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Global The free business magazine featuring articles from the world's most prestigious business schools.


Global The free business magazine featuring articles from the world's most prestigious business schools. Quarterly: March, June, September, December. All articles are authorized reproductions

September 2011 h t t p : / /www. G l o b a l B u s M a g . c o m / info@globalbusmag.com Papegaaistraat 76, 9000 Gent Belgium


INSIDE this issue Facebook's Ethan Beard: Driving Engagement and Growth Through 'Social Design'

4

Is good "enough" enough?

7

Finding the Right Balance

9

Embrace four thinking styles to save your sanity

11

DNA of the World's Most Innovative Companies

13

Finding a Common Language in Intercultural Negotiation

16

Unpacking Prior Experience

19

Murdoch’s own horizon

21

What do you want to be?

22

Rethinking Rewards

24


Facebook's Ethan Beard: Driving Engagement -- and Growth -- Through 'Social Design' Published: July 27, 2011 in Knowledge@Wharton

As director of platform partnerships for Facebook, Ethan Beard oversees the network of developers who build on the social media giant's massive user network to create applications and sharing features for websites. Beard joined Facebook in 2008, after serving as director of social media and director of new business development at Google. In his role at Facebook, Beard manages developer relations and marketing to companies using the Facebook platform and Facebook Connect, which brings the popular "like" feature to external websites and mobile applications. An average of 10,000 new websites integrate with Facebook each day, and more than 2.5 million sites have done so since the platform launched in 2007.

"The Facebook platform allows you, as a user, to take your Facebook profile and your Facebook friends with you to any other website," Beard said while serving on a panel discussion about social media at the recent Wharton Global Alumni Forum in San Francisco. "Our focus is ... mapping out the connections between people, and helping [them] build out what identity on the web looks like." During an interview at the Global Alumni Forum, Beard discussed the next wave of growth opportunities for Facebook, and why he expects "social design" to become a source of disruption in a number of industries, from gaming to retail to commerce. An edited version of the transcript appears below. Knowledge@Wharton: How does Facebook strike the balance of giving users more ways to share things with their friends, both on and off the site, with the need to respect people's privacy? Ethan Beard: [Privacy is] at the core of Facebook in many ways. One of the things that we build into all of our products -- whether they're products that we work with on our own or the way in which we expose those products to partners -- is giving users very clear control over who they share information with and how they share it. It's really important to us that users understand precisely when they want to share a piece of information [and] who is going to see it. That reflects itself also in how we expose our technologies to our partners.... We work with them to make sure that it's very clear to users the sort of information that they're sharing, why they're sharing it, and then what the partner will do with that information and the benefit that a user will get from it. Knowledge@Wharton: Can you tell me a little about how the developer network works? Does Facebook sign off on each company or group that wants to use the technology? What are you looking for in a potential partner who is using the platform? Beard: I lead a team called Platform Partnerships, and we work with all of the


companies that are building on the Facebook platform. The Facebook platform is free, it's open and anyone can build on it. You don't have to come to talk to us; you can just simply come to the website and agree to our terms of service, [which] have various rules and restrictions on what you can do with the information that you get from Facebook. At its core, what happens is that all of the data that you have on Facebook is -- we believe it's yours. You have this information, it is information about you, and it's who your friends are. What we've done with the Facebook platform is enable you to take that with you to lots of other websites or other applications so they can personalize the experience and they can make it social. So when you go to a travel site like Gogobot, you will actually be able to see recommendations on where you'd want to travel or friends who you might want to ask about a place.... Knowledge@Wharton: As Facebook has grown, how have users surprised you in terms of what kind of information they want to share and how they want to share it? Beard: We're now in 60-plus languages, ][with] hundreds and hundreds of millions of people, over two thirds of them outside of the United States. What's actually surprising is that people are almost the same around the world in the sense of how they use Facebook and how they share information. When I first thought about it, you would expect to see geographical differences and things like that and really, at its core, people are people. They want to connect with their friends, they want to talk with their family and they want to share the important things that are going on in their lives. That's the same whether you live in Italy, whether you live in Africa or whether you live here in the United States. Knowledge@Wharton: Facebook currently has more than 750 million active users. Do you think the site has peaked in terms of growth? If not, what are the next growth markets for the site? Beard: Facebook has grown immensely over the

past seven years that it's been around. Yet we are still just at the very beginning. So if we have six hundred million people on Facebook, there's something like six billion people on the planet. I think the Internet population is probably two to three billion, so we think that we're still at the very beginning. In many ways, what we're trying to do with Facebook is get everyone in the network. Once everyone's in the network, you can actually start to build really amazing and compelling experiences on top of it. We think we still have a long ways to go to getting there. We're currently blocked in China. China is one of the largest countries on the planet, so obviously, there's a huge opportunity there. Similarly, in India, we're still at the early stages. There are lots of countries where we think there's growth.... New people are coming online all the time, especially in developing countries where mobile phones are just becoming the way in which people access the Internet. Knowledge@Wharton: A lot of the services that Facebook has added, and the applications created by other websites using the Facebook platform, seem to be focused on aggregation, or having news, recommendations from friends and other information all in the same place. How important is that in terms of the total Facebook experience? Beard: It's more about curation than aggregation and it's actually curation by your friends. Facebook, in many ways, doesn't have a voice. There's no Facebook news or Facebook TV [application] when you come to the site. Everything that you experience on the site has been contributed by the people you've chosen to be friends with, the people who are important to you. Generally, the information that they're sharing is stuff that they think is important and that they want to share there. That's a really important aspect of the way the site works. Knowledge@Wharton: Has it been a conscious choice not to have a "Mr. Facebook" or some kind of voice for the site that appears on everyone's page? I'm thinking back to MySpace,


where everyone was friends with [co-founder] Tom Anderson when they first signed up. Beard: Facebook is very much not about Facebook; it's about the users and about allowing users to connect and share with their friends and their family and the people who are important to them. Knowledge@Wharton: To move more into the general social media sphere, what kind of applications or start-ups do you think are going to be the wave of the future? Beard: We believe at Facebook that social media is really transforming lots of different industries. The kind of disruption that you saw with social gaming with companies like Zynga and Playfish and Playdom, these are companies that put people first and put people at the center of the games. In many ways, social games are more about the interactions you have with your friends than they are about the game-play itself. In fact, if you strip your friends away from them, they're not particularly compelling games. But because they have [interaction build into] them, they're some of the fastest growing games ever. CityVille by Zynga went from zero users to 60 million users in the course of six weeks because it [focused around] playing with your friends. We call this concept "social design," which is really putting people at the center of the application. It drives engagement, and it drives usage incredibly well. We think what's happened in gaming is going to happen in lots of other industries. Gaming frequently leads the way on lots of different platforms; we think a similar thing is happening in social media. Whether this is commerce or recruiting or travel, lots of these industries are, at their core, about people. We think you're going to see a lot of transformation and disruption in these industries frequently by start-ups that say, "I'm going to make a social experience first and foremost," and go from there. For example, you could imagine a store that says, "By default, when you shop in this store, everything that you look at and everything you put in your shopping cart will be shared with

