Peter Principle or Dilbert Principle*

In case you haven't heard, Jeff Zucker has just been named president of CNN. Since we've been discussing incompetent executives lately, this seems like a good time to ask how, despite huge stakes, fierce competition and multiple layers of screening, incompetents still sometimes manage to make it to the top of large corporations.

At first glance, Zucker would appear ot be a perfect example of the Peter Principle, an effective producer promoted past his talents, but when you look closer at Zucker's one big accomplishment, the resurgence of the Today Show, you see less proof of competence and and more evidence that corporate reputations are often built on unrepresentative baselines, delayed effects, external factors and the tendency to embrace appealing and established narratives.

First some background via Wikipedia (as are all block quotes unless otherwise noted).

In 1989, [Zucker] was a field producer for Today, and at 26 he became its executive producer in 1992. He introduced the program's trademark outdoor rock concert series and was in charge as Today moved to the "window on the world" Studio 1A in Rockefeller Plaza in 1994. Under his leadership, Today was the nation’s most-watched morning news program, with viewership during the 2000-01 season reaching the highest point in the show’s history. ... In 2000, he was named NBC Entertainment's president.

Sounds pretty good, but remember two things that happened at the Today Show in 1990 an 1991. The first was a disastrous transition from Jane Pauley to Deborah Norville. You could make the case that Norville was actually better qualified for the job, but that did nothing to soften the viewer reaction. The younger Norville was seen as taking advantage of looks and youth to steal Pauley's position. Saturday Night Live even did a sketch entitled "All About Deborah Norville."

The ratings took a hit from the debacle, but Norville was soon gone, setting the stage for an upturn. That recovery was all but guaranteed by the hiring in 1991 of Katie Couric, a journalist who could have been genetically engineered to host a morning show.

Whoever got the producer's gig in 1992 was almost certain to oversee a substantial rise om ratings as the memory of the debacle faded and Couric started bringing in viewers. Now add in what was going on at Today's significant competitor.

Good Morning America entered the 1990s with its overwhelming ratings success. Gibson and Lunden were a hard team to beat. But Good Morning America stumbled from its top spot in late 1995. Lunden began to discuss working less, and mentioned to network executives that the morning schedule is the hardest in the business. ABC executives promised Lunden a prime time program; Behind Closed Doors would be on the network schedule. On September 5, 1997, Lunden decided to step down after seventeen years on Good Morning America and was replaced by Lisa McRee. Gibson and McRee did well in the ratings. However, ratings sharply declined when Gibson also left the show to make way for Kevin Newman in 1998. With McRee and Newman as anchors of Good Morning America, long-time viewers switched to Today, whose ratings skyrocketed and have remained at the top spot since the week of December 11, 1995.

In other words, Zucker started with an artificially low baseline, was handed a major TV personality on the verge, and saw his competition fall apart at exactly the right time. All of the important drivers of the show's success were things he had nothing to do with.

Just to be clear, many, probably most CEOs get their jobs because they are smart and capable and add value to the company, but there are other ways to  succeed in business. You can:


Fit in with the culture;

Make the right friends;

Couple your career with rising leaders and initiatives;

Fashion a persona that complements the favored narratives;

As for that last one, the legend of the studio boy wonder runs deep in the entertainment industry, from Thalberg to Silverman. When Zucker was put in charge of Today in his twenties and NBC in his thirties, he tapped into something both familiar and resonant.

But Thalberg and Silverman really were boy wonders who had laid down impressive resumes before they were put in charge. Zucker only had the perception of success. Sometimes, though, that's enough.



* Technically not the Dilbert Principle, but close.

Right to work is anything but!

This is right on:

Now naturally an employer's not going to want to agree to that. But he's not going to want to agree to higher pay or more vacation days either. That's why it's a negotiation. A right-to-work law is a law banning employers from making that concession.

The impact, obviously, is to make it hard to form strong unions in a given jurisdiction and thus make it a more business-friendly jurisdiction. But note that this same trick works across the board. You could just ban pay raises in general. Any one firm, after all, faces a dilemma. On the one hand it would be more profitable to pay people less. On the other hand, it's also unprofitable to have everyone quit to go work for some other higher-paying company. So a law against pay raises would make everyone more profitable, spurring crazy business investment and job creation. Except nobody does that because it would be (a) insane and (b) obviously unfair. And yet the proponents of right-to-work laws are generally exactly the people most inclined to stand up for freedom of contract under other circumstances.
 

