Month: October 2015

Last week I said we’d start exploring the relationship between the motivator factors described by Frederick Herzberg and James Surowiecki’s wise crowds as a way of describing the sort of investments business leaders should make in their employees.

But over the last few days I’ve seen several more articles about Dan Price and Gravity Payments. I’ve talked about Dan before and I really like what he’s doing. His experience has been a compelling, real-life example of what I’m trying to describe on this blog, and I read just about every article I see.

So I was brought up short when one of the more recent articles about Dan quotes him as saying that “establishing a $70,000 minimum wage is a moral imperative, not a business strategy.”

Is it? A moral imperative?

So far I’ve taken the position that it’s not anyone’s place to decide what’s a moral wage. It strikes me as a fundamentally un-capitalist thing to say what we pay our employees is a moral question. Market wages are, by definition, the average of the wages that thousands of willing employees and thousands of willing employers agree on to accomplish any given task. So, burger flippers make $7.50 an hour and good welders make $100,000 per year. That’s not my decision, it’s the market’s. And the people in the market are, on the whole, not dumb, so how is it immoral of me to pay my employees less than $70,000 if the market salary is $35,000 and my employee willingly accepts that salary?

I’m reading a new book, Thinking Fast and Slow, by Daniel Kahneman, that talks about our tendency to accept what is familiar as true, so I took the time to reflect on this position.

There’s a central assumption about market wages that bears some scrutiny: whether market wages really are the average of the independent decisions of a bunch of employers and employees meeting in a marketplace with perfect information and a tendency to act rationally in their own self-interest.

When I stopped to think about it, I realized that this probably isn’t true. I’m not an economist (although I almost was) but the idea of a market wage, or, more precisely, a market-clearing wage, is a theoretical construct that doesn’t describe reality very well.

In The Wisdom of Crowds, James Surowiecki cites an interesting study into retail price-setting. He cites the study as evidence of the proposition that convention has as much to do with price-setting as does the demand for a particular good. In effect, he says, “companies [simply] decided on the price they were going to charge and charged that price regardless of what happened.” Now I know that’s a simplistic construct, but if he’s generally right about the strong role that convention plays in how prices are set (and I think he is), there are some important correlations about retail prices and wages that can be made.

After all, wages are simply the price of labor, and the people who decide retail prices are very often the same people who decide wage rates. Just as retail prices are not pure reactions to shifting demand patterns, wages are not set by pure reaction to shifting labor needs. Employers routinely decide that a job function isn’t worth more than a certain wage, regardless of the employee’s demands. With a global economy, accommodating an employer’s decision in this regard is easier than ever. On the other hand, employers also frequently decide to pay their employees more than the market wage.

In any event, I’m not particularly concerned here with why the theory of a market wage doesn’t match the reality of how wages are determined; it’s sufficient to acknowledge the possibility that it doesn’t.

It’s sufficient for my purposes here because if you accept the possibility that market wages aren’t really an accurate reflection of the objective value of a particular job, it’s a whole lot easier to accept the idea that we should consider morality in determining what to pay our employees.

There’s a second important assumption of how market wages are determined that is relevant here. That is, to the extent that market does reflect the average of the expectations about wages held by thousands of employers and employees, there’s nothing to say the market wage actually arrives at the right outcome. The wisdom of the crowd being what it is, the market wage—to the extent it reflects the right outcome at all—is just a better approximation than any individual participant is likely to arrive at.

In other words, because the labor market is essentially an open market in the U.S., and because the market wage is essentially the average of the decision of all participants in any given sector, the market wage takes into account the judgments of all the decision-makers, the good ones and the bad ones. Some are really good, and some are really bad. And as James Surowiecki points out, the crowd is wiser when more people—not fewer—contribute to the decision-making process.

The critical question is how that moral position is expressed in the market. Each market participant is a flawed participant. We have biases, incomplete information, and idiosyncrasies that make our individual judgments less reliable than they otherwise could be. Thankfully, our flaws are not all aligned. If we’re permitted to act independently on the basis of our own convictions, moral or otherwise, and regardless of our flaws, Adam Smith’s invisible hand takes over and our flaws begin to cancel each other out, leaving the market result better than we’d reach individually.