your friends." And then by doing that, that store would get so much more traffic and distribution from your sharing, they'd be willing to have lower and lower prices. And so you'd get a benefit by having lower prices and you'd be able to discover what your friends are actually looking at and shopping with. It's a fundamental rethinking of the way that commerce works today. It would be hard to [add that feature to] an existing site -- if Amazon turned that on, it would be shocking for those of us who use it. But it's easy for a start-up that is starting from the beginning.... Knowledge@Wharton: In the future, what do you think is going to separate the social media companies that make it in the long term from those that don't? Beard: The social media companies that succeed will be the companies that don't try to put social ... on the side, but are really social from the ground up and set user expectations that what you do within this experience will be shared, and that's actually of value. And that the discovery that you have within the experience comes from your friends and therefore you are sharing and contributing back, [which] is creating an overall value in the entire network. "Republished with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu),


IS "GOOD ENOUGH" ENOUGH? How to cope when competitors pile it high and sell it cheap By Professor Adrian Ryans - July 2011

one season? Given the right market conditions, low-cost competitors can rise and challenge industry leaders very quickly. Vizio is a good example: in 2004 it was a small supplier of low-cost bigscreen LCD televisions in the US, with sales in that year of $20 million. Over the next few years it exploited the emergence of new channels for its products at discount retailers such as Costco and Walmart; by 2007 it was the third-biggest manufacturer of large-screen LCD televisions in the US, and by 2009 it was the market leader, with a market share of almost 22 percent – just ahead of Samsung, but well ahead of Sony.

Responding to the low-cost challenge How, then, should premium companies facing competition from low-cost rivals react? The first step is to understand the three types of core value propositions:

Sometimes consumers will put up with a lot to secure a good price. Just look at Ryanair, which is almost as famous for its tough no-frills approach to customer service as for its cheap airfares. As a business model it’s one that works: for much of 2009 and 2010 its market capitalization exceeded that of Lufthansa, despite the German airline’s revenues being more than seven times higher. Other sectors have seen a similar rise in “good enough” businesses, from low-cost retailers such as Aldi and Lidl to “fashion” retailers like H&M and Zara. These companies do not offer a premium service – for example, Aldi offers shoppers little choice other than its own-brand products, while the fashions on sale at H&M are not generally made of high-end fabrics – but consumers do not mind. Who needs choice when the off-brand beans are cheap and tasty, and the checkout process fast? Who needs top-quality tailoring on a new shirt that will only be worn for

1. Price value. This is focused on providing “good enough” solutions and offering these standard products and services at an attractive price. This is the core value proposition of lowcost competitors such as Aldi, Ryanair and ING DIRECT Bank. 2. Performance value. Companies that emphasize this offer their customers a combination of superior functionality, innovative features, an exceptional user experience, excellent quality and style, and fashion leadership. Examples include Apple and Bloomberg. 3. Relational value. This tends to be particularly important to customers who have complex, diverse needs and see value in being able to buy an integrated solution from one supplier. Companies will try to provide customized offerings – if that is what the customer wants. Examples include GE Medical Systems, Cisco, and IBM Global Services. Executives can then use this framework to think through their options; many will choose to use a


combination of two or more of them. The first option is to directly challenge low-cost competitors by moving into the lower tiers of the market and offering a “good enough” product or service that is competitive on price. Advantages to this approach including meeting a real market need, gaining additional economies of scale, creating sell-up opportunities, and helping to control low-end competition. However, while this approach seems quite simple in principle, it is difficult to implement successfully. Developing the core product or service is often the easy part – the real challenges are finding effective routes to market, pricing, manufacturing, and organizational structures. Other very real risks include the possibility that you will cannibalize your own higher margin business, damage your brand, and lose focus on your core business. Another possibility is distancing your business from low-cost competitors by increasing performance value through superior quality, performance, and style. Companies as diverse as Intel, Research in Motion and Gillette have done this successfully for a period of time. However, in many cases it is increasingly difficult to get a good return on investment this from this strategy, particularly as the product category starts to mature. It can cost a lot to make what are, from the customer’s perspective, only marginal improvements, while useful improvements are often quickly matched by competitors. To increase performance value in ways that customers will be willing to pay for requires a deep understanding of their needs. The days when companies could simply try to “out-spec” a competitor and hope that the customer found something useful are long gone; R&D investments have to be much more focused if a company is to get a good return on these investments. In addition, more and more customers, particularly in B2B settings, are looking for proof that improved performance value will lead to improved financial results.

The third option, used by companies as diverse as P&G, Tesco, and Cisco, is to increase relational value. For example, Orica Mining Services – originally ICI Explosives – built more intimate relationships with many of its customers by moving from selling explosives to providing blasting services. It recognized that what mines and quarries wanted was rock on the ground that would meet the customer’s size specifications and facilitate further processing. To meet this need, Orica would take over the customer’s blasting activities and charge them for the rock on the quarry or mine floor that met the size specifications. As Orica developed more sophisticated models for blasting, it was able to deliver more and more of the rock in the specified size range, thus reducing waste and the need for additional processing of rocks that were too large. This created value for both the customer and Orica, and substantial barriers to entry for low cost competitors. But the journey to improved relational value is often long and difficult. Companies who take it have usually begun with a performance value proposition for their customers. In many cases, their emphasis has been on providing the best-performing, highest-quality, most reliable products. This is very different to focusing more on delivering truly integrated solutions, which requires deep and intimate relationships with customers.

Only the paranoid survive In almost every market there is, or soon will be, customers looking for “good enough” solutions that are attractively priced. The low-cost competitors that emerge to meet this demand will eventually challenge the premium brands in the market. This threat may not be immediately apparent, but companies should not be arrogant enough to ignore it simply because initial losses are small. The sooner companies make the tough choices and start grappling with the implementation issues, the better their position will be in the long run. Adrian Ryans is Professor of Marketing and


Strategy at IMD, where he teaches on the Mastering Technology Enterprise and Orchestrating Winning Performance courses. This is an edited version of an article that originally appeared in The European Financial Review. This article is republished courtesy of http://www.imd.org/research/challenges/

Finding the Right Balance Managing Production with Random Yields Research by John R. Birge

repainted. Bumpers are produced on a single machine, one batch after another, and each batch consists of bumpers for a particular car model and color. Changeovers between batches are expensive and can take a long time. The bumpers need to dry before they can be inspected, but by then another batch is already in production so plant managers do not know exactly how many good bumpers they will have before starting the next batch.

