Management Practices in Europe, the US and Emerging Markets Nick Bloom (Stanford Economics and GSB) John Van Reenen (LSE and Stanford GSB) Lecture 4: Management and firm Performance 1

Nick Bloom and John Van Reenen, 591, Lincoln & influences on incentives management Incentives/People Management practices Targets Management

United States Sweden Germany Japan Italy France UK Canada US Australia Poland Mexico China New Zealand Portugal India Chile Brazil Argentina Republic of Ireland Greece Foreign multinationals Domestic firms MULTINATIONALS APPEAR TO ACHIEVE GOOD MANAGEMENT PRACTICES WHEREVER THEY LOCATE Sample of 7,262 manufacturing and 661 retail firms, of which 5,441 are purely domestic and 2,482 are foreign multinationals. Domestic multinationals are excluded – that is the domestic subsidiaries of multinational firms (like a Toyota subsidiary in Japan). Management score

LABOR MARKET REGULATION INHIBIT GOOD INCENTIVES MANAGEMENT Note: Averaged across all manufacturing firms within each country (9079 observations). We did not include other sectors as we do not have the same international coverage. Incentives management defined as management practices around hiring, firing, pay and promotions. The index is from the Doing Business database Argentina Australia Brazil Canada Chile China France Germany Great Britain Greece India Italy Japan Mexico New Zealand Poland Portugal Republic of Ireland Sweden UK US World Bank Rigidity of employment index (0-100) Incentives Management (management sample)

Nick Bloom and John Van Reenen, 591, 2012 SUMMARY OF SOME DETERMINANTS OF MANAGEMENT (& PRODUCTIVITY) Product market competition Meritocratic CEO selection Human Capital Ownership –public sector –Multinationals –private equity Labor market regulations

Nick Bloom and John Van Reenen, 591, Wrap up on Lincoln & “drivers” of good management Incentives/People Management practices Targets Management

Nick Bloom and John Van Reenen, 591, Incentives (people) management Today we will run through 6 dimensions on incentives management (part of HR and talent management) The concept is around the management and motivation of people As before, while the data is mainly for manufacturing, these questions have been used in retail, hospitals, schools, healthcare clinics, tax collection agencies, charities, PPPs and law firms

Nick Bloom and John Van Reenen, 591, 2012 Setting up your clicker Press “GO” Then slowly press “0” and then “5” (channel is “05”) Then slowly press “GO” again A green light should appear signaling the clicker worked

Nick Bloom and John Van Reenen, 591, 2012 Score(1): People are promoted primarily upon the basis of tenure (3): People are promoted upon the basis of performance (5): We actively identify, develop and promote our top performers (16) Promoting high performers

Nick Bloom and John Van Reenen, 591, 2012 (16) Promoting high performers (1): People are promoted primarily upon the basis of tenure (3): People are promoted upon the basis of performance (5): We actively identify, develop and promote our top performers

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (16), promoting high performers – all countries, manufacturing 11 All countries, manufacturing firms (100 to 5000 employees), 9820 observations Average 3.02

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (16), promoting high performers: developed countries, hospitals 12 Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observations Average 2.44

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (16), promoting high performers : developed countries, schools 13 Schools in Canada, Germany, Sweden, UK, US 777 observations Average 2.41

Nick Bloom and John Van Reenen, 591, 2012 (14) Rewarding high performance (1): People within our firm are rewarded equally irrespective of performance level (3): Our company has an evaluation system for the awarding of performance related rewards (5): We strive to outperform the competitors by providing ambitious stretch targets with clear performance related accountability and rewards

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (14), rewarding high performance – all countries, manufacturing 15 All countries, manufacturing firms (100 to 5000 employees), 9820 observations Average 2.61

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (14), rewarding high performance: developed countries, hospitals 16 Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observations Average 2.31

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (14), rewarding high performance: developed countries, schools 17 Schools in Canada, Germany, Sweden, UK, US 777 observations Average 2.18

