“Jonathan Cohn”:http://www.tpmcafe.com/story/2005/7/18/114013/338 asks whether there’s any good reason to believe that nice guys do indeed finish first in the business world.
bq. I’d love nothing more to believe that treating employees well is actually better business than treating them shabbily. But at the moment, anyway, count me as skeptical.
As I think I’ve mentioned before, Gary Miller has used economic theory to make exactly this argument, in a series of publications over the last fifteen years (this “piece”:http://www.isnie.org/ISNIE99/Papers/millerg.pdf co-written with Dino Falaschetti, gives a good flavour of his work). Miller uses social choice theory and game theory to argue that managers, if they are to get workers to deliver their full effort, need to be able to make credible commitments to them that their efforts will be rewarded over the longer term. It’s thus a good idea to keep a strict separation between management and owners. Efforts to make the interests of stockholders and managers coincide with each other are going to weaken management’s ability to credibly commit to workers that they will continue to be employed, as managers become more interested in chasing short term stock market gains than in ensuring the long term health of the company. Long term success, for Miller, is produced through “gift exchange” in which managers credibly commit to insulate workers from the pressure for short term profits, and workers reciprocate by giving additional effort. One of Miller’s examples of a firm that used to do this very well is rather timely. From Miller’s 1992 book, “Managerial Dilemmas”:http://www.powells.com/search/DTSearch/search?partner_id=%2029956&cgi=search/search/&searchtype=kw&searchfor=gary%20miller%20managerial%20dilemmas :
bq. Another condition for the achievement of cooperative equilibria in a repeated game is the mutual expectation that the relationship will go on long enough to justify the investment in cooperation. This was achieved at Hewlett-Packard by an early decision by the two founders not to be a “hire and fire company,” but one in which employees would have the security of employment commitment. In the 1980 recession, this policy was tested severely, but everyone in the organization took a 10 percent cut in pay and worked 10% fewer hours so that no one would be fired (Peters and Waterman 1982: 44). This confirmed everyone’s subjective belief that the relationship was long-lasting and that employee efforts were not going to be exploited for short-term gain by Hewlett-Packard.
How “things have changed”:http://www.washingtonmonthly.com/archives/individual/2005_07/006756.php.
{ 15 comments }
Bernard Yomtov 07.20.05 at 6:57 pm
It’s thus a good idea to keep a strict separation between management and owners. Efforts to make the interests of stockholders and managers coincide with each other are going to weaken management’s ability to credibly commit to workers that they will continue to be employed, as managers become more interested in chasing short term stock market gains than in ensuring the long term health of the company.
Huh? This assumes an awful lot. Is it proven that shareholders are more interested in short term stock market gains than the long-term health of the company? I don’t think so. Don’t many compensation schemes have exactly the opposite effect on management incentives?
And isn’t it a bit odd that the example chosen to establish the wisdom of this strategy is one where management and ownership were anything but separated?
derrida derider 07.20.05 at 7:42 pm
Its all part of the broader point, long familiar to labour (ie anglosphere minus North America, plus the non-anglosphere) economists but seemingly ignored by labor economists, that restrictive internal labour markets, fixed ports of entry, promotion by seniority, etc – all the old-fashioned approaches – yield efficiencies as well as generating inefficiencies.
The optimal approach from managers’ and owners’ POV is an empiric question, and is highly dependent on the nature of the work.
joel turnipseed 07.20.05 at 11:15 pm
I wonder… aren’t a lot of our governing assumptions (ranging from management-labor expectations to life-span of companies) based, in the US (though I expect increasingly elsewhere, too–cf. VW’s issues in Germany), based on a kind of Golden Age spanning from, say, NIRA/Wagner Act to invention of spreadsheet & global telecommunications infrastructure? That is–which are the stable entities doing the bargaining here? In a corporate welfare state like the US, in which so many social benefits are provided by corporations rather than the state, and where (at least, if my memory of a few-year-old McKinsey report serves) the last fifty years have seen a radical reduction in the life-span of companies… just who is doing the bargaining with whom? Maximizing what opportunity? Here in Minneapolis we’re about to see a strike between the Mechanics’ Union and NWA–has either party there got a prayer in hell of coming out ahead in next decade? Having a job? Making a nickel on an investment? What are the UAW/Big Two going to do when China is selling $10K minivans in the US?
Seems like a) globalization b) huge pools of capital c) extraordinary sophistication of business/banking/legal infrastructures and d) rapid rate of technological change have made the idea of “long-term rate of return” something of a joke, and a travesty of the idea of a “job for life.”