John R. Birge is Jerry W. and Carol Lee Levin Professor of Operations Management at the University of Chicago Booth School of Because the production yield is very unpredictable, a sizeable stock of bumpers has to Business. be kept on hand in a very large storage system, with significant costs. "It was getting unwieldy," says Chicago Booth professor John R. Birge, whose visit to the Michigan plant motivated him and coauthors Scott E. Grasman of Missouri University of Science and Technology and Tava Lennon Olsen of the University of Auckland to develop a production control system that would allow the bumper producer, as well as other similar manufacturing plants, to have as many bumpers available as possible while minimizing costs.

When the quantity and quality of manufacturing output are highly uncertain, managers can satisfy customer demand while minimizing the cost of too much or too little inventory if they choose the right level of production. Painting automobile bumpers can be quite complicated. At a major bumper manufacturing facility in Michigan, about one bumper out of four is defective and must be rerouted and

The key is to find the right basestock level or the optimal number of bumpers that managers plan to produce, which they discuss in a study titled "Setting Basestock Levels in Multi-Product Systems with Setups and Random Yield." If managers set the basestock levels too low, then the company may run out of bumpers to satisfy demand from car manufacturers and the plant would have to go on overtime and possibly hire more workers. If basestock levels are set too high, then the company may end up with too many bumpers that nobody wants. Both


scenarios will result in substantial costs to the company. "The idea of finding the optimal basestock level is to set it somewhere in between too many and too few, to get the right balance," Birge says.

Random Yield Just like bumper plants, many modern production systems are characterized by several uncertainties that make output highly variable. For instance, only about half of semiconductor chips pass inspection after the first try, according to previous studies. Similar to producing bumpers in several colors, semiconductor manufacturers have to make different types of chips that go into computers, cell phones, and other digital devices and consumer appliances. Moreover, machines that make these semiconductors tend to be very expensive, so the chips are usually produced in different batches, one type after another, on just one machine. As a result, it is difficult to predict how many defective chips are in a particular batch before production of the next batch starts. New manufacturing facilities also typically have yields that are very low. Output improves as more is learned about the production process, but generally never reaches the point where no defective items are produced. This is because rapidly changing technologies can make a production process obsolete even before it is well understood, or it may not be financially justifiable to correct the yield problem. Thus, random yield models are valuable in helping an operation run more efficiently. But very few studies have analyzed random yield models when multiple products can be made on a single machine, as with the cases of car bumpers and semiconductor chips. Moreover, unlike other studies that make ad hoc calculations of what the basestock levels ought to be, the methods developed by Birge and his coauthors give more consistent cost estimates that managers can rely

on when planning how much of each item to produce. "It allows the manufacturer to design the sequence of products in such a way that it can be very confident about knowing how often it would be able to avoid using overtime and how much inventory it will have," says Birge.

Choosing How Much to Make The authors analyze a manufacturing system where all products must be produced on a single machine and the output is highly variable. Production of each item continues until the inventory position reaches the chosen basestock level. If a customer's order is more than what is available in inventory, then the order is either backlogged or the sale is lost. Because of the delay between production and inspection, defective items cannot immediately be routed back to the production line. Defective items are temporarily stored in a rework storage queue until the next production cycle. In this type of system, the best balance between too much and too little inventory can be found by setting the basestock levels at the point that minimizes the costs of shortage, holding inventory, reworking defective items, and setting up the machine before it switches over to the next item. The method of finding the right basestock levels will differ depending on whether orders can be backlogged. If a customer wants to buy red bumpers but the company runs out of them, it can still take a customer's order and deliver the red bumpers in the future. This backlog of orders, however, comes with a cost: The company has to pay a penalty for every period that it fails to deliver the red bumpers. Thus, in a production system with backlogging, finding the optimal basestock levels involves choosing the amount of bumpers to produce that keeps down the costs of holding inventory and setting up for the next batch as well as penalties for orders that have yet to be delivered.


But if backlogs are not allowed, a company will have to turn down a customer's request for red bumpers if the order cannot be met with what is in stock or what is currently in production. In this case, the company loses the sale. Unlike in backlogging, choosing the best possible basestock levels in this type of system entails minimizing not only inventory and setup costs but also the cost of losing sales and reworking defective items. The expense of reworking defective items is relevant because faulty bumpers—which cannot be sold immediately—are repainted anyway and eventually end up in inventory, which in turn affects the decision of how many bumpers to produce in the next period. Rework costs include the cost of scrapping a previous attempt at making a bumper or the cost of getting the item ready to run through the production process again.

Embrace four thinking styles to save your sanity By Denis Leclerc, Thunderbird professor Before you try to change the way your colleagues, contacts and customers act, learn how they think. Culture involves multiple dimensions that often remain invisible, but the most important to grasp is the way different people process information and approach problems. Not everyone thinks the same, and not everyone likes the way you think. This is a good thing. Managers who recognize and support different thinking styles can leverage the diverse talents and perspectives of everyone around them. Different brains ask different questions, which creates the potential for different answers and different results.

The authors propose that finding the optimal basestock levels in a system with backlogging is similar to solving the so-called "news vendor problem," which asks how many newspapers a vendor should put on the newsstand without knowing what the demand will be. Mindful managers first must gain awareness of their own thinking biases. Thunderbird School On the other hand, finding the best possible of Global Management uses the Cultural basestock levels when unmet orders lead to lost Orientations Indicator, a self-assessment that sales can be very time consuming to calculate. To helps managers identify their cultural get around this difficulty, the authors developed a preferences in 10 categories. Thinking is just one method that approximates some of the key dimension, along with communication, space, variables that go into the optimization problem. power, individualism, competiveness, They find that this "heuristic" approach closely environment, time, action and structure. predicts the cost of a production system with lost sales, where the difference between the predicted Like spokes in a wheel, each dimension works and actual costs was on average very small. together to support a person’s overall identity. The Cultural Orientations Indicator does not This article is republished courtesy of place one dimension above another, but I always www.ChicagoBooth.edu/capideas. explore thinking first when debriefing managers on the instrument. Frustration and division result when managers assume everyone in their organization thinks like them — or ought to think like them. The first thing I consider when analyzing cross-cultural tension is the thinking preferences involved.


