Glaxo changes compensation plan for sales employees

Companies adopt compensation plans to better align the incentives of employees with those of the owners.  Commissions have traditionally been used in many sales jobs to encourage employees to sell as much as they can.  But that can lead the sales team to push product to every potential customer, regardless of whether the customer can use the product or not.

Bloomberg reports that GlaxoSmithKline is considering changes in its Patients First pay plan for sales employees.  The plan, launched in 2011, shifted the emphasis away from sales and toward "scientific knowledge, selling competency, customer evaluations, and overall performance of the representative's business unit."  The general idea is to reward the competencies that are believed to lead to strong customer relationships, as opposed to rewarding short-term, hardball sales tactics.  GSK is looking at making some adjustments to Patients First, including testing sales reps for product knowledge.  Looks like remembering those organic chemistry formulas has a payoff after all!

Can feds lower college costs?

President Obama announced a plan to lower college tuition yesterday.  The key elements are a new set of college performance rankings (done this time by the US Dept of Education, not US News) that will eventually be linked to federal financial aid.  As WP's Ezra Klein points out, the rankings piece can be done without Congressional approval, but Congress would have to approve any changes to the formulas regulating how federal aid is divvied up. 

I have long felt that informational asymmetries have been an issue that require some regulatory action by state or federal governments.  Colleges do not report in any accessible, systematic way their graduation rates or what happens to students when they graduate.  College is a huge investment, but there are no data on graduation rates, placement rates, and salaries by major at most institutions of higher learning.  Collecting such data is not an easy task and publishing it in a way that will inform decisions while protecting the privacy of individual students will be a challenge. 

But (as you might expect) there is much, much more to the Obama plan than a dictate to collect and publish more data.  I am skeptical of any pay-for-performance scheme the feds would cook up.  Suppose the feds include graduation rates as a key part of their performance measure -- what do you think colleges might do to make sure they have high graduation rates?  Any formula can be gamed and, trust me, if fed funds are at stake there would be a whole lot of gaming going on.  And do we really need another Race to the Top for colleges and universities????

Although college-bashing has become routine in the media, keep in mind two facts: (1) the rate of return to a completed college degree is much higher than anyone is likely to see in the financial markets and (2) the U.S. system despite its flaws remains the envy of the world and is one of the few sectors where we run a trade surplus. 

JC Penney believes in pay for performance

JC Penney recruited former Apple exec Ron Johnson to turn the company around.  And he did, albeit not in the direction that the JCP Board had in mind. 

Usually when we see a CEO depart, we also hear about a 7 or 8 figure separation package.  Johnson walks away with the stock he received when he became CEO -- stock that is worth 50% less.  Nothing more, unless he qualifies for unemployment benefits.  WSJ reports that Johnson walked away from $107m of Apple stock when he became JCP CEO. 

This is a unique case of very high-powered incentives where the well being of the CEO was perfectly aligned with that of the shareholders.  Chicago Booth's Steve Kaplan notes in WSJ that most CEOs negotiate a termination package on the way in as a form of insurance.  Not sure how much insurance an exec like Johnson really needs (he made $138m in his last years at Apple after cashing out his options), but one must always be aware of earnings opportunities elsewhere that execs walk away from when they take a new job. 

Bonuses instead of raises

Today's WP has a story about how more and more companies are using bonuses instead of pay raises to reward high-performing employees.  A survey for Aon Hewitt found that companies had reserved 15% of payroll for bonuses as opposed to 3% for raises.  From an employer perspective, this practice allows companies to target rewards and avoid getting locked into long-lasting salary commitments. Employers also think that performance-based rewards get employees to focus on behaviors that boost the bottom line.  

On the employee side, a bonus is better than nothing.  But companies are less likely to provide bonuses in years when financial performance is lackluster, so employees would do well not to count on bonuses year in and year out.  

Side thought: Companies rarely, if ever, cut salaries.  Why is this practice considered taboo?  Prices for everything else go up and down as the market demands, e.g., gasoline, groceries, housing.  Will we soon get to a point where wages and salaries can go down as well as up? 

Economic profits as a performance metric

Students in MBA 505 learn about pay for performance and economic profits.  Yesterday's WSJ reports that economic profits (total revenue less taxes, operating costs and the cost of capital) is increasingly being used as a metric in pay-for-performance plans.  In a recent PriceWaterhouseCoopers survey, 27% of the respondents said they were using economic profits, whereas only 19% were using stock prices. 

