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What I've learnt talking to 2,500+ companies about remote work

This thread outlines the reasons Chris Herd expects the demand for office space to plummet. Two posts really caught my eye.

Walmart to End Quarterly Bonuses for Store Workers

This report (WSJ, Sep 2021) raises an important question: "Which compensation scheme better aligns interests or employees and owners, quarterly bonuses based on store performance or higher wages?"

How do you think the employees view the change?

Palantir and DoorDash CEOs Top List of Biggest Pay Packages in 2020

 

Do the compensation packages align the interests of the two CEOs with owners'? (WSJ, June 2021) 

Questions from WSJ Weekly Review:

• From the article: “Alexander Karp, the chief executive officer and a co-founder of Palantir…received compensation valued at $1.1 billion last year, including $798 million in options and $296 million in restricted stock…” The board of directors of Palantir agreed to compensate Alexander Karp with options to buy Planatir stock. Why would the board pay Karp with options to buy Palantir stock rather than pay him a salary?
• From the article: “Shortly before DoorDash went public…the meal-delivery company awarded co-founder and CEO Tony Xu restricted shares…valued at more than $400 million...” Explain what “going public” means. Why would the founders of DoorDash choose to become publicly owned?
• Prior to becoming a publicly owned firm, could DoorDash experience a principal-agent problem? After become a publicly owned firm, could DoorDash experience a principal-agent problem? Briefly explain your answers.
• From the article: “Mr. Xu…started DoorDash with Stanford University classmates in 2013. The company…had $2.9 billion in revenue last year and reported a loss of $461 million.” Why would the board of directors award CEO Tony Xu a large compensation package when DoorDash suffered a loss of $461 million?
• From the article: “Ambitious, all-or-nothing equity packages are intended to keep and motivate leaders …according to Terry Adamson, a managing director at Technical Compensation Advisors. ‘They’re so levered and so high-risk…They either create massive awards or they create nothing.’” Briefly explain what is meant by an “all-or-nothing” equity package. Briefly explain why an equity package would “create massive awards” or “create nothing.”

Don't reward A and expect B

"You get a guy or a woman in charge of it—they’re personable, the directors like ’em—they don’t know what they’re doing. But they know how to put on an appearance. That’s the biggest single danger". (Warren Buffett, May 2021)

I predict that Starbucks will report more diversity in its workforce by 2025

"Starbucks Corp. SBUX -0.68% said it would mandate antibias training for executives and tie their compensation to increasing minority representation in its workforce" (WSJ Oct 2020). 

Let's conduct a thought experiment. Suppose that the executives face incentives that encourage them to maximize profit (or value). 

1. If executives know that antibias training and minority representation increase profit, would Starbucks need to mandate antibias training and tie compensation to increasing minority representation? Would the mandate and compensation improve the alignment the interests of the executive and owners?
2. Under what conditions would the mandate and compensation improve the alignment of the interests of executives and owners?
3. Under what conditions would the mandate and compensation misalign the interests of executives and owners?

Bad information flows and its consequences

A psychologist
describes why people lie at work and the damage it does (WSJ, April 2020).

Paying everyone at least $70,000

A boss in Seattle has increased profit by taking a pay cut and paying employees at least $70,000 per year (BBC, March 2020). He says that his life is better.

Jack Welch on motivating employees

Jack Welch on motivating employees (WSJ, March 2020).

(Mis-) Alignment of Interests @ AmEx

Salespeople for AmEx earned large bonuses but used "questionable sales tactics" (WSJ, March 2020). How would you improve the organizational design?

A Tale of Two Cultures

Netflix has a corporate culture. I think that the culture is consistent with its mission and compensation scheme.

George Washington University is trying to create / impose a corporate culture. The blogger is critical.

Incentives for Public School Teachers in the D.C.

"screening mitigated both the adverse selection and the moral hazard problems and not by small amounts" (https://managerialecon.blogspot.com/2013/10/michelle-rhees-tenure-as-washington-dcs.html).

Some of the comments fear that cheating by teachers may account for some of the increase in measured performance.

Kodak's failed attempt to decentralize

The post and link describe Kodak's struggle to increase innovation. Some of the blame falls on a decentralized decisions not coupled with strong incentives.

Hart and Holmstrom on aligning interests (and employment decisions)

1. This (re)post contains an excellent summary of what two Nobel laureates say about the best way to align interests of owners and employees. It contains a link to a more detailed summary in MRUniversity that is also excellent. The Nobel laureates are Oliver Hart and Bengt Holmstrom. Here are the basic elements.
2. The premise is that supervisors want to hire employees who work hard and reward them for doing so.
3. Output of an employee depends on how hard the employee works and luck. For example, a salesperson may have a great year when she works hard or when she is lazy and lucky. She can have a bad year even when she works hard because she is unlucky. 
4. Supervisors can observe signals of how hard the employee works. A signal contains information and noise. For example, output may be a signal. When output is a signal the supervisor knows that, on average, salespeople with high output work hard. The supervisor also knows that an individual salesperson may be lazy and have high output because she is lucky.  
5. The best compensation scheme uses all of the signals available to the supervisor to determine the reward to a worker.
6. The best compensation scheme places more weight on the signals that have the least noise. As noise decreases, the signal becomes more reliable. For example, suppose that output depends only on how hard someone works and that luck plays no role. In this case, the supervisor should measure output and use it and it alone to determine the reward. 
7. The best compensation scheme compensates risk averse employees with a higher base salary.
8. The best compensation scheme uses relative performance metrics ("tournaments", rankings) when employees have similar abilities.
9. The best compensation scheme uses absolute performance metrics when employees do not have similar abilities.

The post critiques compensation schemes that reward CEOs when the firm's stock does well because much variation is noise. Changes in the stock market affect the price of all stocks. Therefore, rewarding the CEO for appreciation often is a reward for being lucky, that is, being the CEO during a bull market. 

A better signal is the difference in return on the stock market between the firm and its competitors. This difference is more closely tied to what the CEO does and less affected by noise created by bulls and bears. In other words, a tournament may be best for CEOs.

Here is a key takeaway. When designing a compensation scheme, think about what you want to reward and what you can measure that is a signal. Identify the strongest, least noisy signal and put more weight on it in the compensation scheme. Daryl Morey spend years refining how to measure expected productivity of basketball players. He discovered that points per minute is a better signal than points per game and that points per possession is even better. Even then, noise beset him. He passed on drafting one player because a photo of the player without a shirt revealed man boobs and another player whose statistics were low because the player hated his college coach. 

Here is my final thought. Much of the analysis applies to measuring qualities of employees to hire. Think about the qualities you seek in the applicant and what you can measure that is a signal. Identify the strongest, least noisy signal and put more weight on it in the selection process.

What Changed?

This WSJ article (Sept. 2019) reports that Boeing has changed its organizational chart in response to the crashes of its 737 MAX. Here are my questions.

1. Did the change move decision rights?
2. Did the change affect information flows?
3. Did the change affect incentives?
4. Did the change affect the extent to which the company is centralized?
5. Did the change alter the extent to which the firm is organized around functions or products?

Is AARP an Agent for Old People (Hat Tip to George Carlin)

The report in the WSJ (Aug. 2019) questions whether AARP is operating in the interests of its members. What incentives do the executives at AARP face?

Here is George Carlin on soft language. Warning: Adult Language. Skip to 7:15 for old people.

Google Hangout Increases the Cost of Monitoring Employees who Shirk

This article in the WSJ (Aug. 2019) tells employees how to watch The Office without detection.