 It is very odd that right to work has become a libertarian position.  Employment contracts require both sides to be able to bargain freely.  In an "Adam Smith" nation of shopkeepers, where an employee is bargaining with a single business owner there is some sort of sense to this arrangement.  But business has a lot of money and power relative to workers.  Why would it be illegal to try and pool resources on the worker side when it is fine for a pool of owners to pool resources by forming a corporation?  Do we honestly think that corporations don't also try and influence the political process via lobbying and donations just as unions do? 

Wage controls are also not without precedent but at least the contradiction is more immediate and obvious.  Now, I am not a libertarian but I would really like to know how this sort of ban on organizing groups is a loss of freedom.  Sure, you could end up belonging to a group you did not intend to join.  But we don't ban corporate takeovers because the workers never consented to being a part of the acquiring company, do we? 

I'm a Mac... and I'm about to be eaten by feral dingoes

Yet another reason to stick with the Android.

Hostess Pensions

Some choice quotes from a Yahoo! News article on the Hostess pension plan hijinks (called by one person in the article a "Betrayal without remedy):

Mr. Rayburn became chief executive in March and learned about the issue shortly before the company shut down, he said. "Whatever the circumstances were, whatever those decisions were, I wasn't there," he said.

and

It might have been "impossible" to undo the agreements that called for Hostess to make pension contributions using employee money, Mr. Rayburn added. One reason: Hostess could have been too short of cash to make up the difference, though he said he isn't sure.
 

Now it is true Mr. Rayburn was a last minute CEO and may well have ended up leading a company that was in worse shape than expected.  But how he could not know basic details like whether the company had enough cash to meet obligations or not suggests a lot of disarray.  I understand that precise numbers in a large business are illusory, but he should have a decent idea given that it was a major sticking point of union negotiations.

Similarly, claiming that he can't take responsibility for previous bad decisions makes sense at some level.  But at another level it makes me wonder how anybody can negotiate with an entity that can change management and request a clean slate on past misdeeds since the current teram was not there.

Krugman versus Yglesias

Paul Krugman has two explanations for why profits are rising at the expense of workers:

As best as I can tell, there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.
 

Matt Yglesias advances what I think is a better explanation:

 To put it nonpolemically, you can see in the chart that not only is there a structural trend in the labor share of output, there's also a strong cyclical trend. The labor share declines during recessions and rises during booms. And the problem of the Federal Reserve is that over the past 30 years, it has a perfect track record of never allowing inflation (which is to say a sustained period in which wages rise faster than productivity), but it doesn't have a perfect track record of never allowing recessions. The inevitable consequence of this asymmetrical success is for the labor share to steadily decline.
 

I like this argument for the simplicity: it is based on a clear policy choice that was made and which continues to this day.  There is no need for an appeal to "the world has changed" over and above the decision to be willing to hold price stability in place at the cost of employment.  This is directly relevant to today as the Federal Reserve has a dual mandate.  On one side of the mandate, they have the requirement to ensure price stability.  On the other side of the mandate they need to encourage full employment.  It's pretty clear that they are doing much better with one piece of this mandate than the other. 

To spell out or not to spell out

I just posted some thoughts on the pros and cons of teaching algorithms for solving math problems. It's  fairly long but here's a quick look:

It takes a great deal of thought to come up with an algorithm and to understand why it works, but actually performing one should be an almost entirely mechanical process. The whole point is to get the answer reliably and quickly with an absolute minimum of thinking. 

This isn't a bug; it's a feature. There are situations where you want people operating on autopilot. Thought is slow, unpredictable and distracting. You probably don't want your tax preparer stopping to reflect on the subtleties of economic distortions while filling out your 1040 and if you're an administrator, you certainly don't want students thinking about the nature of numbers while doing long division on a standardized test that determines your next bonus. You could even argue that most of the progress of mathematics over the past three centuries is due to notation that makes much of the work thought-free thus allowing mathematicians and scientists to focus on more important matters.

If you're a teacher or just someone with an interest in math education, check it out and let me know what you think.

First they come for the pigeons...

