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. 

Baseball Umpires and the "Inconsequential Bias"

Stanford Graduate School of Business PhD students Etan Green and David P. Daniels have conducted a fascinating new study about umpires in Major League Baseball.   Here's an excerpt from an article on the Stanford website:

Green and Daniels analyzed ball and strike calls made by Major League Baseball umpires for more than a million pitches between 2009 and 2011. In their study, which recently won second place at the MIT Sloan Sports Analytics Conference, they show that an umpire’s strike zone shrinks in counts when the batter already has two strikes (and therefore a third strike would result in an out) and expands when the batter has three balls (with a fourth ball then resulting in a walk). “Oftentimes, the umpires face a choice between a call that would be really pivotal and a call that would be relatively inconsequential,” says Green. “And what we find is that they err on the side of the inconsequential call unless they’re absolutely certain that the pivotal call is the right one.”

What do we take away from this study?  The findings suggest that decision-makers in high stakes situations may be biased toward "punting" - i.e. they may choose the more inconsequential course of action, if one exists, rather than taking the action with more substantial impacts.   We certainly have all been in situations where we choose the "path of least resistance."  Of course, this study differs from the managerial context in organizations, because the umpires do not experience the consequence here.  The batter and pitcher do (though the umpire is more likely, perhaps, to be criticized if he makes a highly consequential call).   In a business context, the decision-maker often experiences the consequences for themselves.  Still, we should be mindful of this potential bias that may affect us in high stakes situations.   

Clutch Performer or Choker?

Kellogg Insight, a website dedicated to featuring new research by Kellogg school faculty, recently described the work of Julio González-Díaz, Olivier Gossner and Brian W. Rogers.  They conducted a study to examine the question:

"In sports, some athletes are known as “clutch players” who consistently perform well under pressure; in the business world, an individual may gain a reputation for maintaining composure and good judgment in the most trying circumstances, ultimately contributing to their organization’s success.  Does this ability to “rise to the occasion” differ measurably across individuals?"  

Fans of baseball may be aware that sabermetrics experts (such as Bill James) have studied this question for years.  Most of them have argued that there is no such thing as "clutch" players in baseball.  These statistical experts have argued that most players perceived by fans as "clutch performers" don't necessarily perform better in crucial situations.  More recently, some studies have shown that "clutch performers" may exist. 

In this research, the authors focused on tennis.  They looked at point-level data over a twelve year period.  They wanted to know if some players had "high critical ability" - i.e. did they consistently perform well on the most important points?   Here is what they found:

"First, players differed “significantly and substantially” in their critical abilities, and these capabilities were important in explaining point outcomes—that is, players with greater critical ability were more likely to win important points than their opponents. Moreover, critical ability was correlated moderately with serving and returning capabilities. Critical ability was also linked with players’ ratings on the Association of Tennis Professionals (ATP) points system over the 12-year period studied. Critical ability’s correlation with ATP rating was about as strong as the link between returning ability—a crucial skill—and ATP rating. The relationship between critical ability and career success remained even when the researchers accounted for players’ experience levels. For the average professional tennis player, the study found that the impact of improving critical ability on ATP rating is 41 percent that of improving their serve, arguably the most important factor in the sport."

What is the implication for leaders in the business world?   Naturally, if we could identify "high critical ability," that would be of immense value.  Unfortunately, management does not lend itself to the kind of quantitative analysis performed by these scholars with regard to tennis players.   Moreover, we know from many baseball studies that our eyes can deceive us.  Many players regarded as clutch by fans do not actually perform better statistically in important situations over a lengthy period of time (i.e. a player might perform better in the clutch one year, but not the next in many instances).  These celebrated players often simply have had some highly memorable moments where they came through in the clutch... and thereby have been labeled as extraordinary in high stakes situations.  For leaders, the lesson is beware of drawing sweeping conclusions based on one or two isolated moments of greatness in the clutch.  However, don't dismiss the notion of high critical ability entirely. Apparently, at least in tennis, clutch performers do exist. 

Torre, Francona and the Importance of Soft Skills

An executive asked me the following question the other day: "How do I persuade the skeptics who continue to denigrate the importance of "soft skills" in management?  Can you give me a concrete example that I can use to help influence their thinking?"   He posed a tough question, because we all know that persuading these skeptics can be a very challenging endeavor.  I offered an  example for him to use that I think might be helpful. Consider the managers of the New York Yankees and Boston Red Sox for much of the last decade - Joe Torre and Terry Francona.  Fans in baseball love to dissect a manager's game decisions.  Should he have issued an intentional walk in the 7th inning?  When should he have pulled his starting pitcher?  Should the manager have pinch hit for the weak-hitting catcher in the 8th inning? 

Often times, I believe fans over-estimate the importance of these "hard skills" for managers.  What do they under-estimate?  The soft skills.  Fans often do not understand how critical the manager's skills are with regard to managing the clubhouse, dealing with different personalities, enforcing team rules, managing conflict, etc.   Torre and Francona, I believe, excelled at these "soft skills" - even though they, at times, frustrated fans with their actual game management decisions.  Were they superb in those "hard skill" areas?  Perhaps.   However, they surely excelled on the soft skills.  A recent example this week reinforced my view on Torre and Francona.  The New York Yankees' current manager, Joe Girardi, did not handle an issue with aging catcher and designated hitter, Jorge Posada, very well at all, and as a result, we had a controversy that stretched for days. 

For business executives, we can take a lesson from this baseball example.  Do we attribute success to the wrong set of skills at times?  Do we fixate on the small technical miscues, while missing the fact that some leaders have tremendous people management skills that actually overwhelm any small technical deficiencies?  What really matters most for organizational performance?  That's what every executive should ask themselves.