Generally these preferences solidify during a person’s formative years and do not change over time, but effective cross-cultural managers can learn to adapt their communication style. These managers discover they can change how they communicate without changing what they say. They can switch styles without switching the message to be communicated. The Cultural Orientations Indicator describes four basic thinking processes that every global manager should master.

Deductive thinkers Deductive thinkers need to know why. They ask: Why is one project more important than another? Why are we doing this? Why the sudden urgency? Why should I care? These thinkers are looking for the logic of actions in an organization. Knowing why makes all the difference with deductive thinkers. Every time they encounter a new idea or project, they lose interest quickly if they do not understand why. They already have stopped reading this article if I have not explained persuasively why it matters to recognize and embrace different thinking styles. Mindful managers who work with deductive thinkers must explain why. “Trust me, I’m the boss” simply does not work with this audience.

Inductive thinkers The critical question shifts from why to how with inductive thinkers. How did we decide? How did we crunch the numbers? How will we change? Their decision making process also involves looking at history. They often ask: How did we do this in the past? When inductive thinkers analyze a problem, they need data on how things have been done in the past. They want to see reports, review history and double check results before deciding anything. Methodology matters most.

Deductive and inductive thinkers can lose patience with each other when their problemsolving approaches clash. “Who cares how,” a deductive thinker might say. “I can tell you why.”

Linear thinkers Linear thinkers worry first about things like when, and in what order. When is it due? What needs to happen first? Who does what? They dislike ambiguity or gaps in the process. They need to see how A connects to B and then C and D — like a Google Map route that provides step-by-step instructions. Lofty vision statements mean little to linear thinkers unless an organization outlines concrete plans of execution.

Systemic thinkers Systemic thinkers have a tendency to keep an eye on the end goal, paying less attention to the details of the different steps to be taken in order to achieve the goals. In other words these are the people who have a tendency to create vision in an organization and make sure goals are attained. “I don’t care what you do or how you do it,” a systemic thinker might say, “as long as the job gets done.” Such managers cringe when linear thinkers on their team follow up with e-mails seeking guidance on procedures. “That’s your job to figure it out,” a systemic thinker might respond. A classic example of systemic leadership comes from Apple co-founder and CEO Steve Jobs, who gave his research and development team only three requirements for the iPod mp3 player. He did not care what they did as long as they delivered a product that 1. Uses no screws, 2. Is controlled with the thumb, and 3. Changes the way people carry their music. Engineers responded in 2001 with a sleek tool that revolutionized the industry. Most of the time the combination of thinking styles works best — but only if managers remain


mindful of differences and work to build inclusive environments. Airbus overlooked some of these differences and paid a price with the A380 commercial jet. French engineers approached the design with a deductive and systemic mindset, while their German counterparts applied inductive and linear thinking. The result was often costly miscommunication. In one case, visionary French designers added three centimeters to the diameter of a conduit to accommodate the potential of additional wiring. The more practical German designers looked at the plans and saw unneeded costs. They trimmed three centimeters from the pipe’s diameter to save money, but then ran into problems when additional wires did not fit.

The DNA of the World's Most Innovative Companies --- by Nicholas Bray --Innovation makes millionaires and undermines monopolies. It raises the profitability of companies and puts a premium on the shares of the most successful. But how can companies foster it? New research sheds light on the innovation process and how firms can tap into it to raise their performance and their share price.

Innovative business leaders typically share certain qualities. They are always asking questions, The inaugural A380 flew out of Toulouse, France, experimenting, observing and networking. While after nine months of delays with duct tape building on past successes, they keep the doors holding some wires in place. The problem was open to future innovation. not French or German engineering, but differences in thinking preferences and the failure In a world where success often breeds more of managers to cross-cultural communication. success, such behaviour can boost the market Managers who embrace all four thinking styles save their organizations time and money. And they save themselves considerable stress. Denis Leclerc, Ph.D., is a clinical professor of cross-cultural communication and negotiation at Thunderbird School of Global Management in Glendale, Arizona. A native of Normandy, France, Dr. Leclerc has taught at the Institute of Tourism and Transport Studies in the Netherlands and the IMC Fachhochschule in Austria. He also has taught in Mexico and the Czech Republic. He has debriefed thousands of managers all over the world on the Cultural Orientations Indicator. This article is based on a presentation he made June 21, 2011, with Thunderbird International Consortia participants. This article is republished courtesy of http://knowledgenetwork.thunderbird.edu/researc h/

value of their companies well beyond what current profitability would justify. In a newly published study of what makes a successful innovator, “we looked at people who lead incredibly innovative companies”, says Hal Gregersen, INSEAD Senior Affiliate Professor of Leadership and Director of the Learning to Lead executive education programme and one of the study’s co-authors. “And we realised that these companies seemed to be incredibly valuable.” In reaching this realisation, Gregersen and his coauthors, Jeffrey H. Dyer of Brigham Young University and Clayton Christensen of Harvard Business School, had hit on what they call the “innovation premium”. And in their book, “The Innovator’s DNA”, they explain how for some of the world’s most innovative companies it can add 50 percent or more to their market value. “Investors pay a stock price based upon two things,” says Gregersen. “One is the cash flow the money coming from existing products,


services and markets. The other is the belief that the company will develop new markets, new services and new products tomorrow.”

More jam tomorrow Take a company like Amazon. Given its reputation, suggests Gregersen, an investor might well say: “I’ll pay you this amount for your stock for the existing products and services, and for the markets that you’re in. But I also believe you will do something different in the future. You’ll have new markets. You’ll have new services. You’ll have new products you don’t even have today and because of that, I’ll pay you a premium.” Building on this insight, Gregersen and his coauthors worked with HOLT, a unit of Credit Suisse Group, to draw up an innovation premium roll-call of innovative companies based on analysis of the relationship between their cash flow and their share price. To qualify, companies had to be listed on a stock exchange and have a market capitalisation of at least US$10 billion. They also had to have published financial statements over at least the past seven years. The results were striking. Companies like Toyota, Sony and Samsung, which frequently feature on other lists of innovative companies, sank to negative ratings. In their place emerged a number of unexpected and relatively unknown companies - firms like California-based Intuitive Surgical, which builds systems for robotically assisted, minimally invasive surgery, Natura Cosméticos, a Brazilian manufacturer of cosmetics made from plants from the Amazon forest, and Keyence Corporation, a Japanese producer of electronic sensors for automated factory systems.

