Management Practices in Europe, the US and Emerging Markets

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Management Practices in Europe, the US and Emerging MarketsNick Bloom (Stanford Economics and GSB)John Van Reenen (LSE and Stanford GSB)Lecture 4: Management and firm Performance1

Nick Bloom and John Van Reenen, 591, 20122Lincoln & influences on incentives management

Incentives/People Management practices

Targets ManagementNick Bloom and John Van Reenen, 591, 201222.42.62.833.23.43.6United StatesSwedenGermanyJapanItalyFranceUKCanadaUSAustraliaPolandMexicoChinaNew ZealandPortugalIndiaChileBrazilArgentinaRepublic of IrelandGreeceForeign multinationalsDomestic firmsMultinationals Appear to Achieve Good Management Practices Wherever They LocateSample of 7,262 manufacturing and 661 retail firms, of which 5,441 are purely domestic and 2,482 are foreign multinationals. Domestic multinationals are excluded that is the domestic subsidiaries of multinational firms (like a Toyota subsidiary in Japan).Management scoreNick Bloom and John Van Reenen, 591, 2012Labor Market Regulation Inhibit good Incentives ManagementNote: Averaged across all manufacturing firms within each country (9079 observations). We did not include other sectors as we do not have the same international coverage. Incentives management defined as management practices around hiring, firing, pay and promotions. The index is from the Doing Business database http://www.doingbusiness.org/ExploreTopics/EmployingWorkers/ArgentinaAustraliaBrazilCanadaChileChinaFranceGermanyGreat BritainGreeceIndiaItalyJapanMexicoNew ZealandPolandPortugalRepublic of IrelandSwedenUKUS2.62.833.20102030405060World Bank Rigidity of employment index (0-100)Incentives Management (management sample)Nick Bloom and John Van Reenen, 591, 2012SUMMARY OF SOME DETERMINANTS OF MANAGEMENT (& PRODUCTIVITY)Product market competition Meritocratic CEO selectionHuman CapitalOwnershippublic sectorMultinationalsprivate equityLabor market regulationsNick Bloom and John Van Reenen, 591, 201256Wrap up on Lincoln & drivers of good management


Targets ManagementNick Bloom and John Van Reenen, 591, 201267Incentives (people) managementToday we will run through 6 dimensions on incentives management (part of HR and talent management)

The concept is around the management and motivation of people

As before, while the data is mainly for manufacturing, these questions have been used in retail, hospitals, schools, healthcare clinics, tax collection agencies, charities, PPPs and law firmsNick Bloom and John Van Reenen, 591, 20127Setting up your clickerPress GO

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Then slowly press GO again

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Nick Bloom and John Van Reenen, 591, 2012Score(1): People are promoted primarily upon the basis of tenure (3): People are promoted upon the basis of performance (5): We actively identify, develop and promote our top performers (16) Promoting high performers Nick Bloom and John Van Reenen, 591, 2012Open questions. Creates problems of misallocation of workers and exit of the more able workers.(16) Promoting high performers(1): People are promoted primarily upon the basis of tenure (3): People are promoted upon the basis of performance (5): We actively identify, develop and promote our top performers

Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (16), promoting high performers all countries, manufacturing11All countries, manufacturing firms (100 to 5000 employees), 9820 observationsAverage 3.02Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (16), promoting high performers: developed countries, hospitals12Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observationsAverage 2.44Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (16), promoting high performers : developed countries, schools13Schools in Canada, Germany, Sweden, UK, US777 observationsAverage 2.41Nick Bloom and John Van Reenen, 591, 2012(14) Rewarding high performance(1): People within our firm are rewarded equally irrespective of performance level (3): Our company has an evaluation system for the awarding of performance related rewards (5): We strive to outperform the competitors by providing ambitious stretch targets with clear performance related accountability and rewards


