EntrepreneursVenture Capital

Pay on results but judge on process

By October 16, 2007 5 Comments

I have finally finished reading Taleb’s Fooled by Randomness – and my first reaction was to want to read it again.  I believe this is the first time I have had that thought immediately after finishing a book.  (Although to be fair part of the reason must be that my reading has got rather fractured of late, I always seem to have at least four books on the go.)

I’ve said it before, and I’m going to say it again, Fooled by Randomness is a great book.  Taleb’s idiosyncratic style is a pleasure to read, but more importantly the book is all about helping people to make better decisions by understanding how our emotional wiring limits our ability to think rationally.  In that way it has something in common with Malcolm Gladwell’s Blink.  The interplay of rational thought and emotion are at the centre of life for entrepreneurs and their investors and I think both these books have helped make me smarter.

The final nugget I want to share from the book is in the appendix.  If you have ever been in the situation where someone working for you is delivering good results but somehow you are still worried about them then you will know this problem first hand.

Taleb addresses the question by ruminating on the difficulty of assessing senior executive performance and the question of whether they are fairly paid.  As he observes, with more junior staff it is generally pretty easy to work out how good someone is at their job.  They typically repeat the same function over and over so even if they are lucky a few times their results will average out pretty quickly.  The chef who can’t tell the difference between sugar and salt will cook enough meals that he will get exposed in a relatively short period of time, even if he is very lucky.

Not so for the average Chief Executive.

Two things combine to limit the professional lifespan of our incompetent chef – repetition and a clear link between action and result.  He puts salt/sugar on many meals every day and the diner will know immediately if he gets it wrong.

The average CEO, by contrast, takes a small number of decisions the impact of which is far from clear.  It is nigh on impossible to attribute a change in the results of a company to any specific action.  Everything has many causes.

When I am assessing executive performance I look at two things – the results of the company/department and the way the executive goes about her business.  We assess people so we have a view on how they perform going forward – my point here is that the way that person goes about their business is a much better guide than the results they have achieved.

So you have to judge them on process – it is the only way to make sure you aren’t fooled by randomness.  Judging on process has challenges of its own of course, mostly in that it is time consuming and requires a deep understanding of the executive’s job – but the alternative is fraught with risk.
You have to pay on results, of course, as everything else is too subjective, but you should judge on process.