Motivation: The Power of Peer Comparison

Ian Larkin of Harvard Business School has conducted a very interesting field study to examine how comparison to one's peers motivates employees.  Larkin conducted a field study at a large enterprise software firm.  The company paid its sales people based on commission, naturally.   However, employees also could receive a nonmonetary recognition each year if they performed better than 90% of their peers.  They could be granted membership into the "President's Club."  The award did not come with extra monetary compensation.  Instead, employees received a gold star on their name card, company-wide recognition, an e-mail from the CEO, and a weekend trip to a tropical destination with the other club members.    Here is what Larkin found:

The software firm uses a "commission accelerator" program over the course of each financial quarter, meaning that a salesperson expecting a high-volume sale at the beginning of a quarter would receive a higher commission on any additional sales in the same quarter. A salesperson expecting a large sale early in the first quarter of the year would rationally want to delay any other potential sales until later in that quarter, so as to take advantage of the accelerating commission schedule.  However, making the sale right away, before the end of the year, could help the salesperson achieve special recognition as a member of the club. Thus, the salesperson faces a choice: delay the sale and garner eventual commission boosts, or make the sale right away and improve the chance of attaining club membership. In the paper, Larkin uses actual choices of hundreds of salespeople facing this decision to statistically estimate the average salesperson's "willingness to pay" for club induction—the point at which a salesperson is indifferent to waiting for greater commissions and closing the deal now and getting inducted into the club. The willingness-to-pay statistic at the software firm is calculated to be nearly $30,000, or approximately 5 percent of take-home pay.  "My research shows that salespeople who are right on the margin of club induction are actually willing to pay to get over the margin and into the club," Larkin says.


What's the implication of this study?  Well, as we have known for some time, social comparison is a very powerful motivator.  People don't simply worry about what they earn. They care about what they earn relative to their peers.  Designing reward schemes with this in mind can result in a more highly motivated workplace.  Disregarding these findings can lead to disenchanted employees.   I recall Michael Lewis writing about this phenomenon in Liar's Poker.  Bankers would receive huge bonuses, but still be very upset, because they learned that others had received higher bonuses.  We might just chalk that up to "banker greed" - but of course, this study and others show that social comparison is a powerful factor across many organizations. 

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Markkula's Three Principles at Apple

In Walter Isaacson's terrific new Steve Jobs biography, we find a description of the simple principles Mike Markkula outlined at Apple's inception. As my students know all too well, I love the concept that strategy is all about making trade-offs. As Michael Porter has said, "The essence of strategy is choosing what NOT to do." Take a look at principle #2 at Apple. From the firm's inception, its leaders understood the criticality of making trade-offs to create competitive advantage and build barriers to imitation. Here is an excerpt from the Isaacson's biography:

Markkula wrote his principles in a one-page paper titled “The Apple Marketing Philosophy” that stressed three points. The first was empathy, an intimate connection with the feelings of the customer: “We will truly understand their needs better than any other company.” The second was focus: “In order to do a good job of those things that we decide to do, we must eliminate all of the unimportant opportunities.” The third and equally important principle, awkwardly named, was impute. It emphasized that people form an opinion about a company or product based on the signals that it conveys. “People DO judge a book by its cover,” he wrote. “We may have the best product, the highest quality, the most useful software etc.; if we present them in a slipshod manner, they will be perceived as slipshod; if we present them in a creative, professional manner, we will impute the desired qualities.

What an amazingly simple, but powerful statement of core principles. Every entrepreneur should take note!

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TJX: Myths about off-price retailing

USA Today has an in-depth feature on TJX today. TJX is the off-price retailer that operates the Marshalls, TJ Maxx, and Home Goods retail chains. The firm's CEO tackles some myths about her firm's strategy in this article. Meyrowitz explains that the firm does not sell mostly prior season merchandise purchased from liquidators. Here is an excerpt:

"In a rare interview, TJX CEO Carol Meyrowitz explained how conventional wisdom is wrong when it comes to T.J. Maxx and Marshalls. Meyrowitz, 57, has been with TJX for almost 30 years, rising from a buyer in 1983 to CEO in 2007. During that time, the chain has turned into a retail powerhouse, with more than 1,700 stores — nearly as many as Target. She says 85% of what the stores sell is from the same season and same year it was designed for, and 85% is purchased directly from manufacturers. Much is identical to what the brands sell in department stores, she insists. Less than 5% is irregular."