Nick Bloom and John Van Reenen, 591, 2012 Score(1): Poor performers are rarely removed from their positions (3): Suspected poor performers stay in a position for a few years before action is taken (5): We move poor performers out of the company or to less critical roles as soon as a weakness is identified (15) Removing poor performers

Nick Bloom and John Van Reenen, 591, 2012 (15) Removing poor performers (1): Poor performers are rarely removed from their positions (3): Suspected poor performers stay in a position for a few years before action is taken (5): We move poor performers out of the company or to less critical roles as soon as a weakness is identified

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (15), removing poor performers – all countries, manufacturing 20 All countries, manufacturing firms (100 to 5000 employees), 9820 observations Average 3.11

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (15), removing poor performers – USA, manufacturing 21 Manufacturing firms (100 to 5000 employees), 1291 observations Average 3.73

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (15), removing poor performers – Japan, manufacturing 22 Manufacturing firms (100 to 5000 employees), 176 observations Average 2.78

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (15), removing poor performers – France, manufacturing 23 Manufacturing firms (100 to 5000 employees), 605 observations Average 2.90

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (15), removing poor performers – India, manufacturing 24 Manufacturing firms (100 to 5000 employees), 1135 observations Average 2.81

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (15), removing poor performers – US, Canada and UK, retail 25 All countries, retail firms (100 to 5000 employees) 660 observations Average 3.03

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (15), removing poor performers: developed countries, hospitals 26 Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observations Average 2.56

Nick Bloom and John Van Reenen, 591, 2012 Score(1): Our competitors offer stronger reasons for talented people to join their companies (3): Our value proposition to those joining our company is comparable to those offered by others in the sector (5): We provide a unique value proposition to encourage talented people join our company above our competitors (17) Attracting human capital

Nick Bloom and John Van Reenen, 591, 2012 (17) Attracting human capital (1): Our competitors offer stronger reasons for talented people to join their companies (3): Our value proposition to those joining our company is comparable to those offered by others in the sector (5): We provide a unique value proposition to encourage talented people join our company above our competitors

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (17), attracting human capital – all countries, manufacturing 29 All countries, manufacturing firms (100 to 5000 employees), 9739 observations Average 3.06

Nick Bloom and John Van Reenen, 591, 2012 Score(1): We do little to try and keep our top talent. (3): We usually work hard to keep our top talent. (5): We do whatever it takes to retain our top talent. (18) Retaining human capital

Nick Bloom and John Van Reenen, 591, 2012 (18) Retaining human capital (1): We do little to try and keep our top talent. (3): We usually work hard to keep our top talent. (5): We do whatever it takes to retain our top talent

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (18), retaining human capital – all countries, manufacturing 32 All countries, manufacturing firms (100 to 5000 employees), 9782 observations Average 2.55

Nick Bloom and John Van Reenen, 591, Some “drivers” of good management Incentives/People Management practices Targets Management

Nick Bloom and John Van Reenen, 591, Targets management Run through 5 dimensions on targets management (questions 8 to 12 on the grid) The concept is around the setting of stretching targets As before, while the data is mainly for manufacturing, these questions have been used in retail, hospitals, schools, healthcare clinics, tax collection agencies, charities, PPPs and law firms

Nick Bloom and John Van Reenen, 591, 2012 Score(1): Goals are exclusively financial or operational (3): Goals include non-financial targets, which form part of the performance appraisal of top management only (they are not reinforced throughout the rest of organization) (5): Goals are a balance of financial and non-financial targets. Senior managers believe the non-financial targets are often more inspiring and challenging than financials alone. (8) Target balance

Nick Bloom and John Van Reenen, 591, 2012 (8) Target balance (1): Goals are exclusively financial or operational (3): Goals include non-financial targets, which form part of the performance appraisal of top management only (they are not reinforced throughout the rest of organization) (5): Goals are a balance of financial and non- financial targets. Senior managers believe the non-financial targets are often more inspiring and challenging than financials alone

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (8), target balance – all countries, manufacturing 37 All countries, manufacturing firms (100 to 5000 employees), 9824 observations Average 2.89