Well this is ominous:

The study, conducted largely by scientists from the University of Toulouse, is titled "Freshwater Killer Whales" and describes the beaching behavior of European catfish on the River Tarn in France. The study's abstract section states: "Among a total of 45 beaching behaviors observed and filmed, 28 percent were successful in bird capture."

Dogwalking

I was struck by this comment in Dean Dad's column:

The Times article quotes someone saying he knows people with six figure incomes from dog-walking businesses.  I don’t.  And I bet you don’t, either.
 

What is interesting about this quote is that I see a six figure income as a dog walker as plausible if you are talking revenues.  Dog walker is actually a tough gig if you are going to make it a profession and give high end experience.  You need a vehicle to transport the animals to a dog park.  You need insurance (liability and personal health).  You need to be bonded as you likely have access to people's houses when they are at work.  You are dealing with beloved animals who may well decide not to listen at a key time. 

So it takes trust and there is a lot of effort involved in building that reputation.  The effect of reputation (do you trust the professional or the new person) is an effective barrier to entry to new dog-walkers who simply can't just compete on price.  So this creates a space for some dog-walkers to end up able to generate a lot of revenue. 

But this sort of heavily networked profession is more than just picking up dog poop.  It's also about controlling lots of animals, knowing how to run a high liability business and developing an impeccable reputation -- being able to sell yourself as trustworthy.  Ending up in that sort of profession where you are the real product being sold (musicians, car salesman, model) has always been a alternate path to a decent income.  But there is a huge element of risk in all of these approaches and not everyone can end up with a highly successful network. 

Value Investing

I often cringe at Megan McArdle's social commentary, but she seems to be pretty sharp at the level of the small, individual investor.  I especially liked her comments on value investing:

Graham's big investment coups came in the early 1930s, when the market was so depressed it was literally possible to buy some stocks for less than you'd get if you just shut the place down and sold off the assets.  Buffett similarly made a lot of money in the prolonged bear market if the 1970s.  And except for a brief period in late 2008 and early 2009, the market has simply never dipped low enough for investors to make those kinds of profits.  To be sure, 2009 was a great year for value investors, but you cannot build an entire financial career off of a single nine-month period.
 

I think that this is precisely correct.  To gain huge returns (on the order of Buffet) one really needs a stock market so depressed that extraordinary value is just sitting there.  I remain skeptical that such opportunities exist (in general) where everyone is looking.  In modern, carefully analyzed and highly liquid stocks this seems to be a hard thing to pull off. 

It's also the case that it can't be done consistently.  A single mis-priced stock could end up never appreciating in value or, even worse, could suffer an adverse change (say of CEO and thus strategy).  You need to be able to play the numbers (trying for many opportunities and relying on the law of large numbers) and that probably requires systematic under-pricing. 

Incentives

There has been a recent discussion of Ross Douthat's column on women in the West not having enough children and how this is a sign of decadence.  I want to outsource one major objection to this column to James Joyner, who is far from a liberal.  Consider:

Or, as some of our fellow conservatives call it, “taking responsibility for their lives and not having more children than they can afford.” Indeed, Douthat seems to acknowledge that on the part of the individual while lamenting the collective outcome.

and

But this is an argument that we conservatives apply nowhere else that I can think of. Indeed, most American conservatives, myself included, rail against collectivism in much less significant arenas. Let government try to force us to change to a more energy efficient lightbulb or regulate the water capacity of our toilets and the calls for revolution ring out across the land. Encourage us to buy more energy efficient automobiles through tax incentives and corporate subsidies and you’re a tyrant. Suggest that we turn off electronic devices that aren’t in use and you’re at very least a dirty hippy and probably an out-and-out commie. But suggest that women give up the advances they’ve made over the last half century because somebody has to have more kids, why, what could be more reasonable?

I think that this point is completely correct.  Even worse, there are a lot of policy choices that we could implement if we decided (as a society) that we wanted more children.  Just consider programs like "Aid to Families with Dependent Children" that could be reinvented.  Or we could subsidize childcare.  Or add in mandatory long maternity leaves.  Why not use incentives to try and improve collective outcomes?

Golden Sponge Cake with Creamy Filling and Moral Hazard

One argument for high executive compensation is that there is a high degree of risk that comes with the job. In theory, great success is met with great reward, mediocre results produce much lower compensation and anything short of that will cost you your job. This is supposed to align the interests of executives with those of shareholders -- my portfolio loses value and you lose your job -- but where we have risk, it probably makes sense to talk about moral hazard.

