Richard Feynman Explains the PDSA Cycle

Posted on May 17, 2012  Comments (0)

Ok, really Richard Feynman Explains the scientific method. But his thoughts make the similarity between the PDSA cycle and the scientific method obvious.

1) Plan, hypothesis.
You make a guess about a theory (in using the PDSA cycle this step is often missed, while in the scientific method this is of the highest priority). You make a prediction based on that theory.

2) Do the experiment

3) Study the results

If the results disprove the theory you were wrong. If they results don’t disprove the theory you may have a useful theory (it can also be that your theory is still wrong, but this experiment happened not to provide results that disprove it).

Step 4, Act, only exists for PDSA. In science the aim is to learn and confirm laws. While the PDSA cycle has an aim to learn and adopt methods that achieve the desired results.

Richard Feynman: “If it disagrees with experiment it is wrong, in that simple statement is the key to science, it doesn’t make any difference how beautiful your guess is, it doesn’t make a difference how smart you are (who made the guess), or what his name is, if it disagrees with experiment it is wrong.”

Actually far to often “PDSA” fails to adopt this understanding. Instead it become PA: no study of the results, just implement and we all already agree it is going to work so don’t bother wasting time testing that it actually does. Some organization do remember to study results of the pilot experiments but then forget to study the results when the new ideas are adopted on a broader scale.

Related: Does the Data Deluge Make the Scientific Method Obsolete? – Video of Young Richard Feynman Talking About Scientific Thinking – How to Use of the PDSA Improvement Cycle Most Effectively – Using Design of Experiments

Management Improvement Blog Carnival #166

Posted on May 11, 2012  Comments (0)

Tim McMahon is hosting the Management Improvement Blog Carnival #166, highlights include:

  • Performance Organizations – Art Smalley answers why is there such a resistance to creating learning organizations and why are leaders letting the future deteriorate without doing anything about it.
  • Trust – Cornerstone of Performance – George Rathburn explains that teams lose trust in their leaders when they fail to show trust and respect in their teams.
  • Lean Snake Oil Cures What Ails Ya – Mike Wroblewski takes some creative license to explain Lean and it benefits but warns against secrets to implementation as Lean takes hard work and personal commitment.

Take a look at the entire post on Tim’s blog: A Lean Journey

The management sub-Reddit is a social network for those interested in management improvement to post useful online resources and recommend those they found most worthwhile.

Long Term Thinking with Respect for People

Posted on May 9, 2012  Comments (3)

Toyota nearly went bankrupt near 1950 and had to lay off a third of their employees. A huge focus of the Toyota Production System as envisioned by Taiichi Ohno was to secure the long term success of the company. The priority of doing so is easier to see when you respect people and are in danger of witnessing the destruction of their careers.

photo of John Hunter with a walking stick

I can’t find the quote (maybe Jon Miller, or someone else, can provide one), but I recall one along the lines of the first priority of management is providing long term viability of the company (my sense is this is first due to the respect of the workers and also for all the other stakeholders). The respect for people principle requires executive put the long term success of employees at the top of their thinking when making decisions for the company. I don’t believe it is a ranked list I believe there are several things right at the top that can’t be compromised (respect for people, safety of society, support for customers…).

This means innovating (Toyota Management System, Toyota Prius, Toyota Robots, Lexus brand, etc.) and seeking growth and profit with long term safety that does not risk the failure of the company. And it means planning for the worst case and making sure survivability (without layoffs etc.) is nearly assured. Only when that requirement is met are risks allowed. You do not leverage your company to put it at risk of failure in dire economic conditions even if that would allow you to be more profitable by various measures today. And you certainly don’t leverage just to take out big paychecks for a few short term thinkers.

The economic situation today is extremely uncertain. The whole eurozone financial situation is very questionable. The government debt burden in the USA and Japan is far too high (and of course Europe). China is still far from being a strong economy (they are huge, fast growing and powerful but it is still fairly fragile and risky).