Cut-throat car market The list includes household names like Amazon, Apple and Google. But what makes it different from other similar lists is that it ranks firms not just by past achievements but by what investors expect going forward. “Our list is future-looking,

forward-looking and it’s based on past performance predicting the future,” Gregersen explains. “These are organisations that systematically, over at least a five-year period, have generated this kind of premium. Investors bet with their wallets: this company is innovative, not only now but in the future.” Common to all companies on the list is the fact that their share prices are 25 percent or more above what would be justified by cash flow alone. The leader is cloud computing company Salesforce.com, with its AppExchange that offers more than 1,000 applications for businesses, and which recently launched Chatter draws on features of Facebook and Twitter to provide social software for enterprise collaboration. Market expectations for further innovations have given it a premium based on 2010 results of no less than 75 percent. Bringing up the rear, PepsiCo scrapes in at number 50, with a premium of 25.45 percent. Companies like Toyota and BMW, by contrast, despite their known capabilities for innovation are nowhere to be seen. That, says Gregersen, is because investors expect them to find it hard to earn dividends from new innovations in the face of tough competition from Chinese manufacturers in today’s cutthroat car market.

Think different, behave different So how do companies develop the innovative qualities that enable such results? “There are three elements to this,” says Gregersen. “The people in the company, the processes they have and the philosophies they have.” The essence of the innovator, he adds, is that he or she not only thinks differently from other people, but also behaves differently. Take Steve Jobs, the founder of Apple. “If we walked into his world and followed him for a day, we could see him behaving in ways that will generate new ideas. He lives the Innovator’s DNA skills. He observes the world really carefully. He talks to all different kinds of


people. He’s more than willing to engage in different kinds of experiments, constantly peppering the world and the people around him with questions that provoke people and challenge the status quo.”

him that experimentation matters. He lived on a farm with them in the summertime and when things broke down, they fixed the things that broke down. They learned that when you try and experiment you can figure out a solution.”

Or take Mike Lazaridis, founder and co-CEO of Research in Motion, the firm that gave the world the BlackBerry, or Scott Cook, the founder of Intuit. They, too, are always asking questions and looking out for the unexpected: “Why not this? Why couldn’t we do that? What’s going on here? How could we do this better?” When someone “behaves that way, acts differently, asks lots of questions, observes like an anthropologist, experiments constantly, networks for new ideas,” Gregersen observes, “they’re likely to get incredibly insightful ideas about new businesses, new products, new services, breakthrough processes: things that will make a difference for any company or country.”

As for Gadiesh, “She grew up in a family where questioning was everything and it was reinforced to her that she question. So they both not only had some genetics around these skills, but they grew up in a world that said ‘keep them, pay attention to them, use them, do something with them’. And then when they became adults they actually went out and did something with them.”

Down on the farm That’s something most companies in today’s environment would pay dearly for. And the good news for those who really want to innovate is that, given the right environment, innovation can be within the reach of anyone. “About 25 to 30 percent of our innovation capacity is a genetic component, it’s our DNA,” says Gregersen. “But that’s one-third of the equation. The other two-thirds is the world we live in. It’s fascinating when we interview these famous entrepreneurs to realise that they grew up in worlds where adults paid attention to these innovation skills.” Most often these adults were parents and grandparents, but in about one-third of the cases they were master teachers at Montessori or Montessori-like schools.” To show how curiosity and willingness to experiment can be nurtured, he cites the founder of Amazon, Jeff Bezos, and the chair of Bain & Company, Orit Gadiesh. “Bezos had grandparents who taught him and reinforced to

Everybody’s job What lessons does Gregersen draw for other firms that want a piece of this innovation bonanza? Firstly, innovation starts at the top. “Companies on this list are led by leaders who spend at least a day more a week than a noninnovative CEO doing these innovation skills: asking provocative questions, going out there and making real observations and not relying on second-hand data.” Secondly, innovation must be allowed to permeate every level of the company. In a truly innovative company, innovation has to be everybody’s job. “It’s just part of what you do when you walk in through the door today when you come to work. You need to figure out a better way, a more innovative process, a better product, better service.” Finally, however, a warning: innovation can be disruptive, and in a company with no innovation philosophy, it’s likely to be unwelcome. In this case, says Gregersen, a would-be innovator faces a Catch 22 situation. “If I’m in a company that’s not innovative and I just do what they ask me to do, I’ve sealed my fate to not have a future. If I start engaging these skills, on the other hand, I may get a lot of pushback and irritation, and I may even get fired.” In such a worst case scenario, he concludes, it’s


time to use these skills in a more receptive environment, so as to “create a future that otherwise won’t be there”. The book's research led to the publication by Forbes of the Innovation Premium List of the 100 most innovative large companies in the world.

Finding a Common Language in Intercultural Negotiation What happens when Chinese and Brazilian energy executives sit across from one another at a negotiating table? The Texas Executive Education brought them together to find out. By Rob Heidrick

This article is republished courtesy of INSEAD Knowledge http://knowledge.insead.edu

Executives from the Chinese energy company Sinopec and Brazilian energy company Petrobras recently sat across from one another at a negotiating table to discuss a proposed business transaction. The leaders on both sides had only limited experience with international negotiation, and both teams were hesitant to get the conversation started. Without an understanding of each other’s backgrounds, it was hard to know where to begin. The reluctance to engage with people from another country is not uncommon. Language barriers may be just the tip of the iceberg in an international negotiation. Because each culture has its own customs for communicating in business and social situations, it can be difficult for members from different groups to bridge those gaps in a short amount of time. Gaylen Paulson with students from Sinopec and Petrobras, after working through an intercultural negotiation simulation with Texas Executive Education. “The cultural element adds another layer of complexity,” says Gaylen Paulson, a negotiations expert. “It’s harder to understand and explain the choices that the person on the other side of the table is making. It’s harder to deliver value effectively because you don’t understand quite as well what they’re after and why they’re after it.”


executives about the ways culture influences negotiations. Juan An, a participant in the Sinopec program, found this to be true. “I have to admit, the two companies do not know each other much due to the totally different culture and management mechanisms,” he said.

Gaylen Paulson with students from Sinopec and Petrobras, after working through an intercultural negotiation simulation with Texas Executive Education. Paulson, associate dean for executive education at the McCombs School of Business, facilitated the simulation in international negotiations between the executives from Sinopec and Petrobras, who were on campus participating in Texas Executive Education programs created for their respective companies. In the exercise, students were divided into teams — some with one Brazilian student matched up against two or three Chinese students, others with a Chinese student partnered with a Brazilian student to negotiate with another Sinopec student. The simulation revealed some of the challenges inherent in negotiating across cultures. It also demonstrated some ways that those obstacles can be overcome.

