Nick Bloom, 149, 2015 The Modern Firm in Theory and Practice
Nick Bloom (Stanford Economics and GSB) Lecture 3: Management and
incentives 1
Slide 3
Nick Bloom, 149, 2015 2 Incentives/People Management Some
drivers of good management Lincoln Electric
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Nick Bloom, 149, 2015 Score(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
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Nick Bloom, 149, 2015 The survey scores to question (16),
promoting high performers all countries, manufacturing 4 All
countries, manufacturing firms (100 to 5000 employees), 9820
observations Average 3.02
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Nick Bloom, 149, 2015 The survey scores to question (16),
promoting high performers: developed countries, hospitals 5
Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183
observations Average 2.44
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Nick Bloom, 149, 2015 The survey scores to question (16),
promoting high performers: developed countries, schools 6 Schools
in Canada, Germany, Sweden, UK, US 777 observations Average
2.41
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Nick Bloom, 149, 2015 (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
Slide 9
Nick Bloom, 149, 2015 The survey scores to question (14),
rewarding high performance all countries, manufacturing 8 All
countries, manufacturing firms (100 to 5000 employees), 9820
observations Average 2.61
Slide 10
Nick Bloom, 149, 2015 (15) Removing poor performers (Making
room for talent in McKinsey speak) (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
Slide 11
Nick Bloom, 149, 2015 The survey scores to question (15),
removing poor performers all countries, manufacturing 10 All
countries, manufacturing firms (100 to 5000 employees), 9820
observations Average 3.11
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Nick Bloom, 149, 2015 The survey scores to question (15),
removing poor performers USA, manufacturing 11 Manufacturing firms
(100 to 5000 employees), 1291 observations Average 3.73
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Nick Bloom, 149, 2015 The survey scores to question (15),
removing poor performers Japan, manufacturing 12 Manufacturing
firms (100 to 5000 employees), 176 observations Average 2.78
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Nick Bloom, 149, 2015 The survey scores to question (15),
removing poor performers France, manufacturing 13 Manufacturing
firms (100 to 5000 employees), 605 observations Average 2.90
Slide 15
Nick Bloom, 149, 2015 The survey scores to question (15),
removing poor performers US, Canada and UK, retail 14 All
countries, retail firms (100 to 5000 employees) 660 observations
Average 3.03
Slide 16
Nick Bloom, 149, 2015 The survey scores to question (15),
removing poor performers: developed countries, hospitals 15
Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183
observations Average 2.56
Slide 17
Nick Bloom, 149, 2015 16 Incentives/People Management Some
drivers of good management -competition -ownership -skills
-regulation Lincoln Electric
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Nick Bloom, 149, 2015 COMPETITION & MODELS OF MANAGEMENT
Various ways that competition may influence management Selection
badly run firms more likely to exit Effort incentivizes firms to
try harder to survive/gain market share We find competition in
manufacturing and retail is strongly linked with better management
through selection & effort
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COMPETITION IMPROVES MANAGEMENT Sample of 9469 manufacturing
and 661 retail firms (private sector panel) and 1183 hospitals and
780 schools (public sector panel). Reported competitors defined
from the response to the question How many competitors does your
[organization] face? 2.55 2.6 2.65 2.7 2.75 2.8 012 to 45+ 2.8 2.85
2.9 2.95 3 012 to 45+ Manufacturing and Retail (the private sector)
Management score Hospitals and Schools (the public sector) Number
of Reported Competitors STOP
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2.72.82.933.13.2 Dispersed Shareholders Private Equity Family
owned, non-family CEO Managers Government Family owned, family CEO
Founder owned, founder CEO Management score (by ownership type)
FAMILY FIRMS & GOVERNMENT OWNED FIRMS TYPICALLY HAVE THE WORST
MANAGEMENT Management scores after controlling for country,
industry and number of employees. Data from 9085 manufacturers and
658 retailers. Founder owned, founder CEO firms are those still
owned and managed by their founders. Family firms are those owned
by descendants of the founder Dispersed shareholder firms are those
with no shareholder with more than 25% of equity, such as widely
held public firms. ?? THE GREAT OWNERSHIP QUIZ ?? Rank these from 7
ownership types from best to worst by management score: Dispersed
shareholders Family owned, family CEO Family owned, non-family CEO
Founder owned, founder CEO Government Manager owned and run Private
Equity
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Nick Bloom, 149, 2015 FAMILY FIRMS AND MODELS OF MANAGEMENT
PRACTICES Impact of family firms depends on involvement Ownership
but not management probably positive Concentrated ownership so
better monitoring Management typically negative Smaller pool to
select CEO from Possible Carnegie effect on future CEOs Less career
incentive for non-family managers
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Nick Bloom, 149, 2015 2.42.62.833.23.43.6 United States Sweden
Germany Japan Italy France UK Canada US Australia Poland Mexico
China New Zealand Portugal India Chile Brazil Argentina Republic of
Ireland Greece Foreign multinationals Domestic firms OWNERSHIP:
MULTINATIONALS APPEAR TO ACHIEVE GOOD MANAGEMENT WHEREVER THEY
LOCATE Sample 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 score
Slide 23
Nick Bloom, 149, 2015 EDUCATION FOR NON-MANAGERS AND MANAGERS
APPEAR LINKED TO BETTER MANAGEMENT Sample of 8,032 manufacturing
and 647 retail firms. Non-managers Management score Managers
Percentage of employees with a college degree (%) 2.6 2.7 2.8 2.9 3
3.1 3.2 3.3 01 to 1011 to 2526 to 5050+ 2.5 2.6 2.7 2.8 2.9 3 3.1
01 to 1011 to 2526 to 5050+ ?? THE EVEN GREATER SKILLS QUIZ ?? Is
management correlated with managers skills, non-managers skills or
both?