Why are economic profits becoming more popular as a measure?  After all stock price is what shareholders should be caring about, so stock grants and stock options would be the best way to align the interest of managers and shareholders.  However, stock prices are a forward looking measure taking into account a wide range of variables, many of which are outside the realm of control for middle or even top managers.  Economic profits are an indicator of cash flow, a variable that is much easier for managers to control, either through increased revenue or lower cost. 

One thing Pepsi and Coke have in common is that both reward execs using economic profits as the basis for bonus calculations. 

Merit pay versus collective bargaining

One of many issues embedded in the recent controversy over collective bargaining rights for state employees is how should pay be determined.  Typically under union contracts, pay raise are given out across the board, either in percentage terms or absolute dollar amounts.  Critics say this is unfair because the best and worst performers get the same reward.  Far better to have merit pay, they say.

I generally support that argument, but merit pay in the public sector is no slam dunk either, as pointed out in a recent NYT op-ed by UCLA management prof Sam Culbert.  As Jenkins MBAs all learn in their first semester, it is not easy to define performance and it is even more difficult to adopt appropriate metrics. 

Performance reviews corrupt the system by getting employees to focus on pleasing the boss, rather than on achieving desired results. 

Culbert thinks performance reviews should be replaced by a process he calls "performance previews" where the boss and the employee agree on goals and metrics, followed by regular consultations to make sure the targets are being met (or, if need be, readjusted). 

High-powered incentives for the UAW?

WSJ reports that General Motors wants its unionized workers to have part of their pay tied to the company's financial performance.  From a financial standpoint, this appears to make a lot of sense on the surface, as worker pay would go down when the company has bad years thus reducing the variance of profits. 

I see at least two reasons why this may not end well.  First, GM stockholders and bondholders have multiple ways of hedging any risk associated with the assets they own, as anyone who has taken an MBA level finance course should easily understand.  Are profit-sharing or bonus plans desirable for UAW members?  These are individuals who for the most part have limited financial resources beyond their wages, benefits and home equity.  By putting more pay at risk, it is not clear what they can do to offset that risk.  Perhaps UAW members would have more stable jobs if the price of labor fell during downturns, but if I were a UAW member familiar with the long run trend of employment in the domestic auto industry I would be skeptical.  On the surface this looks like a classic case of inefficient shifting of risk from stockholders to workers. 

Second, how much would a pay-for-performance plan affect employee behavior?  This looks like a classic case of what I call the 1/n problem where individual workers see that the impact of their own behavior on the bottom line is virtually zero in any organization where the number of employees (n) is 100 or more.  Given the decades of mistrust between GM and the UAW, it is hard for me to see any new pay scheme changing productivity, especially in an industry where workers have little control over the pace of work and the connection between individual contributions and company outcomes is tenuous. 

What role should student evaluations play in assessing professor performance?

NYT blogger Stanley Fish (former Duke English professor and very well known academic) has some not-so-kind words for student evaluations. Fish's main point is that the end of the semester is rarely the best vantage point for determining what you have gained from a particular course and its professor.  Money quote:

Students tend to like everything neatly laid out; they want to know exactly where they are; they don’t welcome the introduction of multiple perspectives, especially when no master perspective reconciles them; they want the answers.

But sometimes (although not always) effective teaching involves the deliberate inducing of confusion, the withholding of clarity, the refusal to provide answers; sometimes a class or an entire semester is spent being taken down various garden paths leading to dead ends that require inquiry to begin all over again, with the same discombobulating result; sometimes your expectations have been systematically disappointed. And sometimes that disappointment, while extremely annoying at the moment, is the sign that you’ve just been the beneficiary of a great course, although you may not realize it for decades.

Fish is alarmed to see some states using student evals as a component of performance-based pay for faculty.  His fear is that faculty who provide high entertainment value will eventually crowd out those who provide solid learning and development.

My own take as associate dean who regularly sees student evaluations: It provides useful information about classroom performance (especially at the tails of the distribution) but it should not be the only metric.  Faculty also need to be involved, especially for evaluating whether a course is being taught at the proper level of rigor.  Also alumni can provide a perspective that current students cannot bring.