The failures in the current financial system have not been addressed. Band-aids were applied to provide welfare to the largest 30 financial institutions in the form of hundreds of billions or trillions in aid. The system was left largely untouched. It is hard to imagine a more textbook example of failing to fix the causes and just treating the symptoms. This leaves a huge financial risk poised to cause havoc.

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Lean Manufacturing and the Toyota Production System

Posted on May 3, 2012  Comments (3)

In this post I explore my thought about what lean (lean manufacturing, lean thinking…) means. The way I think about it is that lean manufacturing sprung from Toyota. It seems to me the lean manufacturing name was meant to capture the entire Toyota Way. Capturing the whole of what that encompasses isn’t possible in 1 or 2 or even 10 books so it wasn’t done completely.

To me the difference between lean manufacturing described early on by Womack and Jones and the Toyota Way was more about what can be captured and conveyed than about an intentional creation of “lean” ways that are different than Toyota ways.

The question is further complicated by what happens with any management idea of any popularity: the using of the name with all sorts of watered down and even just plain not-lean implementations. So much of what is called “lean” is not the Toyota Production System (TPS), it isn’t even lean.

It seems to me today there is no real accepted authority for what is lean. LEI is good. Some people might say they should be the arbiter but they are not in any way I know of.

Then too, over time any organization of people changes. So what Toyota does today isn’t exactly what Taiichi Ohno would say they should be doing. Even the Toyota Way can be ignored by Toyota. And Ohno certainly wouldn’t think standing still was the answer. Just like Deming; Kiichiro, Sakichi and Shoichiro Toyoda; Ohno expected the management system itself to continually improve. And just like Deming, they would expect the implementation in a different organization (different system) to be different.

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Management Improvement Carnival #165

Posted on May 2, 2012  Comments (1)

Matt May is hosting the 165th Management Improvement Carnival. He takes a look at the wonderful manifestos posted at ChangeThis. ChangeThis really is wonderful, if you haven’t already been looking at what they offer you are in for a treat (and have quite a bit to keep you busy for awhile). Highlights from this management carnival edition include:

  • How Habits Work (and How They Change) by Charles Duhigg. His point: “Most of the choices we make each day may feel like the products of well-considered decision making, but they’re not. They’re habits. Countless people, from Aristotle to Oprah, have tried to understand why habits exist…”
  • Changing the Way We Change by Eric Haseltine. He writes: “As a senior executive in fields as diverse as Aerospace, Entertainment and Intelligence, I’ve learned a hard lesson about people and organizations everywhere: they seldom learn from previous failures. To make matters worse, most people not only repeat past mistakes, but fail to learn that they’ve failed to learn from the past so they go on making the same mistakes over and over again.”
  • Grow by Jim Stengel. This manifesto is based on his book Grow. “It’s time to change the narrative of business,” Jim writes. “From a winner-take-all tale, no-holds-barred, no matter what the cost to individual firms, investors, the economy, and society, to doing business on the basis of what I call brand ideals, shared ideals of improving people’s lives. Maximum business growth and high ideals are not incompatible. They’re inseparable.”

In addition to great ideas the ChangeThis manifestos actually look great. Sadly so much of what you find is distracting to read due to the presentation. ChangeThis puts you in the mood to enjoy the manifesto as soon as you see it.

Related: When new ideas have become habits you have changed

Management Blog Posts From November 2006

Posted on April 26, 2012  Comments (0)

I have selected a few great posts from the Curious Cat Management Blog back in November 2006.