So the fact that a market wage exists isn’t an argument against taking a moral position at all. In fact, it’s an argument for taking a strong moral position about what wages should be. By contributing our moral convictions to the market decision-making machine, we’re actually making the market result better.

So I guess I agree with Dan; as long as he means its an individual moral imperative and not a governmental one, establishing a $70,000 minimum wage is a moral imperative.

Just don’t tread on me.

I’ve talked a lot on this blog about making investments in our employees. For the most part, that talk has been framed in terms of increasing our employee’s pay as much as possible. But there is much more to investing in our employees than merely paying them more.

In 1968, Frederick Herzberg wrote a now-classic article for the Harvard Business Review titled How Do You Motivate Employees? The basic premise of his article was that there are two kinds of factors that employers can use to increase the output of their employees. He calls the first a hygiene factor (he also euphemistically calls it a KITA, always abbreviated just so); the second, he calls a motivator. A hygiene factor works by applying an external stimulus to the employee, while a motivator increases the employee’s internal motivation for accomplishing any given task. While hygiene factors often result in short-term gains, they’re insufficient to achieve truly lasting growth.

Fred illustrates the concept with a simple question about motivation: “If I kick you in the rear (physically or psychologically), who is motivated?” Answering his own question, he explains, “I am motivated; you move.”

Turning it around he asks, “If I say to you, ‘Do this for me or the company, and in return I will give you a reward, an incentive, more status, a promotion, all the quid pro quos that exist in the industrial organization,’ am I motivating you?” Fred reports that the overwhelming majority of managers respond affirmatively, that this is indeed motivation.

Unfortunately, they’re wrong.

Just like the threat of physical punishment, the promise of a reward is external motivation. If Fred gives his dog a biscuit and his dog moves, the dog doesn’t move because it wanted to but because Fred wanted it to.

It’s a profound insight.

The answer, Fred explains, is to install a generator in an employee; to give or to help the employee find a reason for wanting to accomplish the work with which they’re tasked. Fred discusses several factors that help to install that generator: achievement, recognition for achievement, the work itself, responsibility, and growth or advancement.

As leaders, our primary responsibility is to build a team that can accomplish the task at hand. Sometimes it’s a team of one, sometimes it’s a multinational corporation. But whatever the size of the team, we are responsible for its creation and for helping it to achieve its purpose. In order to do that, we’ll need to invest the members of our teams with the ability, and the responsibility, to fulfill their roles effectively. This means, as James Surowiecki points out in The Wisdom of Crowds, that we’ll need to decentralize decision-making as much as possible, for “people with local knowledge are often best positioned to come up with a workable and efficient solution. The virtues of specialization and local knowledge often outweigh managerial expertise in decision making.”

Using Fred’s motivators and James’ wise crowds both amount to making an investment in our employees. We’ll explore the relationship between them over the next few weeks.

 

Of capitalism, James Surowiecki says that it’s “healthiest when people believe that the long-term benefits of fair dealing outweigh the short-term benefits of sharp dealing.”

This concept isn’t strictly limited to capitalism, which is not surprising since it comes from a book in which the author argues effectively that organizations can be—and when given the right configuration, often are—better at making decisions than individuals. So it is that families, the 501st Legionnaires, and the stock market are all healthiest when people are invested in the long-term stability of the organization and in the candid, unrestricted interaction of their respective constituents in pursuit of a common goal.

This is a concept that is especially relevant to anyone who wants to implement an otherish approach to business. In fact, it’s intimately related to the concept of otherishness to begin with. It means that in order to accomplish the greatest good that can come from capitalism, we must adopt a long-term perspective that emphasizes outcomes that are appropriate to the nature of the relationship rather than outcomes that will leave one or the other party feeling ill-used.