The survey scores to question (14), rewarding high performance all countries, manufacturing15All countries, manufacturing firms (100 to 5000 employees), 9820 observationsAverage 2.61Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (14), rewarding high performance: developed countries, hospitals16Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observationsAverage 2.31Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (14), rewarding high performance: developed countries, schools17Schools in Canada, Germany, Sweden, UK, US777 observationsAverage 2.18Nick Bloom and John Van Reenen, 591, 2012Score(1): Poor performers are rarely removed from their positions (3): Suspected poor performers stay in a position for a few years before action is taken (5): We move poor performers out of the company or to less critical roles as soon as a weakness is identified(15) Removing poor performers Nick Bloom and John Van Reenen, 591, 2012Regulation important but not only thing MNE example, moving people out(15) Removing poor performers(1): Poor performers are rarely removed from their positions (3): Suspected poor performers stay in a position for a few years before action is taken (5): We move poor performers out of the company or to less critical roles as soon as a weakness is identified


The survey scores to question (15), removing poor performers all countries, manufacturing20All countries, manufacturing firms (100 to 5000 employees), 9820 observationsAverage 3.11Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (15), removing poor performers USA, manufacturing21Manufacturing firms (100 to 5000 employees), 1291 observationsAverage 3.73Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (15), removing poor performers Japan, manufacturing22Manufacturing firms (100 to 5000 employees), 176 observationsAverage 2.78Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (15), removing poor performers France, manufacturing23Manufacturing firms (100 to 5000 employees), 605 observationsAverage 2.90Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (15), removing poor performers India, manufacturing24Manufacturing firms (100 to 5000 employees), 1135 observationsAverage 2.81Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (15), removing poor performers US, Canada and UK, retail25All countries, retail firms (100 to 5000 employees)660 observations

Average 3.03Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (15), removing poor performers: developed countries, hospitals26Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observationsAverage 2.56Nick Bloom and John Van Reenen, 591, 2012Score(1): Our competitors offer stronger reasons for talented people to join their companies (3): Our value proposition to those joining our company is comparable to those offered by others in the sector(5): We provide a unique value proposition to encourage talented people join our company above our competitors (17) Attracting human capital Nick Bloom and John Van Reenen, 591, 2012(17) Attracting human capital(1): Our competitors offer stronger reasons for talented people to join their companies (3): Our value proposition to those joining our company is comparable to those offered by others in the sector(5): We provide a unique value proposition to encourage talented people join our company above our competitors


The survey scores to question (17), attracting human capital all countries, manufacturing29All countries, manufacturing firms (100 to 5000 employees), 9739 observationsAverage 3.06Nick Bloom and John Van Reenen, 591, 2012Score(1): We do little to try and keep our top talent. (3): We usually work hard to keep our top talent. (5): We do whatever it takes to retain our top talent. (18) Retaining human capital Nick Bloom and John Van Reenen, 591, 2012(18) Retaining human capital(1): We do little to try and keep our top talent. (3): We usually work hard to keep our top talent. (5): We do whatever it takes to retain our top talent.


The survey scores to question (18), retaining human capital all countries, manufacturing32All countries, manufacturing firms (100 to 5000 employees), 9782 observationsAverage 2.55Nick Bloom and John Van Reenen, 591, 201233Some drivers of good management


Targets ManagementNick Bloom and John Van Reenen, 591, 20123334Targets managementRun through 5 dimensions on targets management (questions 8 to 12 on the grid)

The concept is around the setting of stretching targets

As before, while the data is mainly for manufacturing, these questions have been used in retail, hospitals, schools, healthcare clinics, tax collection agencies, charities, PPPs and law firmsNick Bloom and John Van Reenen, 591, 201234Score(1): Goals are exclusively financial or operational (3): Goals include non-financial targets, which form part of the performance appraisal of top management only (they are not reinforced throughout the rest of organization) (5): Goals are a balance of financial and non-financial targets. Senior managers believe the non-financial targets are often more inspiring and challenging than financials alone.(8) Target balance Nick Bloom and John Van Reenen, 591, 2012(8) Target balance(1): Goals are exclusively financial or operational (3): Goals include non-financial targets, which form part of the performance appraisal of top management only (they are not reinforced throughout the rest of organization) (5): Goals are a balance of financial and non-financial targets. Senior managers believe the non-financial targets are often more inspiring and challenging than financials alone.