  • What Could we do Better? – There are many important ideas to improve management. This is one of the most important tips to aid improvement that I know of: it is easy to do, brings huge benefits and most organizations fail to do it. Ask your customers: “What one thing could we do to improve?”
  • Ackoff’s F-laws: Common Sins of Management presents 13 common sins of management, such as: Managers who don’t know how to measure what they want settle for wanting what they can measure
  • Common Cause Variation – “Every system has variation. Common cause variation is the variation due to the current system. Dr. Deming increased his estimate of variation due to the system (common cause variation) to 97% (earlier in his life he cited figures as low as 80%). Special cause variation is that due to some special (not part of the system) cause.”
  • Sub-Optimize by Interrupting Knowledge Workers – “The general consensus is that the loss from interrupting [software] developers is much greater than for interrupting most other forms of work and therefor a great deal of effort is placed on improving the system to allow developers to focus.”
  • Amazon Innovation – “I believe Amazon uses technology very well. They have done many innovative things. They have been less successful at turning their technology into big profits. But I continue to believe they have a good shot at doing so going forward (and their core business is doing very well I think).” [Amazon announced great sales numbers today, continuing their long term tread. They are also continuing to be very slow to grow profits (CEO, Jeff Bezos remains willing to challenge common practices - such as his willingness to build business and sacrifice current profits)].

Webcast on Lean Startups by Eric Ries

Posted on April 23, 2012  Comments (0)

Lean Startups [PARC Forum]
View more videos from PARC, a Xerox company

Webcast with Eric Ries at PARC, author of Lean Startups, July 2011.

Related: Why Lean is Different – An Introduction to Deming’s Management Ideas by Peter Scholtes (webcast) – Dr. Russell Ackoff Webcast on Systems Thinking

Management Improvement Carnival #164

Posted on April 20, 2012  Comments (0)

Paul Borawski is hosting 164th Management Improvement Carnival on ASQ’s View from the Q blog. Highlights from this edition include:

Remember to add new blogs that you discover through the carnival to your RSS feed so you enjoy their new posts.

Joy in Work in the Quality Improvement Field

Posted on April 17, 2012  Comments (3)

As I mentioned previously, I will be posting on a topics raised by Paul Borawski, CEO, ASQ as part of ASQ Influential Voices. This month Paul’s post, Are Quality Professionals Happy On the Job? looks at job happiness in the quality improvement field.

Paul stated he “wasn’t surprised that Forbes Magazine named software quality assurance engineer as the ‘happiest job’ in the U.S.” I was. Frankly looking at the results I question the methodology used – I just find their claims questionable. Whether any ranking could be sensible is also a reasonable question. I do believe certain careers make people happier than others, I question whether you can sensibly differentiate the top 20.

Still, looking at the happiness of those in the quality field is an interesting topic. My father created a challenge for me. He loved what he did: professor (statistics, chemical engineer, industrial engineer, business) and consultant (same things, with focus on quality and management improvement). Helping achieve better results was important to him. And helping create joy in work was also. It took me a while to see how much of an outlier he was – finding people who love what they do is much rarer than those that complain a great deal I have found.

That software development ranks toward the top doesn’t surprise me. Software programmers are some of the people happiest in their jobs in my experience. My experience is biased toward those given more freedom than those working in large bureaucracies (I can imagine those programmers are less happy overall). In addition to being happier with their jobs they also are demanding. They are not the least challenging of authority (some managers seem to equate docility with happiness, but that isn’t accurate, in my opinion).

To me the quality field allows for a great deal of joy in work. That doesn’t mean it is without frustration. I think the field does have a fairly high level of frustration as many are stuck in systems that are moving much to slowly to improve management practices. This is the biggest concern I find from most in the quality improvement field. So in order to be happy one has to learn to cope with some frustration while making good progress and finding happiness in all the achievements even while knowing more could be done.

Related: The Importance of Management Improvement – Respect People by Creating a Climate for Joy in Work – Respect for People: Optimize for Developer Happiness at Etsy – Create a System That Lets People Take Pride in Their Work – Signs You Have a Great Job … or Not

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Marketplace Looks at the Apple Economy

Posted on April 15, 2012  Comments (1)

Marketplace looks at the Apple economy in China. Marketplace is an excellent source of actual journalism; rare in the post Bill Moyers days, sadly.