Seems, further, that this poses greatest risk to US, with its laggard regard for social welfare in general and its New Deal/Big Union legacy of corporate, rather than government, benefit funding and management.
Tom T. 07.20.05 at 11:17 pm
I’m not sure that an agreement to work 10% fewer hours is the best example of “workers reciprocating by giving additional effort.” Somewhat more seriously, I think there’s an argument to be made that shafting 100% of one’s workers out of 10% of their pay is not necessarily better than shafting 10% of one’s workers out of 100% of their pay. I’m risk averse, so I would probably prefer the all-around pay cut, but others might prefer to take their chances with the layoffs in hopes of holding on to their whole salaries.
Also, I’m not sure that H-P is a good example of the “short-term thinking is bad” thesis. Fiorina’s ideas for H-P were wrongheaded and ultimately disastrous, but it seems to me that her problem was the pursuit of a foolish long-term Big Idea (one-stop technology shopping, as described in the linked WaMo article), not an obsession with short-term profit. Fiorina’s severance package is a monstrosity, but isn’t that a failure to align her interests with the company’s, rather than an example of alignment to excess? Indeed, Fiorina’s tenure and severance pay looks like she told the H-P board in her job interview, “I intend to gamble the company on my grand vision for H-P’s future, and I expect you to pay me for that long-term vision, not for the results that it produces.” The problem was that the vision was stupid, but not that it was short-sighted.
Finally, as Bernard Yomtov alludes, H-P was long famous for offering stock options to a broad range of its employees, somewhat blurring the lines between workers and owners.
FM 07.21.05 at 1:21 am
One of the problems with mourning the death of “The HP Way” is that HP started to decline while holding onto those cherished principles. One of the reasons that the HP board hired Fiorina in the first place is that the “HP Way” had led to considerable underperformance during the early and mid 1990s. Fiorina was hired to shake things up, to inject some marketing focus and vision into a company that was too used to thinking in engineering terms – to turn an engineering company into a successful global consumer megabrand.
Another thing: as noted above, the HP board did do the right thing after hiring Fiorina – they gave her six-plus years to implement her long term plan. In retrospect, she should have been fired much sooner, but the problem here is not short-term thinking at the expense of the company, but rather an over-commitment to a long-term strategy that ignored all the short term warning signals that things were going badly off-course.
None of this should be considered a defence of Fiorina’s leadership of HP. She was a first-rate bullshitter (of an almost Steve-Jobsian level) when it came to convincing people she had a plan, but was abysmal at actually implementing it, and she seemed far more interested in building up her Q-value and name recognition than in actually doing the detail work to run HP (and she repeatedly refused to let the board appoint a Chief Operating Officer who would handle the detail work, no matter how badly she was performing.)
bad Jim 07.21.05 at 3:57 am
My own experience, as an owner and employee of a medium-sized manufacturing company in southern California (at peak, 100 employees and $30M sales), may be uselessly anomalous, but I’ll comment anyway.
We, the owners and managers, required a company that we’d be happy to work for, because we were going to be working there. Because we needed to employ other people and work beside them, the company had to be a place they’d be happy to work for, too.
We treated our ourselves and our employees as well as we could (decreasingly generous health care and pension funding, bonuses in profitable quarters). How could we have endured, much less enjoyed working there, if everyone else had been sullen or resentful?
Eventually we did cash out and screw our employees, more or less (we shared a bit of our take, and the acquiring company was generous when it closed our factory), but some of them still love us. Better this way.
bad Jim 07.21.05 at 4:15 am
Note also that the commonplace consideration of
is due to Anatol Rapaport’s minimalist “Tit for Tat” program. Treating others the way they treat you does tend to impel a version of a categorical imperative.
bad Jim 07.21.05 at 4:22 am
Rapoport. Sorry.
Henry 07.21.05 at 8:02 am
I should have been a little clearer in my post; I’m not implying that the reason HP is hurting is because it abandoned the HP way (there’s clearly a lot of other stuff going on as well) – rather that HP is an example of a firm that once gave this kind of commitment to its staff, and now very clearly doesn’t (there seems to be no sense of an obligation to share burdens as once there used to be). That said, my read (am I incorrect?) of the fight over the Compaq acquisition is that one of the issues was whether or not HP was abandoning what had made it special as a company. Nor am I trying to make some general claim (nor is Miller) that creating this bargain will always result in successful companies; rather, as Derrida Derider suggests, that there are important efficiencies that can be pursued by doing this (and tradeoffs too, which I haven’t gone into, but which should be fairly self-evident).