What's interesting is the brands appear to have perpetuated the myth about off-price retailing. Many branded manufacturers do not want to acknowledge publicly that they are selling the same goods at full price in department stores at the same time that these goods are for sale at Marshall's. It seems to me Meyrowitz runs a risk with this interview. Exposing these myths may attract more shoppers to her stores, but it may not thrill her suppliers. They like the myth. If the truth becomes well-known, and TJX attracts more upscale shoppers, it may decrease willingness to pay and margins for the branded manufacturers' products.

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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. 

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Learning from Improv

Russ Meyer has a great article on the Fast Company website.  Meyer offers some solid recommendations for how companies should go about trying to design better customer experiences.  For instance, imagine that you are trying to provide a better after-sale service experience for your customer, or you are trying to redesign the check-out process in your retail store.  Meyer draws on the lessons of Improv comedy to offer his advice to you in these types of efforts.   For starters, he argues:

"In improv, this means don’t disregard premise, no matter how outrageous... In experience design, you can’t start by denying what could be: 'We can’t change the check-in process because...,' for instance. For a great new customer experience to come to life, it will have to break some of the conventions of the current experience. Make sure you’re open, especially at the beginning of a process, to accept what may be an outrageous premise or idea."

Meyer also argues that "thoughtful watching" should be the approach one takes toward discovering a better customer experience.  In Improv, people concentrate intensely on what others are saying, and they listen actively.  Meyer explains, "Sitting back, watching, listening and concentrating on how people are presently experiencing the brand (while leaving yourself open to the outrageous) can identify moments where the experience could be improved."   Similarly, I've argued that systematic observations of customers and front-line employees yield powerful insights regarding your firm's problems and deficiencies, as well as how to improve in the future. 

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Ben & Jerry's: Schweddy Balls Not Always on a Shelf Near You

Ben and Jerry's has launched a new flavor called Schweddy Balls, a play on the famous Saturday Night Live skit below.  The ice cream, which contains fudge-covered rum balls, has sparked a protest from a conservative group called One Million Moms.  Moreover, many supermarket chains apparently have refused to stock the product.  Nevertheless, the company reports that it has become one of its best-selling limited edition flavors.

The question is:  Did Ben and Jerry's anticipate the controversy, and if so, did they go ahead anyway?  I suspect they did know that some retail partners would not stock the product, and that some negative publicity would emerge.  In the end, though, you have to ask yourself how you would define the company's target market.  I don't know many moms and dads who buy Ben and Jerry's for their small children.  It's expensive, after all, even if it is terrific ice cream.  If you have a family, you are likely to buy half gallons or gallons of less expensive ice cream.  Perhaps you splurge on occasion for Ben and Jerry's, most likely when you stop at one of their shops.

Who is the target market for Ben and Jerry's?  I believe it's adults with fairly high disposable income who seek a delightful indulgence, some of whom do not have young children at home.  It also includes people who identify with the firm's social mission.  Many people in that target market are not likely to be offended by this flavor.  In fact, the brand will be quite appealing to them, as they have fond memories of this particular SNL skit.

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Katrina Markoff and Vosges Haut-Chocolat

Katrina Markoff made Fortune's list of 40 under 40 this year (just announced this week).  Markoff is the founder of Vosges Haut-Chocolat.  Markoff creates exotic truffles using fine ingrediennts which she personally from around the world.   She developed her skills at Le Cordon Bleu in Paris, where she began to create her unique chocolates, which involve infusions of rare spices and flowers combined with premium chocolate.

Her growth exploded when she began selling her chocolates at Neiman Marcus.  She also has grown her catalog business substantially and operates eight boutique retail locations of her own. 

According to Fortune, Markoff now has agreed to develop a lower-priced line of chocolates for Target and Wal-Mart. Naturally, she follows a long list of designers who have gone this route, creating popular lines at affordable prices ("affordable luxury" if you will).   The move always comes with some risk though.  How does one manage the brand so as not to dilute it?  Beyond that, though, "designers" such as Markoff have to think about how they manage their retailer relationships.  How does one continue to please Neiman Marcus and maintain that strong relationship, while selling lower-priced items at Target and Wal-Mart?  To thrive, designers have to create products of clearly different quality and positioning for the different retailers.  They must really understand the differences in the consumer at each retailer to do that effectively.   Some cannibalization always will occur, but a designer can avoid that if they continue to innovate and first bring exciting new products to their high-end luxury retailers.  Without that "reward", they risk damaging the relationships with those retailers who first helped them build their brand.  They also have to think carefully about WHICH mass merchandisers with which to partner.  Some would question whether it makes sense, for instance, to sell to both Wal-Mart and Target, given Vosques' positioning. 

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