees on important decisions that will affect them, and invite your employees to hold you accountable for this process. If you discover signs of lagging motivation in your employees, it might be because your employees have discovered you don’t value justice as much as they do.

What do you think? Please share your thoughts in the comment section below!

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Five Keys To Employee Motivation

Most managers I meet admit that motivating employees is one of the most challenging issues they struggle with. In my EMBA class on Organizational Behavior, we spend several weeks digesting the most recent evidence on employee motivation and engagement.

In our assigned reading from the book “Becoming the Evidence-Based Manager,” Gary Latham offers the following five evidence-based suggestions to help motivate employees to become high performers (pp. 75-76):

  1. Attend to employees’ psychological and security needs
  2. Make sure your employees have high, specific goals
  3. Focus on job performance
  4. Understand and change the work environment if necessary
  5. Avoid demotivation

What doesn’t work? The evidence shows that using money as a motivator in the form of a raise or occasional bonus does not get you much improvement in performance. Oddly enough, giving employees a monetary reward for work they would have done anyway can reduce the intrinsic appeal and satisfaction of doing the work.

Pay is important for motivation because it must be seen as sufficient and fair. Latham goes on to say:

Pay is important to the extent that it enables employees to satisfy their needs for security and autonomy. Pay is not motivating if it is not closely tied to performance. If high performers are paid the same as low performers, both job performance and job satisfaction will be low. Money is motivating to the extent it leads to the setting of and commitment to high goals. (77).

Latham is not saying that money is required for people to set and commit to high goals. Money is most effective when it is aligned with the goals people would set anyway to excel at the work they love to do.

What do you think? Please leave your thoughts in the comment section below!

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Chase The Learning

We strive to make our Online Executive MBA (EMBA) program relevant, rigorous, and evidence-based. We know the market for the EMBA degree is crowded, but we think ours is one of the best values out there from an AACSB accredited College of Business.

One of the books that is assigned reading in my Organizational Behavior class in our first cohort of students is “Becoming the Evidence-Based Manager: Making the Science of Management Work for You,” by Gary Latham. In the chapter on how to develop and train to create a high-performing team, Latham talks about the value of encouraging errors. Latham counsels that if you want the folks on your team to become creative, high performers, you as a leader have to encourage and celebrate errors.

I love Latham’s distinction of the difference between people with a learning goal orientation and those with a performance goal orientation:

People with a performance goal orientation paradoxically lack a high-performing mindset, because they focus too much on their performance. Their goal is to look good in the eyes of others. As a result, they actively avoid situations in which they run the risk of seeming incompetent. Instead, they seek assignments in which they can perform effectively. On the other hand, people with a learning goal orientation seek to master new skills and knowledge. Consequently, they enjoy challenging, difficult projects. They even seek constructive criticism. This in itself is an effective strategy because pursuing high goals makes errors all but inevitable. (p, 71)

As you pursue your EMBA, try to keep a learning rather than a performance goal orientation. Understand how to achieve in each class (e.g. pass exams, write specific types of papers, complete assignments), but then stop chasing the points and chase the learning instead. Your professors track points because they have to, but only you can really evaluate your learning.

Step outside the assigned work in each class and develop for yourself ways to apply the new information, knowledge, and understanding to change your behavior and become a better leader and organizational citizen.  That’s your responsibility to yourself, and only you can hold yourself accountable for continually improving and learning.

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