Nick Bloom and John Van Reenen, 591, India, manufacturing firms (100 to 5000 employees), 1136 observations Average 2.44 The survey scores to question (8), target balance – India, manufacturing

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (8), target balance – US, Canada and UK, retail 39 All countries, retail firms (100 to 5000 employees) 661 observations Average 2.74

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (8), target balance: developed countries, hospitals 40 Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observations Average 2.73

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (8), target balance: developed countries, schools 41 Schools in Canada, Germany, Sweden, UK, US 777 observations Average 2.70

Nick Bloom and John Van Reenen, 591, 2012 Score(1): Goals are based purely on accounting figures (with no clear connection to shareholder value). (3): Corporate goals are based on shareholder value but are not clearly communicated down to individuals (5): Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations. (9) Target interconnection

Nick Bloom and John Van Reenen, 591, 2012 (9) Target interconnection (1): Goals are based purely on accounting figures (with no clear connection to shareholder value). (3): Corporate goals are based on shareholder value but are not clearly communicated down to individuals (5): Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations.

Nick Bloom and John Van Reenen, 591, 2012 Target interconnection (9): all countries, manufacturing 44 All countries, manufacturing firms (100 to 5000 employees), 9813 observations Average 3.01

Nick Bloom and John Van Reenen, 591, 2012 Score(1): Top management's main focus is on short term targets. (3): There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other (5): Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals (10) Target time horizon

Nick Bloom and John Van Reenen, 591, 2012 (10) Target time horizon (1): Top management's main focus is on short term targets. (3): There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other (5): Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals

Nick Bloom and John Van Reenen, 591, 2012 Target time horizon (10): all countries, manufacturing 47 All countries, manufacturing firms (100 to 5000 employees), 9814 observations Average 2.99

Nick Bloom and John Van Reenen, 591, 2012 Score(1): Goals are either too easy or impossible to achieve; managers provide low estimates to ensure easy goals (3): In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" that are not held to the same rigorous standard (5): Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale (11) Targets are stretching

Nick Bloom and John Van Reenen, 591, 2012 (11) Targets are stretching (1): Goals are either too easy or impossible to achieve; managers provide low estimates to ensure easy goals (3): In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" that are not held to the same rigorous standard (5): Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale

Nick Bloom and John Van Reenen, 591, 2012 Targets are stretching (11): all countries, manufacturing 50 All countries, manufacturing firms (100 to 5000 employees), 9819 observations Average 3.00

Nick Bloom and John Van Reenen, 591, 2012 Score(1): Performance measures are complex and not clearly understood. Individual performance is not made public (3): Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged (5): Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition (12) Performance clarity

Nick Bloom and John Van Reenen, 591, 2012 (12) Performance clarity (1): Performance measures are complex and not clearly understood. Individual performance is not made public (3): Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged (5): Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition

Nick Bloom and John Van Reenen, 591, 2012 Performance clarity (12): all countries, manufacturing 53 All countries, manufacturing firms (100 to 5000 employees), 9821 observations Average 2.67

Nick Bloom and John Van Reenen, 591, 2012 My favourite quotes Interviewer: “How many production sites do you have abroad? Manager in Indiana, US: “Well…we have one in Texas…” Americans on geography Production Manager: “We’re owned by the Mafia” Interviewer: “I think that’s the “Other” category……..although I guess I could put you down as an “Italian multinational” ?” The difficulties of defining ownership in Europe

Nick Bloom and John Van Reenen, 591, Wrap up 1) Large variation in targets practices – best organizations set broad, clear and balanced targets which are tough but feasible 2) Variation common across all industries we have looked at – manufacturing, retail, schools, hospitals, clinics and charities 3) As with monitoring potential for improvement is extensive, especially in smaller organizations and developing countries

Nick Bloom and John Van Reenen, 591, 2012 The survey scores to question (15), removing poor performers: developed countries, schools 56 Schools in Canada, Germany, Sweden, UK, US 777 observations Average 2.50