Bernard – the problem here is one of credible commitments which can be secured through a variety of mechanisms. A committed owner who shows his willingness to share the pain is, in Miller’s book, as good as a strict separation between management and workers.
Joel – you may want to read the piece by Hacker that I linked to recently – it’s directly relevant to the point you’re making.
Bad Jim – you’re right – Miller does use TfT, and the more general set of folk theorem results to make his claim.
Steve 07.21.05 at 8:44 am
I think it’s a new style of Executive management that looks for the easy way out of a problem–by laying off thousands of people–instead of finding inovative ways to make the company profitable. The Executives have no real incentive to make things work well for the long haul. They know they have $40M waiting for them if they do a terrible job and get fired.
roger 07.21.05 at 10:35 am
Henry, there’s a good demonstration of what Wall Street thinks of decent pay scales and median to low CEO pay in the NYT Sunday — the article about Costco, here: http://www.nytimes.com/2005/07/17/business/
yourmoney/
17costco.html?incamp=article_popular&pagewanted=print
This quote from Emme Kotzloff is precious. Marx would have snapped it up. It is a flash photo that depicts the whole mindset of Wall Street — the sheer poetry of it:
Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco’s workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.
“He has been too benevolent,” she said. “He’s right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden.”
On the model of the term “marketmaker”, I’d say that Kozloff and her numerous kind could well be called miserymakers. Miserymakers construct the expectations to which shareholders refer, when making investment decisions. And the combined effect of those decisions is to select out companies that do well treating their employees well, given that the point of the game is not only to profit, but to find areas within the company that one can turn into money for the shareholder in a very short time frame. This search is, for all practical purposes, the mechanism for increasing inequality. That increase is what contemporary wealth is all about.
mpowell 07.21.05 at 3:03 pm
As to the question of why CEO’s make so much money, the answer is simple: their friends determine how much they are paid, not shareholders. The idea that management effectively represents shareholders in the vast majority of publicly held companies is the biggest joke running. Why do you think dividends have evaporated? Its b/c when executives reinvest the company’s profits they are growing the business that they happen to manage, increasing their ego and justification for ever higher pay.
brayden 07.21.05 at 5:43 pm
Isn’t Miller just rehashing the old humanistic or commitment approach to management that was the all the rage in the 60’s?
jane adams 07.22.05 at 12:33 pm
I knew people who knew Pckard when he started buying up land in Big Sur. The impression was “pompous” and protected by sycophants. He was getting old, the praise got to him. Certainly his daughter Julie regarded herself as a queen with every right to spit on the commoners, a morally superior queen at that. Money, wealth, power, the company really exploded with the HP printer and took on elements of huge huerarchies. Helocopters ferrying top people to fancy meetings, the fancy cars (aka Apple parking lot in the early eighties where the “I’ve got more money than you so I’m better” and “ship the manual workers overseas they smell bad”) attitude first blossumed in the valley.
And HP at that time was no longer considered a brilliant or innovative company. By the late seventies it like Lockheed was one of those places that “everyone” worked before finding something more interesting. The absolute disinterest in Wozniak’s little toy was a symptom.
The founders themselves admitted they stooped understanding current electronics in the fifties. They mantained inteigirty and competence for a while and were able to shift the company from heavy reliance on bomb timers to almost no reliance on military spending in the seventies. But there strength was a wide variety of high quality products sort of tinkered together which sort of took off, the calculator and then the laser printer. The later distorted things and the instrument business was tossed off. As were loyal workers.
It’s a fairly complicated process with lots of forces combining into tragedy/farce. The current perception of the company is that it’s a printer manufacturer that tried to diversify, it isn’t percieved as the pioneer of Silicon Valley.
Gavin Cameron 07.24.05 at 4:16 am
I haven’t read Miller, but will now make an effort to track it down, but should say that economists (and labour economists, contra derrida derrider) have been thinking about these things for quite some time (see George Akerlof on Labor Contracts as Partial Gift Exchange (1982!): http://ideas.repec.org/a/tpr/qjecon/v97y1982i4p543-69.html).
Joel Turnipspeed’s point is a good one: some sets of circumstances and institutions may be good at supporting the pareto-superior equilibrium in the coordination game (see Barry Eichengreen on this, or perhaps even my paper on the Bretton Woods era: http://hicks.nuff.ox.ac.uk/users/cameron/papers/479.pdf)
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