A look inside a Foxconn factory

The first misconception I had about Foxconn’s Longhua facility in the city of Shenzhen was that I’ve always called it a ‘factory’ — technically, it is. But after you enter the gates and walk around, you quickly realize that it’s also a city — 240,000 people work here. Nearly 50,000 of them live on campus in shared dorm rooms. There’s a main drag lined on both sides with fast-food restaurants, banks, cafes, grocery stores, a wedding photo shop, and an automated library. There are basketball courts, tennis courts, a gym, two enormous swimming pools, and a bright green astroturf soccer stadium smack-dab in the middle of campus. There’s a radio station — Voice of Foxconn — and a television news station. Longhua even has its own fire department, located right on main street. This is not what comes to mind when you think “Chinese factory.”

Yet it is: as you walk beyond the civic center of Longhua, the buildings begin to change.

From a management perspective there is a great deal to be desired in Apple’s manufacturing practices. The economic perspective however, for me, provides a much different picture than those in rich countries (USA, Europe, Singapore, Japan…) often feel.

The jobs provide workers a chance to earn what for them is a great deal of money. Yes the conditions are harsh – I wouldn’t want to have to work there. But I am pretty sure I would not be happier, if I lived in China, and everything else remained the same in China except now all the Apple products were made in Singapore, USA and Spain.

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Motivation, Rewards, Performance Appraisals and Your Career

Posted on April 12, 2012  Comments (0)

In this interview Dan Pink again makes some great points relating to psychology, managing people and managing your career.

Q. What kinds of programs can managers and companies put into place to motivate their workforce?

Assuming companies are paying people fairly, they should do what they can to foster autonomy, mastery, and purpose. One of my favorite specific ideas is this: The Australian company Atlassian conducts what they call “FedEx Days” in which people work on anything they want for 24 hours and then show the results to the company the following day. These one-day bursts of autonomy have produced a whole array of fixes for existing products, ideas for new ones, and improvements to internal processes that would have otherwise never emerged. For creative tasks, the best approach is often just to hire great people and get out of their way.

I agree. Focusing on motivation is wrong, as Douglas McGregor detailed in the Human Side of Enterprise over 50 years ago. The problems with theory x management (motivation through fear and rewards) has been detailed over and over again decade after decade. I get tired of us ignoring very well done work to help us manage better for decades :-(

Q. Are you suggesting that offering someone a 50 per cent raise won’t motivate him or her to work harder?

…most organizations dangle what I call “if-then” rewards — as in, “If you do this, then you get that” — bonuses, commissions, and like. Fifty years of social science tells us that “if-then” rewards are great for simple, routine, algorithmic work [but not creative work]… The best use of money as a motivator is to hire great people and then pay them enough to take the issue of money off the table.
…
By the way, even that juicy, non-contingent 50 per cent raise has some serious limits. People will be thrilled in the short-run, but over the long term (say, the third paycheck) the thrill will become the status quo…

Again I agree: When Performance-related Pay Backfires, Righter Incentivization, Build an Environment Where Intrinsic Motivation Flourishes.

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Management Improvement Blog Carnival #163

Posted on April 10, 2012  Comments (0)

Jason Yip is hosting Management Improvement Blog Carnival #163. Highlights from this edition include:

The Customer is the Purpose of Our Work

Posted on April 9, 2012  Comments (2)

photo of poster with Gandhi quote

Quote from Gandhi on customer focus at the Chakra restaurant

A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so.

Mahatma Gandhi

A snapped this photo at the Chakra restaurant in Johor Bahru, Malaysia. Ironically the food is great but the service isn’t what I would like. But I will gladly go back many times. I’d like a bit more attentive service but I love the food and that is more important to me.

I think service at restaurants is one of the tricker things to do well: different customers have different desires. I basically want great food, my water to be filled up and my bill to be given to me before I finish so I don’t have to wait around to pay. But lots of people will find it annoying to get a bill early, feeling that they are being rushed out the door.

Still there is a certain standard I share with lots of people for things like not having to wait around for a long time to get the bill after I am done. Getting water filled up as needed, pleasant decor, etc..

In Johor Bahru there are a fair number of Japanese restaurants (the food is very good and the service is also good). Several of these restaurants have buzzers on your table to press when you want service. I love Indian food. I must say I like the Japanese service (it did take me a bit to warm up the buzzer idea – it is very practical). It do believe some of the things I would see as weaknesses in customer service are partially a cultural difference (it is interesting to see the different customer service experiences at the different restaurants here).

