Malcolm Gladwell has a new podcast called Revisionist History. Gladwell describes the podcast as an opportunity to discuss topics that have either been overlooked or misunderstood.
Revisionist History consists of 10 episodes, the last of which was released last week. I just finished the sixth episode, which Gladwell dedicated to educational philanthropy.
Strong link versus weak link systems
One key question in episode six revolves around the notion of a “strong link” system versus a “weak link” system. What does that mean?
Think of basketball, which we’d call a “strong link” system. In basketball, the quality of your team basically depends on the quality of your best player. Want a better team? The most direct path is to find a better superstar to build around.
What about soccer? That’s more of a “weak link” system, where the quality of your team depends mostly on the quality of your weakest player.
What’s the difference between these two sports? In basketball, you can ensure the game revolves around your best player. It’s comparatively easy to make sure your best player gets the ball and has an opportunity to work his or her magic. In soccer, no single player dominates play. You rely on the whole team to funnel the ball from one end of the pitch to the other. The vast majority of scoring opportunities are built out of chains of passes, which involve a large number of players.
How does this relate to educational philanthropy? I won’t spoil it for you. What I will say is that you should think about America’s system of higher education. If you wanted to improve the quality of higher education in America, what would you do? Would you strengthen the strongest institutions (“strong link”)? Or would you strengthen the relatively weaker institutions (“weak link”)? Gladwell is very clear about the direction he leans.
Is business a strong link or weak link system?
As I thought about this episode of Revisionist History, I realized that you can pose the same question about business. If you wanted to improve the quality of a business, what would you do? Would you upgrade the CEO? Or would you improve the quality of your front line or back room staff?
Let’s be a little more specific. Imagine we’re talking about a large, publicly-traded company with a $50 billion market capitalization. Say we had $10 million to spend (annually), with the aim of maximizing financial performance over the next 10 years. What should we do?
Further, let’s keep this in line with the sports analogy. We want to limit ourselves to changes in people. (Yes, there are tons of other ways to improve a business than changing its people. I want to use the constraint around people to guide this bit of discussion.)
Back to our question. What should we do? I can think of two extreme paths, keeping in mind we have $10 million we can spend:
- Replace our CEO. Bump the annual pay package up by $10 million, and recruit the best candidate our money can buy.
- Replace a front line team. Say we have a team of 100 people making on average $100,000 each. We can bump the compensation for each team member by another $100,000, and recruit the best team our money can buy.
Which path do you think will more likely improve the fortunes of the business over the next decade?
My take: business is a weak link system
I pretty firmly fall in camp 2. Why do I think that? Three big reasons:
- I don’t believe the quality of CEO candidates would vary drastically, even if you had $10 million more to spend. The CEO was likely already making in the $5-10 million per year range. I don’t have any indication that you would find a markedly better candidate at $15-20 million per year range. I could be wrong, but I think we’re quickly in diminishing returns territory, with each additional compensation dollar buying a marginal improvement in quality.
- Empirically, there’s no indication that highly-paid CEOs deliver improved results. In fact, there are studies showing that highly-paid CEOs actually underperform their peers.
- I’m a big believer in execution, rather than ideas, being the prime differentiator for successful companies. CEOs don’t execute.
In other words, I believe business is a “weak link” system. The quality of a business hinges more on the quality of the front lines or the back office, than it does on any high-profile senior executive.
I think the soccer analogy works nicely. A business chains together a string of actions, all of which fold into an ultimate delivery to the customer. The weakest link in the chain can disrupt the performance of the whole system.
Say a business has a dysfunctional supply chain organization. If so, that business almost certainly has out of control product costs. No matter what the rest of the organization looks like, that business will struggle to compete. One of its most significant costs is out of line with the competition.
The same thing can happen with a dysfunctional sales team. It doesn’t matter how good the product or service is. It doesn’t matter how good the customer support is. If the sales team can’t articulate the value, even the best product or service will die.
Celebrity CEOs skew our understanding of a business as a system
This observation leads me to the ridiculousness of celebrity CEOs. Read the business press, and what do you see? Article after article about Warren Buffett, Jamie Dimon, Tim Cook, and Elon Musk.
It’s the same criticism you hear about the news generally. News organizations prefer to cover the horrific, one-off events, rather than the more meaningful, but more boring, stories that affect larger numbers of us. News is entertainment, whether it’s politics, sports, or business.
The ubiquity of the celebrity CEO gives an indication that the CEO has an outsized influence on the performance of the company as a whole. In a few select instances, I’m sure that’s true. (Say, Steve Jobs leading Apple away from the graveyard, after a handful of high-priced CEOs did their best to kill the company.)
In most instances, it can’t be true. There are way too many people involved in the day-to-day. The CEO is one person, out of tens or hundreds of thousands of employees. The smartest, most charismatic CEO can’t make sure the company cleverly negotiates with its suppliers, aggressively pursues innovative research, or reliably delivers high-quality products and services to customers.
The CEO can make it clear that she wants these things to happen. She can’t make sure these things actually happen. She needs countless teams of top notch folks to do their jobs, day in and day out. That’s how the business will succeed.
Where do we get the most value out of our incremental compensation dollars?
Malcolm Gladwell makes an impassioned case about the nature of the American system of higher education. Given his understanding of the system, he makes an impassioned case for where dollars should and shouldn’t be spent, if your goal is to educate as many talented students as possible.
I think we should ask the same questions about business. Just because celebrity CEOs get all the money, and all the attention, does that necessarily mean the business is getting a good return? That’s where the PR is…no doubt.
To me, it’s a glaring inefficiency of our system. But boards and senior executives have tons of clout. And tons of visibility. They also have the protection of almost every other business behaving the exact same way, showering their leaders with compensation without proof the business is performing better as a result.
I’ll happily take the contrarian position. Pay the CEO comparatively less. Pay some subset of the front line or back office comparatively more. It won’t be easy to find exactly which groups will respond most strongly to improved compensation. But I think it’s pretty clear at this point, the diminishing returns of CEO compensation is a sink that our companies should avoid.