To Relate or Not to Relate For instance, people from certain cultures, including Asia and Latin America, place great value on creating deep personal relationships, even — or perhaps especially — in business, says Orlando Kelm, an associate professor of business and Spanish and Portuguese at the University of Texas at Austin. In cases when there hasn’t been enough time to build a bond of mutual trust between business partners, negotiations tend to be more difficult, says Kelm, who has interviewed many international business

Looking for common ground can help speed up the relationship-development process. “Brazil and China are in the same situation: Both of the two countries developed very quickly,” said Frank Zang, another Sinopec participant. There are also similarities between the corporate strategies of Sinopec and Petrobras, which are both steadily expanding their international presence. “Our group and the Petrobras group also have the same background — we are all executives,” Zang added.

Speaking a Common Language

The best way to overcome language barriers in a professional setting is to keep communication as clear and direct as possible, Kelm suggests. Speak slowly and use visual aids, and avoid presenting a large amount of information at once, because this can cause an overload and important details could get lost in the shuffle. Language barriers are frequent obstacles to successful cross-cultural negotiations, and different cultures have different ways of dealing with that hurdle, Kelm says. In his observations, professionals from China tend to be more selfconscious about conversing in a foreign language with native speakers. Brazilians, he says, are generally more open to speaking freely, without


worrying about imperfections in their diction. “We sometimes don’t appreciate how hard that is when you have two people who are not totally fluent in whatever language they’re speaking,” Kelm says. The best way to overcome language barriers in a professional setting is to keep communication as clear and direct as possible, Kelm suggests. Speak slowly and use visual aids, and avoid presenting a large amount of information at once, because this can cause an overload and important details could get lost in the shuffle. “I’ve been in situations where I’ve known that people have an opinion or a sense of what they want to say, but the volume is too much,” Kelm says. “You’re hit with too much information too fast to actually process all that information and then contribute with comments out loud.” The result of this avalanche can be that people listen more than participate because it’s too much to listen, speak, and understand nuances and numbers all at once. Follow-up correspondence can also be useful. In China, it is common to arrange one-on-one meetings after a negotiation to smooth out any unfinished business. Kelm also says it can be helpful for both parties to send each other written summaries of what they got out of the meeting, along with feedback about how they thought it went. This can help everyone avoid misunderstandings and bring to light any issues that need to be corrected for the next meeting.

Check Out a Guidebook Lacking a basic knowledge of the customs, history, and politics of other countries is a recipe for almost certain failure in an international setting — a problem Americans, in particular, frequently bring to the negotiating table. “Foreigners know so much about our country,” from current events to politics, Kelm says. Many Americans, on the other hand, don’t know

something as simple as the name of the president of the country they’re visiting. “That puts us at a disadvantage with them because we can’t talk about those sorts of things,” Kelm says. “If you want to make a negotiation successful, the best way is to understand each other’s cultural background and do some research,” said Roger Zhou, the group leader from Sinopec. This homework will help you respond authoritatively to any topic that might arise.

Make it a Win-Win Zhou noted that in addition to knowing the background of the other culture, it is also important to know what the other side hopes to accomplish in each individual negotiation. One strategy he found particularly effective was approaching the negotiation with multiple goals in mind rather than one critical issue. “In a negotiation, we have many issues. Maybe we focus on one, two, three issues; maybe you focus on four, five, six issues. So we can make an agreement eventually. If we all just focus on one or two issues, we can get stuck,” Zhou said. “Negotiation is not a zero-sum game. It should be win-win.” The mock negotiation may have started slowly, but as Paulson prompted students to discuss the strengths and weaknesses of the business cultures in the U.S., China, and Brazil they quickly developed a common understanding and opened up. The simulation intensified, as the executives animatedly exchanged offers and shot down proposals they deemed inadequate. When it was over, many students weren’t ready to quit. “This session was too short,” said Petrobras student Marcos Baião. “The results were wonderful, but it could be better with more time.” Paulson says the students’ experience in the simulation is likely to translate into practical skills with immediate relevance. Sinopec and Petrobras recently concluded negotiations on a


deal to develop offshore oil drilling on the coast of The bonds of corporate loyalty were broken northern Brazil, where Sinopec is rapidly decades ago. It is a truism that in the postexpanding its operations. industrial era, all bets are off, and the concepts of lifetime employment and “the company man” “The world is moving fast and cross-culture are relics. In theory, companies have it good, negotiations occur every moment, but in many fishing for new employees in a sea of circumstances, culture has become a barrier and experienced workers with no strings attached. reduced efficiency,” said An from Sinopec. “Cross- We set out to test whether new hires with cultural communication skills are vital to business relevant experience are always the best catch. development.” The growing instability of the employment This article is republished courtesy of relationship has been the subject of intense http://mccombstoday.org/ scrutiny. Fewer people follow stable or predictable career patterns within one organization, and their experiences are increasingly likely to occur across, rather than within, firm boundaries. In the late 1970s, Americans were estimated to have an average of seven employers in their working lifetimes. By 2005, the US Bureau of Labor Statistics had found that the average American worker born in the later years of the baby boom had 10.5 employers by age 40. Experience in a single firm, therefore, captures only a fraction of the total work experiences of most individuals. The corollary to a more mobile workforce is the hiring of more experienced workers. But what do organizations get when they hire experienced workers? Yes, experienced workers can bring in diverse knowledge that enables innovation and performance. But most organizations do not explicitly hire in order to gain diverse knowledge. Instead, they seek employees whose prior work experience is similar to the current needs of the organization, because they expect that these employees will bring knowledge that enables them to be immediately productive. An employee’s understanding of how her industry works, as well as norms from her prior experiences, may conflict with a new employer’s expectations and result in a negative effect on performance once knowledge and skill is accounted for. While prior-related experience is believed to


confer valuable knowledge and skill that can be applied to the current work context, empirical findings have been mixed. Most studies of experience and performance treat experience as a proxy for knowledge. However prior work experience may include not only relevant knowledge and skill, but also routines and habits that do not fit in the new organizational context. Indeed, these routines and habits may limit the positive effect of prior experience on performance, suggesting that when individuals move across firm boundaries, their prior experience may not be wholly beneficial.