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Nick Bloom, 149, 2015 LABOR MARKET REGULATION INHIBIT GOOD
INCENTIVES MANAGEMENT Note: 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/
http://www.doingbusiness.org/ExploreTopics/EmployingWorkers/
Argentina Australia Brazil Canada Chile China France Germany Great
Britain Greece India Italy Japan Mexico New Zealand Poland Portugal
Republic of Ireland Sweden UK US 2.6 2.8 3 3.2 0102030405060 World
Bank Rigidity of employment index (0-100) Incentives Management
(management sample)
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Can also ask why do firms not self improve (learn they have bad
management practices)?
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We asked at the end of the survey: Excluding yourself, how well
managed would you say your firm is on a scale of 1 to 10, where 1
is worst practice, 5 is average and 10 is best practice So we
investigated if firms can self-assess their management
practices.
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Class question what do you think we found?
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We found firms are too optimistic on management Average
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and self-scores show no link to performance
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Nick Bloom, 149, 2015 29 Incentives/People Management Some
drivers of good management Lincoln Electric
Slide 31
Nick Bloom, 149, 2015 Lincoln is still doing very well Lincoln
Electric is already the largest welding company in the world, with
something in the neighborhood of 14% to 15% global share. (Seeking
Alpha)
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Nick Bloom, 149, 2015 Lincoln firm and case summary 31
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Nick Bloom, 149, 2015 Lincoln firm and case summary 32
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Nick Bloom, 149, 2015 Q1 What types of performance incentives
does Lincoln Electric provide, and how have these helped to drive
performance 33
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Nick Bloom, 149, 2015 Q2 What are the downsides of Lincoln
Electrics performance incentives try to relate this to experiences
you have had with strong performance incentives 34
Slide 36
Nick Bloom, 149, 2015 Q3 Do you think Lincoln electrics
incentive systems would work outside the US? Discuss their possible
success/failure in another country you know. 35
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Nick Bloom, 149, 2015 MY FAVOURITE QUOTES: [Male manager
speaking to an Australian female interviewer] Production Manager:
Your accent is really cute and I love the way you talk. Do you
fancy meeting up near the factory? Interviewer Sorry, but Im
washing my hair every night for the next month. The traditional
British Chat-Up
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Nick Bloom, 149, 2015 Production Manager: Are you a Brahmin?