The quote from Gandhi is great. “He is the purpose of it” is something we would all benefit from taking to heart. To do so, I think we are wise look at how we can better meet customer desires every day.

Related: Delighting Customers – quotes by Mahatma Gandhi – Paying New Employees to Quit

Respect for People: Optimize for Developer Happiness at Etsy

Posted on April 3, 2012  Comments (1)

The webcast above discusses the culture of software engineering at Etsy (a very popular site providing a marketplace and community for small businesses – artisan focus). Some of the key points of the talk. Etsy trusts employees. Etsy’s strategy is to optimize for developer happiness. Etsy has lunches twice a week where employees build community.

Etsy sees code as craft. The echos Etsy’s value on authorship: “the people behind what we buy make commerce meaningful.” It re-inforces the belief that work has meaning and is valued and should have intrinsic value to those doing the work, people should have the opportunity to take pride in their work.

Chad Dickerson discussed the importance Peter Drucker placed on connecting people to the value provided to customer. Etsy takes steps to connect employees to the value provided to customers, including emphasizing the community of the company and the customers of Etsy.

Related: Respect People by Creating a Climate for Joy in Work – Mistake Proofing Deployment of Software Code – Build an Environment Where Intrinsic Motivation Flourishes

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Management Improvement Blog Carnival #162

Posted on April 1, 2012  Comments (0)

The Curious Cat management blog carnival is published 3 times a month with hand picked recent management blog posts. I also collect management improvement articles for the Curious Cat Management Articles site; an RSS feed of new article additions is available.

  • Stress Solutions, Not Blame by Kevin Meyer – “My organization often hears me say that 90% of problems are the result of poor processes, not people, and 9%… are probably due to poor leadership.”
  • The Real Leadership Lessons of Steve Jobs by Walter Isaacson – “Caring deeply about what customers want is much different from continually asking them what they want; it requires intuition and instinct about desires that have not yet formed.”
  • Kanban and Lean Startup: Making the Most of Both by Alexei Zheglov – “Kanban is an important process-improvement tool for technology organizations. Lean startup is a new approach to discovering new, innovative ways to do business. To get the most from both, it is important to understand how they relate to each other.”
  • Is Agile too inefficient for start-ups? by Jason Yip – “You Ain’t Gonna Need It was about creating a culture of simplicity (you must justify building more than you need to), which tends to preserve cash, versus a culture of anticipation (you must justify why you’re not building something that handles every imaginable scenario), which tends to burn cash as if it magically falls from the heavens.”

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Continual Feeding

Posted on March 29, 2012  Comments (2)

I like growing things. I think it is part the connection to system thinking I have had since I was a kid. I like finding ways to leverage my effort so that I put in a bit of thought and effort and then get to enjoy the fruits of that effort for a long time. This idea also guides my investing approach.

I planted a vegetable garden in my yard a few years ago. My strategy was to find methods that gained me what I wanted (yummy food) without much effort required from me. I don’t want to deal with persnickety plants. Basically I composted leaves, grass and yard waste. I put that into the garden spot and put in some seeds and small plants to see what would happen. I watered things a bit early on and if we had very little rain for a long time. But in general my attitude was, if I could get success with some plants with this level of effort that was good. Only if nothing would grow would I bother with more involvement from me.

photo of wineberries

Wineberries in my backyard.

Luckily it turned out great. Lots of great tomatoes and peppers and peas and beans and cucumbers and more, and very little effort from me.

I actually even had more success with wineberries. I didn’t even have to plant them (some bird probably seeded them for me and I just let them grow). It was wonderful for several years. Then I had a huge area with huge amounts of tasty berries: it was wonderful. Sadly then birds started to eat them before I go them and I got far fewer good berries than before. The berries were so good I went to effort to keep the birds from devastating my reward (to some success but with much effort). Oh well, I didn’t really mean to get onto that – those berries were just so great.