Is the Past Prelude? We proposed that experienced workers may carry knowledge and skill that contributes to an organization’s goals, especially when there is similarity between the prior experience and the current work. However, we predicted they also may transfer cognitive and behavioral rigidities that can impede performance in the new firm. For instance, in the insurance industry, a claims adjuster hired from another company, where haggling over claims was the norm, might take this model of industry practice to a new insurance company that charges a premium price and differentiates on service, where haggling with customers is contrary to the new firm’s customer service norms. Haggling behaviors may not be valued in this new setting, yet they may be very difficult for an adjuster to give up if it has become part of her mental model of how insurance companies make money or how a competent adjuster behaves. Performance can suffer as a result. We addressed these issues using career history data from all applicants to the call centers of a major US property and casualty insurance firm. We conceptually and methodologically distinguished between prior-related experience and task-relevant knowledge and skill as defined by the current organization. By distinguishing prior-related experience from task-relevant knowledge and skills, we were able to

disentangle the positive and negative effects of prior-related experience on performance. Specifically, we predicted that prior-related experience has an overall positive effect on job performance because of the transferable knowledge and skill, but has a negative effect on performance once knowledge and skill is accounted for. To support our contention that this negative effect of prior experience on performance is related to cognitive and behavioral rigidities, we explored whether adaptability and cultural fit made a difference. Interestingly, we found that the effects of priorrelated experience on task-relevant knowledge and skill in the current firm diminish the longer a person is employed at the current firm.

Caveat Employer Our findings reflect the subtleties of the imperfect portability of experience and the importance of adaptability. An employee’s understanding of how her industry works, as well as norms from her prior experiences, may conflict with a new employer’s expectations and result in a negative effect on performance once knowledge and skill is accounted for. In contrast, adaptable workers and those who feel they fit well into the culture of the new firm are less subject to the negative overhang of the past. And while prior-related experience has a positive effect on task-relevant knowledge and skill, firm tenure ultimately becomes more important. Assessing the effects of hiring experienced workers is important because human resources are mobile, and lifetime employment within one firm is a relatively small part of the US employment picture. Workers have differing portfolios of knowledge and skill gained from prior work experience, and these portfolios contribute differentially to a worker’s current job performance. Understanding how past job experiences contribute to organizations’ needs is important. If organizations understand how applicants’ work histories affect their


performance, they might consider the effects of activity was directly sanctioned by Rupert or prior experience in designing selection, training, James, the latter of whom is responsible for or socialization processes. News Corp.’s European and Asian businesses, or it’s a product of an overly aggressive, take-noGINA DOKKO is assistant professor of prisoners corporate ethos. “Both scenarios,” say management and organizations at NYU Stern. Finkelstein, “lead to the same conclusion of STEFFANIE L. WILK is associate professor of culpability. Even if Murdoch didn’t sanction this management and human resources at Ohio State behavior, as the senior executive of the company, University’s Fisher College of Business. NANCY he’s responsible for the culture of the P. ROTHBARD is associate professor of organization.” management at the Wharton School of the University of Pennsylvania. Finkelstein believes the latter situation is more likely, given Murdoch’s reputation in the media This article is republished courtesy of world. Indeed, Murdoch built News Corp. into http://w4.stern.nyu.edu/sternbusiness/ one of the globe’s biggest media conglomerates mostly through his own swashbuckling business tactics. In a 1995 New Yorker profile, he was described as a “pirate” who will “cunningly by Kirk Kardashian circumvent rules, and sometimes principles, to get his way.” Through acquisitions of British Rupert Murdoch, the chairman and controlling tabloids and the New York Post, and his founding shareholder of News Corp., is reportedly fond of of the Fox News network, Murdoch’s penchant saying, “bury your mistakes.” Up until recently, for hard-nosed deal making was matched with a his company was fairly adept at it too. newsgathering spirit that critics contend places In 2009, for instance, News Corp. paid $1.6 sensationalism ahead of truth and accuracy. A million to settle claims connected with alleged corporate history like that, says Finkelstein, sets phone hacking practices dating back to 2005. But a tone for the employees. “Being aggressive, a few weeks ago, those misdeeds bubbled up to sensationalist, and going after your enemies is the surface again when it was revealed that the really what it’s all about, and not necessarily News of the World, one of Murdoch’s British journalistic integrity.”

Murdoch’s own horizon

tabloids, hacked into the voicemail of a missing schoolgirl who was later found dead. Now the scandal is a veritable geyser: News of the World is gone, arrests have been made, Murdoch gave up his bid to take over British Sky Broadcasting, and he and his son James have been summoned to testify before the House of Commons.

The pattern reminds Finkelstein of the revelations about BP’s corporate culture after last year’s Deepwater Horizon oil spill. “There were so many reports from insiders talking about how safety was not a primary concern,” he says. This attitude, Finkelstein believes, flowed directly from the stated priorities of former BP CEO For Sydney Finkelstein, the Steven Roth Professor Tony Hayward, who encouraged cost-cutting at of Management and an expert in leadership and the expense of workplace safety. strategy, there’s no denying that News Corp.’s As this scandal has played out, Murdoch’s troubles are the result of a “colossal leadership response hasn’t been particularly adroit, and management failure.” Finkelstein says. For example, Murdoch decided There are two ways to think about the genesis of to shut down News of the World just three days this failure, Finkelstein says. Either this criminal after the media reported on the hacking of the missing girl’s voicemail. “The fact that he did


that so quickly makes you wonder what else we don’t know,” he explains. “When you make concessions like this, it emboldens your critics and they want more.”

What do you want to be?

To make matters worse, when Murdoch was initially asked to answer questions at the House of Commons, he demurred, stating that he wasn’t available. No CEO wants to submit to questioning from a governmental body, Finkelstein says, but it’s part of the job description, and Murdoch’s unwillingness betrayed the cavalier attitude that probably contributed to this mess. Murdoch changed his mind when the request turned into a summons. The in-demand careers of the future will be very different from those of the not so recent past. From here, the path for the “man who owns the Lynda Gratton’s research reveals the must-have news” gets tricky. Resignations from top-level careers of the future. Three broad career paths executives in News Corp., and even Scotland will be of value (beyond those that are always of Yard, are piling up. The FBI has opened an value) over the coming decade: grassroots investigation into whether or not News Corp. advocacy, social entrepreneurship and microjournalists tried to access the phone records of entrepreneurs. victims of the September 11 attacks. The cycle of disclosures and blame is bound to continue. The Grassroots advocacy only way to leave his son James with a viable business to run, Finkelstein says, may be for In 2009, the strategists at Shell developed two Murdoch to step down. Perhaps only then will scenarios about the future of energy resources. critics believe that a reform of the corporate What is interesting about the Shell 2050 scenario, in the ‘Blueprint’ scenario, is the role that local, culture is possible. regional and global advocates play. They believe “If he asked me,” Finkelstein says, “I’d tell him that rather than a top–down, centralised approach – in an increasingly transparent world, highit’s time to resign.” profile local actors will influence the national This article is republished courtesy of stage. Change will come through the success of http://www.tuck.dartmouth.edu/ many individual initiatives which become linked and amplified around the world and progressively change the character of international debate. These grassroots advocates will become the early developers of experiments, innovative solutions and the adoption of proven practice. We can expect to see advocacy rising in any area that people care about – from the education of children in developing countries, to the eradication of endemic diseases, to the support of small businesses. Expect to see a proliferation of enterprises built around developing and


supporting advocacy skills and capabilities. These could be NGOs like Save the Children which already has a sophisticated programme of support to people who want to volunteer to work with them, and also to those who work as advocates on their behalf. Or they could be companies like Projects Abroad which has sent over 18,500 people to volunteer as interns in areas as diverse as teaching, conservation, medicine and journalism.