Interviewer Yes, why do you ask? Production manager And are you
married? Interviewer No? Production manager Excellent, excellent,
my son is looking for a bride and I think you could be perfect. I
must contact your parents to discuss this The traditional Indian
Chat-Up MY FAVOURITE QUOTES:
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Nick Bloom, 149, 2015 MY FAVOURITE QUOTES: Interviewer: How
many production sites do you have abroad? Manager in Indiana, US:
Wellwe have one in Texas Americans on geography Production Manager:
Were owned by the Mafia Interviewer: I think thats the Other
category..although I guess I could put you down as an Italian
multinational ? The difficulties of defining ownership in
Europe
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Nick Bloom, 149, 2015 MY FAVOURITE QUOTES: The bizarre
Interviewer: [long silence]hello, hello.are you still there.hello
Production Manager: .Im sorry, I just got distracted by a submarine
surfacing in front of my window The unbelievable [Male manager
speaking to a female interviewer] Production Manager: I would like
you to call me Daddy when we talk [End of interview]
Slide 41
Nick Bloom, 149, 2015 Incentives Wrap-Up Large variation in
incentives: hiring, firing, pay and promotions On average more
aggressive use of these practices associated with better
performance: e.g. Lincoln But: a)Part of a more general system of
practices b)Depends on country, culture and process c)Needs to be
applied correctly Next Wednesday monitoring and Danaher case Works
for donuts
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Nick Bloom, 149, 2015 BACK UP 41
Slide 43
Nick Bloom, 149, 2015 Score(1): Senior management do not
communicate that attracting, retaining and developing talent
throughout the organization is a top priority (3): Senior
management believe and communicate that having top talent
throughout the organization is a key way to win (5): Senior
managers are evaluated and held accountable on the strength of the
talent pool they actively build (13) Managing human capital
Slide 44
Nick Bloom, 149, 2015 (13) Managing human capital (1): Senior
management do not communicate that attracting, retaining and
developing talent throughout the organization is a top priority
(3): Senior management believe and communicate that having top
talent throughout the organization is a key way to win (5): Senior
managers are evaluated and held accountable on the strength of the
talent pool they actively build 1. 2. 3. 4. 5.
Slide 45
Nick Bloom, 149, 2015 The survey scores to question (13),
managing human capital all countries, manufacturing 44 All
countries, manufacturing firms (100 to 5000 employees), 9806
observations Average 2.43
Slide 46
Nick Bloom, 149, 2015 Score(1): Failure to achieve agreed
objectives does not carry any consequences (3): Failure to achieve
agreed results is tolerated for a period before action is taken.
(5): A failure to achieve agreed targets drives retraining in
identified areas of weakness or moving individuals to where their
skills are appropriate (7) Consequence management
Slide 47
Nick Bloom, 149, 2015 (7) Consequence management (1): Failure
to achieve agreed objectives does not carry any consequences (3):
Failure to achieve agreed results is tolerated for a period before
action is taken. (5): A failure to achieve agreed targets drives
retraining in identified areas of weakness or moving individuals to
where their skills are appropriate 1. 2. 3. 4. 5.
Slide 48
Nick Bloom, 149, 2015 The survey scores to question (7),
consequence management all countries, manufacturing 47 All
countries, manufacturing firms (100 to 5000 employees), 9820
observations Average 3.56
Slide 49
Nick Bloom, 149, 2015 (6) Performance dialogue 1. 2. 3. 4. 5.
(1): The right data or information for a constructive discussion is
often not present or conversations overly focus on data that is not
meaningful. Clear agenda is not known and purpose is not stated
explicitly (3): Review conversations are held with the appropriate
data and information present. Objectives of meetings are clear to
all participating and a clear agenda is present. Conversations do
not, as a matter of course, drive to the root causes of the
problems. (5): Regular review/performance conversations focus on
problem solving and addressing root causes. Purpose, agenda and
follow-up steps are clear to all. Meetings are an opportunity for
constructive feedback and coaching.
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Nick Bloom, 149, 2015 Performance dialogue (6): all countries,
manufacturing 49 All countries, manufacturing firms (100 to 5000
employees), 9794 observations Average 3.19
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Nick Bloom, 149, 2015 50 Score(1): Other than JIT delivery from
suppliers few modern manufacturing techniques have been introduced,
(or have been introduced in an ad-hoc manner) (3): Some aspects of
modern manufacturing techniques have been introduced, through
informal/isolated change programs (5): All major aspects of modern
manufacturing have been introduced (Just-in-time, autonomation,
flexible manpower, support systems, attitudes and behaviour) in a
formal way (1) Modern manufacturing, introduction
Slide 52
Nick Bloom, 149, 2015 Modern manufacturing (1): all countries,
manufacturing 51 All countries, manufacturing firms (100 to 5000
employees), 9830 observations Average 2.77
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Nick Bloom, 149, 2015 52 Marking out a factory floor
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Nick Bloom, 149, 2015 53 Score(1): Performance is reviewed
infrequently or in an un- meaningful way e.g. only success or
failure is noted. (3): Performance is reviewed periodically with
successes and failures identified. Results are communicated to
senior management. No clear follow-up plan is adopted. (5):
Performance is continually reviewed, based on indicators tracked.
All aspects are followed up ensure continuous improvement. Results
are communicated to all staff (5) Performance review