Now I am living in Malaysia and growing plants on my balcony. It is wonderful in many ways but one of the issues is I have to continually water the plants. Even though we get a great deal of rain, not nearly enough reaches the plants (and also the dirt doesn’t retain the water well – especially given the small volume of the containers). So if I want the fresh vegetables I have to continually water the plants. This goes against my desire to plant seeds and let me sit back and enjoy the bounty of my limited efforts (ok it is still pretty limited).

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How Could They Know?

Posted on March 28, 2012  Comments (3)

I am a big fan of Dr. Deming’s ideas on management. The way I see one of the quotes of Dr. Deming used I don’t agree with. Dr. Deming said “How could they know?” to explain why people continued to follow less successful practices (for example, page 55 of Out of the Crisis). How could they know of better practices, he would say.

I must say I have always thought the answer to that question was pretty easy. They could learn about the job they were paid to do. It is a shame that many organizations do a very poor job of preparing or coaching those they promote into management for their new position. However, I don’t see that as an excuse to fail to learn yourself.

There are plenty of books with great information. How could they know? They could read.

Yes, there are also plenty of management books filled with nonsense. That does make it a bit more difficult. But I still don’t have much sympathy for hearing, “how could they know” as a reason for continuing performance appraisals or failing to understand variation or falling to know that “motivating” through monetary rewards backfires or… If you wish to manage human systems I don’t think it is too much to expect you to know about how to do so, and have the knowledge to distinguish nonsense from well reasoned thoughts.

If you want to take on a management job you should take your responsibility seriously. Choosing not to take advantage of the wealth of great material in the past 70 years on how to manage more effectively is not a decent excuse. How could they know? They could take responsibility to learn. If they chose not to do so that is their choice. They chose not to know. I guess some can see that as an acceptable excuse. I don’t.

If they are trying to apply ideas and having trouble: I have sympathy for that. Applying ideas on management is not easy. Human systems are complex and there are no simple guides that tell what is needed in your specific situation and organization. but ignorance of basic management principles, with no evidence of concerted efforts to learn I don’t have sympathy for.

I seem to expect more from managers than most people I talk with. Most seem to find it a perfectly acceptable excuse that a manager never bothered to learn about management. I don’t really understand that. Dr. Deming did seem to hold senior executives accountable for failing their organizations, but he was more accepting of manager’s ignorance than I am.

Read and use The Leader’s Handbook and The Improvement Guide and you will be well ahead of most of the management practice I see.

Related: Curious Cat Essential Management Books – Bad Management Results in Layoffs – The Importance of Management Improvement

Management Improvement Blog Carnival #161

Posted on March 21, 2012  Comments (0)

Nicole Radziwill is hosting Management Improvement Blog Carnival #161. Highlights from this edition include:

Make sure you check out the full carnival post on the Quality and Innovation blog.

Selling Quality Improvement

Posted on March 19, 2012  Comments (2)

In this month’s ASQ influential quality voices post, Paul Borawski asks How Do You “Sell” Quality?

I am amazed how difficult it is to sell quality improvement. I look at organizations I interact with and easily see systemic failures due to faults that can be corrected by adopting management improvement strategies that are decades old. Yet executives resist improving. The desire to retain the comforting embrace of existing practices is amazingly strong.

What sells to executives are usually ideas that require little change in thinking or practice but promise to eliminate current problems. What Dr. Deming called “instant pudding” solutions sell well. They are what executives have historically bought, and they don’t work. I can’t actually understand how people continue to be sold such magic solutions but they do.

If you want to enable effective management improvement, as I do, you need to both have buyers for what you offer and offer something that works. Honestly I am not much of a salesperson. Based on what I see executives buy the sale should be packaged in a way that minimize any effort on the executives part. However, that doesn’t interest me because it nearly always leads to failed improvement efforts. For years (decades?) Dilbert has provided a humorous view on the continuing tragedy of these efforts.