Social entrepreneurship For some, advocacy will be about becoming highprofile local actors who galvanise energy, and create ideas about how to move forward. For others, advocacy will entail using their leadership skills and management know-how to create organisations that serve social needs. At the heart of social entrepreneurship is the will to organise, create and manage a venture to make social change. So while a business enterprise measures performance in profit and return, a social entrepreneur focuses on measuring outcomes in broader ways. All over the world, social entrepreneurial businesses are springing up – NIKA Water Company, for example which sells bottled water in the USA and uses 100% of its profits to bring clean water to those in the developing world. Or Newman’s Own, which donates 100% of its total profits to support various educational charities. But it is not just individuals who are making the running here. Across Asia and Europe in particular social entrepreneurs are gathering together in teams, networks, and movements for change. Gen Y is beginning to play a role and we can expect this to gather greater momentum over the coming decades. For example, the Young Social Pioneers group in Australia actively invest in young social entrepreneurs, while Istanbul’s Bilgi Üniversity does the same in Turkey.

Micro-entrepreneurship Small businesses have always played a key role

in the economy of developed and emerging markets. For example, in 2004, 40% of the working population in the USA worked in small business, while 47% of the UK working population did the same. But what it means to be a micro-entrepreneur in 2025 will be very different from now. Although we can still expect large companies to exist in 2025 – and in fact there is an argument that these companies will become even larger – proportionally we can expect more people to work for themselves, or with a small group of other people. Many will be employed in ecosystems that become the hinterland of companies. Like the many thousands of independent people who build the applications for the iPhone – these people will be working on small parts of the value chain. Alternatively, they will be part of a much larger collaboration of many thousands of people brought together to experience economies of scale. Whatever the mechanism of coordination, we can expect a greater proportion of the valuable work in companies to be carried out by people working independently. The main driver of course will be the continuing falling price of IT, combined with the ubiquitous cloud which will allow even the smallest business to use highly sophisticated analytics to track orders, work with third parties and collect money. What has also become more prevalent and will continue to grow is the ability of the Internet to coordinate funding for entrepreneurs – it’s a method for people to donate or invest in ideas they think are exciting or profitable. Lynda Gratton is Professor of Management Practice at London Business School. Her latest book is Hot Spots: Why Some Teams, Workplaces and Organizations Buzz with Energy - And Others Don't (published by Berrett-Koehler in North America and Financial Times/Prentice Hall in the UK).

This article is republished courtesy of London Business School http://bsr.london.edu/lbsarticle/614/index.html


Rethinking rewards Josie Powell

CEO and senior executive compensation is the subject of ongoing discussion in the media, fuelled by periodic disclosures of salary and bonus figures. However, Professor Thomas Noe of Oxford University’s Saïd Business School says most criticism of pay levels and how they relate to performance are unfounded. “The sometimes sensationalist reporting of high salaries is damaging and misses the point,” he says. “There is a lot of misunderstanding about reward and the important part it plays in shaping senior executive behaviour – even among academics. Compensation should not be structured in isolation from the other components of the manager-board relationship. Relying on a naive model of CEO being a sort of super-worker who requires high-powered incentives to motivate effort is misguided.”

Professor Noe calls for a review of the structure of reward packages, which could allow companies to reduce the cost of remuneration without reducing the value of the package for individuals. Companies need to reward senior employees in the most efficient way, he suggests, that is one which achieves the goals the company identifies – such as motivating and directing executives’ efforts – for the least cost. “Changes in the reward package to executives can generate value for firms both through attracting talent at lower cost to the company and through improving the alignment between corporate and executive goals. I would encourage firms to rely less on conventional design and more on tailoring reward packages to their overall business model,” Professor Noe says. Many of the reward practices which are now commonplace arose in response to past tax, accounting or regulatory requirements which have long since been superseded, yet the reward practices have remained in place. In other cases, such as with options, they came to prominence as a result of a government initiative – in this case, to encourage entrepreneurial behaviour among boards. There is no evidence, Noe says, that they do encourage this sort of behaviour, and yet they continue to be widely used, often without a company having any insight into the behaviour they actually encourage. In most circumstances, options are not an effective motivator and are expensive: there are more effective and cheaper alternatives. The debate around the efficacy of options


continues. What is clear is that the valuation of those options is often hard to determine, particularly where stocks are understood to be overvalued. Whilst bonuses have been much criticised, Professor Noe argues that wellconceived performance-related bonuses are a cost effective and logical motivator. ‘Bonuses which rise at a decreasing percentage rate as targets are met, encourage executives to maintain effort beyond a certain point, which can be significant for an organisation. Although the percentage gain decreases as goals are reached, the actual sums of money gained are increasing for the individual and continue to motivate’. In response to the issue of ever rising pay packages Professor Noe comments: ‘The market sets the rate for CEO and senior executive reward levels, so there is little that an individual company can do to keep down the sums here without risking a reduction in its ability to attract and retain the right people. Companies can however reduce the “wasted” pounds or dollars in current packages, represented by those elements which do not effectively motivate staff, which do not encourage the right strategic decisions, nor induce efforts and which they do not value. More efficient alternatives exist.’ Professor Noe concludes: "It is time to review rewards for senior executives. We should beware just following past pay practices we have inherited. We have a strong tendency to do what we have always done, and what our competitors do, and that is not necessarily productive for anyone. The goal is to encourage CEOs and boards to do the right thing strategically for the benefit of the organisation, to take a sufficiently long term view, and to manage risk. Reward can be a powerful means of encouraging particular behaviours, if it is managed well." This article is republished courtesy of http://www.sbs.ox.ac.uk/


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