The survey scores to question (8), target balance all countries, manufacturing37All countries, manufacturing firms (100 to 5000 employees), 9824 observationsAverage 2.89Nick Bloom and John Van Reenen, 591, 2012

38India, manufacturing firms (100 to 5000 employees),1136 observationsAverage 2.44The survey scores to question (8), target balance India, manufacturingNick Bloom and John Van Reenen, 591, 2012

The survey scores to question (8), target balance US, Canada and UK, retail39All countries, retail firms (100 to 5000 employees)661 observations

Average 2.74Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (8), target balance: developed countries, hospitals40Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observationsAverage 2.73Nick Bloom and John Van Reenen, 591, 2012

The survey scores to question (8), target balance: developed countries, schools41Schools in Canada, Germany, Sweden, UK, US777 observationsAverage 2.70Nick Bloom and John Van Reenen, 591, 2012Score(1): Goals are based purely on accounting figures (with no clear connection to shareholder value). (3): Corporate goals are based on shareholder value but are not clearly communicated down to individuals(5): Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations. (9) Target interconnection Nick Bloom and John Van Reenen, 591, 2012

(9) Target interconnection (1): Goals are based purely on accounting figures (with no clear connection to shareholder value). (3): Corporate goals are based on shareholder value but are not clearly communicated down to individuals(5): Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations.


Target interconnection (9):all countries, manufacturing44All countries, manufacturing firms (100 to 5000 employees), 9813 observationsAverage 3.01Nick Bloom and John Van Reenen, 591, 2012Score(1): Top management's main focus is on short term targets . (3): There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other(5): Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals (10) Target time horizon Nick Bloom and John Van Reenen, 591, 2012

(10) Target time horizon (1): Top management's main focus is on short term targets . (3): There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other(5): Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals


Target time horizon (10):all countries, manufacturing47All countries, manufacturing firms (100 to 5000 employees), 9814 observationsAverage 2.99Nick Bloom and John Van Reenen, 591, 2012Score(1): Goals are either too easy or impossible to achieve; managers provide low estimates to ensure easy goals (3): In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" that are not held to the same rigorous standard(5): Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale (11) Targets are stretching Nick Bloom and John Van Reenen, 591, 2012

(11) Targets are stretching (1): Goals are either too easy or impossible to achieve; managers provide low estimates to ensure easy goals (3): In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" that are not held to the same rigorous standard(5): Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale


Targets are stretching (11):all countries, manufacturing50All countries, manufacturing firms (100 to 5000 employees), 9819 observationsAverage 3.00Nick Bloom and John Van Reenen, 591, 2012Score(1): Performance measures are complex and not clearly understood. Individual performance is not made public (3): Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged (5): Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition(12) Performance clarity Nick Bloom and John Van Reenen, 591, 2012

(12) Performance clarity (1): Performance measures are complex and not clearly understood. Individual performance is not made public (3): Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged (5): Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition


Performance clarity (12):all countries, manufacturing53All countries, manufacturing firms (100 to 5000 employees), 9821 observationsAverage 2.67Nick Bloom and John Van Reenen, 591, 2012 My favourite quotesInterviewer: How many production sites do you have abroad?Manager in Indiana, US: Wellwe have one in TexasAmericans on geographyProduction Manager: Were owned by the MafiaInterviewer: I think thats the Other category..although I guess I could put you down as an Italian multinational ?The difficulties of defining ownership in EuropeNick Bloom and John Van Reenen, 591, 201255Wrap up1) Large variation in targets practices best organizations set broad, clear and balanced targets which are tough but feasible

2) Variation common across all industries we have looked at manufacturing, retail, schools, hospitals, clinics and charities

3) As with monitoring potential for improvement is extensive, especially in smaller organizations and developing countries


The survey scores to question (15), removing poor performers: developed countries, schools56Schools in Canada, Germany, Sweden, UK, US777 observationsAverage 2.50Nick Bloom and John Van Reenen, 591, 2012

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Management Practices in Europe, the US and Emerging Markets