Another sales option is look for desperate executives that have already tried taking the easy way out 5 or 6 or 7 times and are still in desperate for improvement. Once they can’t see any options offering simple solutions they may be willing to work at a solution.

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Massively Unjust Executive Compensation Damages Companies and Investments

Posted on March 13, 2012  Comments (1)

For years I have believed the massively unjust executive compensation packages have been doing great harm to American businesses. As an investor, one of the big risks that has to be evaluated is how much of the business profits executives will divert to their personal bank accounts. And investors also have to worry about the risks executives take to reach huge incentives which then greatly damage your investment.

In 2007, I added two of my own deadly diseases to Dr. Deming’s list. These deadly diseases have emerged since Dr. Deming created the list of 7 deadly diseases (which started out at 5 deadly diseases- he added 2 more later). Excessive executive compensation is one of those new deadly diseases. Our outdated and harmful laws, regulation and tolerated behavior relating to patents, copyright and “intellectual property” is the other.

The Incentive Bubble by Mihir Desai, Harvard Business Review

Mature corporations without large shareholders may become bloated with perquisites or preoccupied by empire building that satisfies managers rather than shareholders—the classic principal-agent problem.
…
In order for these pay mechanisms to be successful, managers and investors should be rewarded only for success beyond what would normally be generated. Said another way, there are returns that one can generate by doing little, and managers and investors shouldn’t be compensated for those returns.

A very important point to consider in calculating “excess” returns is an understanding of variation. This core component of Dr. Deming’s management system is not understood by most executives today and leads to mis-assigning credit and blame. In addition, an appreciation of systems thinking shows the fallacy of assigning individual causal credit or blame when in reality much of the result is systemic in nature (result of the system with little ability to sensibly assign individual cause – not that those wishing to have huge transfers of corporate wealth deposited in their bank account won’t pay lots of money to people that will create fancy formulas to try and justify such payments).

The rapid spread of stock options over the past two decades resulted in large windfalls for managers because no effort was made to subtract average performance during a period of remarkable returns in asset markets. Moreover, wide varieties of misbehavior have been traced to incentives created by the “cliffs” in most compensation packages: strike prices and vesting dates. Reaching for extra earnings by cutting small corners when such large amounts were at stake was inevitable. The corporate governance crises of the past 15 years had many roots; large stock option grants and the distorted incentives they provide loom large among them.
…
Absent regulators, irresponsible intermediaries, and oblivious homeowners were all important agents in creating the financial crisis, but the transformation of investment banks into risk-hungry institutions was central to it—and that transformation is connected to the growth of financial-markets-based compensation. At a basic level, the appetite for risk by managers of investment banks can be linked to the rise of compensation structures that provided them with highly asymmetrical incentives
…
Second, it is tempting to diminish the role of the skewed incentives identified above and reorient the debate toward ethics and morality: If only we hadn’t lost our sense of right and wrong. Such complaints may be well-grounded, but they obscure just how important these high-powered incentives are. More can be achieved by understanding incentive structures and the ideas that underpin them than by bemoaning a decline in character or promoting the virtues of professionalism. And moving away from shareholder-centered capitalism toward stakeholder capitalism risks overcorrecting the excesses of the past three decades. Indeed, capitalism appears to be serving managers and investment managers at the expense of shareholders.

Well said. From a Deming management perspective I see the huge problems created by the deadly disease of unjustly outsized executive compensation. And as an investor I see great risk in executives destroying investment returns as they try and extract hugely excessive amounts of the profits the organization makes to their personal treasuries.

Related: Taking What You Don’t Deserve, CEO Style – Obscene CEO Pay, 2005 data – Executives Again Treating Corporate Treasuries as Their Money – “Too often, executive compensation in the U.S. is ridiculously out of line with performance” Warren Buffett – Leverage, Complex Deals and Mania – The soaring executive pay in the 1990′s turned Drucker into a leading critic of unjust pay (and those levels were tiny compared to what executives are taking from treasuries today) – No Excessive Senior Executive Pay at Toyota – Brooks Brother Bureaucrats – Losses Covered Up to Protect Bonuses

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