Think about the familiar argument against a one-time government program to bail out underwater homeowners. Even if we included a provision saying that the homeowners sign away the right to take advantage of similar programs in the future, you could still argue that the program presented a moral hazard because it set a precedent. To put it in plainer terms, it's a bad example. Other prospective homeowners will look at this and be more likely to buy more house than they can afford or, worse yet, pick up a copy of Rich Dad and start flipping houses.

We can argue about the validity of the argument in this particular case (I have problems with it myself), but we should all be able to agree on at least two points:

1. there are potential problems to shielding people from negative consequences;

2. these problems extend, not just to those shielded but to those who think they may be shielded in the future.

All of this suggests that the numerous and highly publicized examples we've seen of executives getting better compensation than their performance merits might be doing damage even in companies that really are aligning   pay and performance.

And it makes stories like this truly scary:

The latest news from the bankruptcy front at iconic Twinkies maker Hostess Brands: AP is reporting that the Irving, Texas company is planning to ask a bankruptcy judge to grant approval of bonuses totaling up to $1.8 million for its executives. Hostess says the incentive pay is necessary to assure that the 19 managers in charge of the liquidation process remain on board until the wind-down is complete. Hostess wants to make two of those executives eligible for additional financial rewards, depending on how efficiently they carry out the liquidation.

What's so disturbing here is the fact that the horrible condition of Hostess is actually an argument for increasing the potential compensation of the executives who drove it into the ground. They managed the company so badly it supposedly can't survive a change in management.

That's what I call a bad example.

Marketplace on data mining and targeted marketing

Two stat relevant segments on today's show, one on Obama email marketing and another on mining online data. Good stuff.

Tsunamis and Scientologists

Since this last post seems to have gotten some interest, here are some more thoughts (or at least some previous thoughts spelled out in greater detail).

If you remember this started with a humor piece about the horrors of living in LA. It's an old and pretty much mined out genre. It was already tired when Harlan Ellison wrote the definitive rebuttal ("Face Down in Gloria Swanson's Swimming Pool") thirty-four years ago and time has not made it any fresher. Ellison could make a meal out of this latest piece, picking through  the literary flaws or the dubious cultural observations but I have to admit, it wasn't those that really caught my attention; it was the sampling methodology. 

Of course, we don't expect writers to base their work on random samples but we can hope for representative ones and one way to accomplish that is by sampling broadly. Here we have any incredibly narrow sample, both geographically and culturally. When the author tries to generalize from the sample, he (not entirely sure of the gender)  ends up applying traits to the entire area that are only found in a tiny portion of either Hollywood or Venice Beach, specifically the most touristy parts (Not that there's anything wrong with being touristy, but it should make you nervous when an expert on a region doesn't seem to be familiar with anything you can't see from a tour bus).

Take the Tsunami signs. When you walk down to the beach in LA you almost always really do walk down. This is a rocky coast and most of the beach towns are fairly elevated (more than New York, for instance). The notable exception is Venice (which actually has canals, by the way). Venice is the only neighborhood I know of that's close to sea level. Thus it's the only place I've seen Tsunami warning signs.

Then there's the fear of Scientology the author claims all Angelenos have. In the tiny area of Hollywood the author is focusing on, signs of the church and its founder are everywhere. Literally within a two mile radius, you have multiple buildings, displays, festivals, people offering free personality tests, even an L. Ron Hubbard drive. Outside of that radius, virtually nothing and the subject of Scientology seldom comes up.

For reason that aren't entirely coincidental, the Groundlings, Second City LA and the Upright Citizen's Brigade are also in that same two mile radius, hence the author's belief that all Angelenos are fans of improv. 

It's like this through the entire piece. The author latches onto some characteristic found only in four or so square miles of LA and assumes it holds for the remaining four thousand. The result is that old story, if you take your data from an unrepresentative subpopulation and try to generalize, you're likely to come out looking like an idiot.

Now if I could just figure out how a link to this got into Felix Salmon's blog.

Horribly pretentious person seeks out horribly pretentious people so she can be horrified at their pretentions

There's a certain type of humorous writing (and you have no idea how badly I wanted to use quotation marks there) where an out-of-towner moves to a city/state/region, seeks out the most stereotypical aspects and complains about them ("The trouble with Houston is, if you don't like cowboy hats and line dancing..."). These pieces are also sometimes accompanied with impressive-sounding sociological terms, in which case they qualify as serious journalism.