Dave Ramsey, one of my favorite thinkers, frequently says that two of the primary reasons to get out of debt are the ability to build wealth and the ability to start giving like crazy. And he pounds over and over again on the idea that our incomes are the most effective wealth-building tool we have. I love what he says. Once we’ve reached the point where we can reliably take care of our own needs, giving is one of the most consistently satisfying opportunities we have, and giving takes wealth.

Wealth is a funny word. Its root, weal, is derived from an Old English word that means well-being. Political scientists still use it in its archaic sense when they talk about the common weal, meaning the well-being that pertains to a society as a whole. Wealth, then, carries with it the concept of well-being that I think, sadly, only vaguely persists in most people’s minds.

A few years ago, after hearing Dave talk about building wealth and giving it away, I started to wonder: how much is “crazy”? Is giving away 10% of your income crazy? What about 50%? Or 90%? Is there a point at which giving like crazy is no longer good?

I’ve talked about the problem with charities before. I’ve also pointed out that while a gift that satisfies an immediate need is good, a greater gift is one in which the giver works face-to-face with the receiver and gives to him so that “his hand will be fortified so that he will not have to ask others [for alms].”

Here’s where we tie all these thoughts together.

Businesses, small and large, are the engines of our economy.

If it’s true, as Dave says, that the most effective wealth-building tool is a person’s income, then a business has two of the most effective tools for improving the well-being of its employees: (1) the ability to teach and hone valuable skills and (2) the ability to improve an employee’s income.

If it’s also true, as James says, that capitalism is healthiest when people act fairly toward others rather than trying to take short-term advantage, then to be otherish in business—that is, to see the business primarily as a means to have a positive impact on its employees by developing their skills and by paying them the highest possible wages rather than primarily as a means to benefit the owners—is a spectacular way to create healthy capitalism.

The best part of being otherish, in business or anywhere else, is that it creates a positive feedback loop; employees who recognize the investment made in their own well-being are more likely to reciprocate. Because the nature of the relationship is one where the employees’ well-being is a high priority, they will align their goals with the company’s goals and drive further growth. As long as the company maintains its employee-centric focus, the continued growth will compound on itself and help more employees more effectively.

 

 

 

Adam Grant, in his book Give and Take, explains that successful givers have a distinctive approach to success. While takers are focused on themselves and matchers seek balance, otherish givers “are inclined to . . . characteriz[e] success as individual achievements that have a positive impact on others.”

All too often, business leaders like to believe that it is the force of their vision or the brilliance of their ideas that primarily drives the success of their business. Unfortunately, that’s rarely true.

No doubt, a leader’s insight can be the catalyst that changes how a business or even a whole market operates. But few leaders work alone. Even fewer can claim sole credit for their visions or their brilliant ideas.

One of the perverse consequences of our inordinate focus on solo (or small group) success is that it ignores the input from the teams that support us. A couple of weeks ago I heard about a book by James Surowiecki titled The Wisdom of Crowds. It arrived today and after we got the kids to bed I read the first few chapters. In those chapters, James explains how a crowd that is diverse, that is composed of independent agents, and that maintains a certain kind of decentralization, will select the wisest outcome more consistently than a single person or a select group of experts.

James explains that we can make better decisions by leveraging the collective wisdom of a group of people who are each informed about the task at hand but who bring to bear a distinct set of skills and perspectives. His point is not new. But it is important.

A successful leader will surround herself with people who complement her strengths and weaknesses. She’ll put them in roles suited to their skills and interests. As she does so, she’ll build a team that expands her capacity along two dimensions. Not only will her team bring a greater collective competence to bear, they’ll also far outstrip her in the sheer number of hours they can devote to the work.

No matter how many hours she has put in, her employees collectively have known more and have devoted many hundreds more hours toward the work. This realization should inspire great humility in that leader.

This humility leads naturally to an otherish approach in business. It would, as Adam Grant says, “require dramatic changes in the way that organizations hire, evaluate, reward, and promote people. It would mean paying attention not only to the productivity of individual people but also to the ripple effects of this productivity on others.”