Wednesday, April 08, 2015

Don't Pay for Past Performance!

This week marks the beginning of another major league baseball season.   Hope springs eternal.  In my home state, fans believe that our beloved Boston Red Sox will engineer another  magical "last to first" season, much like the 2013 campaign.  In Chicago, fans of the downtrodden Cubs believe that this season might just be the year that they return to respectability.  Of course, most teams have welcomed some new players in the offseason, including some high-priced free agents.  In addition, they have had to say goodbye to some key players who were signed by other teams.  In Boston, we lost ace pitcher Jon Lester to the Cubs.  Fans were not happy.  Management of the Red Sox claimed that they did not want to commit to a 6 year, $155 million contract to a pitcher in his 30s.  The philosophy is clear: Don't pay for past performance.   Fans don't like to hear that.  We fall in love with players based on past performance, and we aren't worried much about what that player will be like in three years.  Management, though, must think about the future.  Smart baseball teams, as well as other sports teams, do not pay for past performance. 

Business leaders should take a cue from the smart general managers in sports.   Of course, in sports, the reason we don't want to pay for past performance is because skills deteriorate with age.  In business, that is not the case.  In fact, performance can increase as managers gain more experience.  However, we still should be worried about paying strictly based on past performance. Why?  What made a manager and an organization successful in the past may not be the key to future success.  Competitive environments, technology, and consumer preferences can change dramatically.  As a result, the needed employee skill sets change.  Someone may have excelled in the past, but they may not have the skills required to succeed in the future.  They may have mental models that are rooted in the past, and they may have a hard time changing those mindsets.   For these reasons, companies need to think about the future drivers of performance, and not simply pay for talent that has excelled in the past. 


Bryant University Graduate School of Business said...

How do you determine the line of paying (and in essence rewarding) for past performance and success versus paying for forward thinking, future success (which in some ways is paying for potential)?
What types of measures or things can a manager look for to make the decision to NOT pay for past performance?
As you stated, sports is a bit easier to make that distinction as skills typically decrease with age and a lot of sport is based on skill level and athletic ability.
Curious to hear your thoughts...Thanks!

Michael Roberto said...

Great question. Definitely easier in sports! Here are a couple thoughts:

1. Are you paying someone because they were part of a unit that achieved great success in the past, but perhaps giving them too much credit for that success? In other words, have you attributed too much of that past success to that particular individual?

2. Is your organization's business model fundamentally changing? Will different functional areas now become more important, or others less important?

3. Will you need to shift people from one business unit to another as time unfolds? Do people's skills transfer to that new unit? Are their skills applicable?

4. How well has that person adapted to change in the past? They might be a high performer, but are they flexible?