The LA subgenre invariably focuses on a tiny sliver of the more than four thousand square miles of LA County (when people talk about LA, they generally mean the county). It's a tiny strip that runs through (but doesn't encompass) Silver Lake, Hollywood, Beverly Hills, and Santa Monica. When you read one of these pieces bitching about cliche LA, you can be reasonably sure the writer didn't make it to Watts or East LA (if you want to read someone who actually did explore the area, check out Dana Goldstein).

Perhaps the worst example inexplicably come recommended by Counterparties. In it the writer, with a couple of notable exceptions, picks things that are so close they are actually in walking distance of each other, largely in a neighborhood that most Angelenos tend to avoid, leaving it to the tourists. As a result, she spends most of her time complaining about things that are only of concern to people who live in a tiny neighborhood dominated by Scientology buildings, improv theatres and tourist attractions. The writer is the only resident of LA I have ever encountered who actually talks about the stars on the sidewalk.

The only non-Hollywood area she refers to is Venice, specifically the boardwalk (once again, more of a tourist spot than a place for locals) and the Tsunami warning signs. She goes on about these at length in a way that makes me wonder if she has actually seen any of the coast other than Venice and Santa Monica (Venice is exceptionally low lying. Most of LA's coast is not).

Finally, as for the writer's depiction of LA being a town full of waiters calling themselves actors and directors, my experience here has actually been the opposite. Most people I meet are sensitive to the cliche and tend to overcompensate. I've never had a conversation with an aspiring entertainment type who overstated his or her resume. I have, however, had acquaintances I've known for a while before I happened to look them up on IMDB or Wikipedia and discovered they had done something pretty impressive. If the writer of this piece keeps running into people trying to impress her with exaggerated accomplishments, perhaps it's because they think she's shallow enough to be impressed by them.

Walmart and Unions

Matt Yglesias points out that Megan McArdle is actually making a pretty solid pro-Union arguement for Walmart (while trying to argue the opposite).  Consider:

This is a great case study in rhetorical strategies. But the analysis is admirably clear. Wal-Mart's profit margins, though by no means enormous, are larger than those of its main competitors. Given the weak national labor market, Wal-Mart has no reason to cough up extra money to its workforce. But a strong labor union could coerce them into coughing up higher pay and bringing their margins in line with Costco and Macy's. As a result, each Wal-Mart employee might get a bit less than $3,000 more a year. Whether that's "life-changing" or not is an interesting question, but since we're talking about low-wage workers here, I think the intuitions of highly paid professionals may be a bit off. It seems very plausible that the marginal hedonic value of a thousand bucks or three to Wal-Mart's workforce would be very large.

How large?  The average wage for a Walmart employee is tricky as many are not full time and the mean hourly wage is a subject of debate.  However, this is a high end estimate (both in hourly wages and in the assumption of full time employment):

The average Walmart "associate," Wake Up Walmart reports, makes $11.75 an hour. That's $20,744 per year. Those wages are slightly below the national average for retail employees, which is $12.04 an hour. They also produce annual earnings that, in a one-earner household, are below the $22,000 poverty line.
 

So a $3,000/year hike in wages would, conservatively, be a 15% increase in pay.  That would leave prices unchanged and reset the margins at Walmart to that of Macy's (hardly a disaster in the making to have margins at this level).  If the average employee makes more like $14,000 (another plausible estimate) then the pay rise is even steeper.  At these pay levels, a few thousand a year can be a life changing event, given the number of fixed expenses in life.   

The other argument Megan advances, that Amazon is coming, is admittedly more subtle.  But here is the thing, Matt is absolutely correct that Amazon is unstoppable so long as its current business model is permitted to exist.  It has no margin . . . at all, and is thus a bet on the future of e-commerce.  Now the United States has been aggressively subsidizing e-commerce in a number of ways, ranging from failing to collect sales taxes for online items, providing a reliable postal service everywhere to make the shipping model work, and Wall Street being willing to pour cash into the company despite no profits. 

But that issue doesn't affect Walmart more than any other retailer.  Nobody is immune to this problem and it remains to be seen how this will all shake out.