Nick Bloom and John Van Reenen, 591, 2011 Management Practices in Europe, the US and Emerging Markets Nick Bloom (Stanford Economics and GSB) John Van Reenen (LSE and Stanford GSB) Lecture 3: Management and firm Performance 1

Nick Bloom and John Van Reenen, 591, Targets management Today we will run through 5 dimensions on targets management (questions 8 to 12) The concept is around the setting of stretching targets As before, while the data is mainly for manufacturing, these questions have been used in retail, hospitals, schools, healthcare clinics, tax collection agencies, charities, PPPs and law firms

Nick Bloom and John Van Reenen, 591, 2011 Score(1): Goals are exclusively financial or operational (3): Goals include non-financial targets, which form part of the performance appraisal of top management only (they are not reinforced throughout the rest of organization) (5): Goals are a balance of financial and non-financial targets. Senior managers believe the non-financial targets are often more inspiring and challenging than financials alone. (8) Target balance

Nick Bloom and John Van Reenen, 591, 2011 Setting up your clicker Press “GO” Then slowly press “0” and then “5” (channel is “05”) Then slowly press “GO” again A green light should appear signaling the clicker worked

Nick Bloom and John Van Reenen, 591, 2011 (8) Target balance (1): Goals are exclusively financial or operational (3): Goals include non-financial targets, which form part of the performance appraisal of top management only (they are not reinforced throughout the rest of organization) (5): Goals are a balance of financial and non- financial targets. Senior managers believe the non-financial targets are often more inspiring and challenging than financials alone

Nick Bloom and John Van Reenen, 591, 2011 The survey scores to question (8), target balance – all countries, manufacturing 6 All countries, manufacturing firms (100 to 5000 employees), 9824 observations Average 2.89

Nick Bloom and John Van Reenen, 591, India, manufacturing firms (100 to 5000 employees), 1136 observations Average 2.44 The survey scores to question (8), target balance – India, manufacturing

Nick Bloom and John Van Reenen, 591, 2011 The survey scores to question (8), target balance – US, Canada and UK, retail 8 All countries, retail firms (100 to 5000 employees) 661 observations Average 2.74

Nick Bloom and John Van Reenen, 591, 2011 The survey scores to question (8), target balance: developed countries, hospitals 9 Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observations Average 2.73

Nick Bloom and John Van Reenen, 591, 2011 The survey scores to question (8), target balance: developed countries, schools 10 Schools in Canada, Germany, Sweden, UK, US 777 observations Average 2.70

Nick Bloom and John Van Reenen, 591, 2011 Score(1): Goals are based purely on accounting figures (with no clear connection to shareholder value). (3): Corporate goals are based on shareholder value but are not clearly communicated down to individuals (5): Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations. (9) Target interconnection

Nick Bloom and John Van Reenen, 591, 2011 (9) Target interconnection (1): Goals are based purely on accounting figures (with no clear connection to shareholder value). (3): Corporate goals are based on shareholder value but are not clearly communicated down to individuals (5): Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations.

Nick Bloom and John Van Reenen, 591, 2011 Target interconnection (9): all countries, manufacturing 13 All countries, manufacturing firms (100 to 5000 employees), 9813 observations Average 3.01

Nick Bloom and John Van Reenen, 591, 2011 Score(1): Top management's main focus is on short term targets. (3): There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other (5): Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals (10) Target time horizon

Nick Bloom and John Van Reenen, 591, 2011 (10) Target time horizon (1): Top management's main focus is on short term targets. (3): There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other (5): Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals

Nick Bloom and John Van Reenen, 591, 2011 Target time horizon (10): all countries, manufacturing 16 All countries, manufacturing firms (100 to 5000 employees), 9814 observations Average 2.99

Nick Bloom and John Van Reenen, 591, 2011 Score(1): Goals are either too easy or impossible to achieve; managers provide low estimates to ensure easy goals (3): In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" that are not held to the same rigorous standard (5): Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale (11) Targets are stretching

Nick Bloom and John Van Reenen, 591, 2011 (11) Targets are stretching (1): Goals are either too easy or impossible to achieve; managers provide low estimates to ensure easy goals (3): In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" that are not held to the same rigorous standard (5): Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale

Nick Bloom and John Van Reenen, 591, 2011 Targets are stretching (11): all countries, manufacturing 19 All countries, manufacturing firms (100 to 5000 employees), 9819 observations Average 3.00

Nick Bloom and John Van Reenen, 591, 2011 Score(1): Performance measures are complex and not clearly understood. Individual performance is not made public (3): Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged (5): Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition (12) Performance clarity

Nick Bloom and John Van Reenen, 591, 2011 (12) Performance clarity (1): Performance measures are complex and not clearly understood. Individual performance is not made public (3): Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged (5): Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition

Nick Bloom and John Van Reenen, 591, 2011 Performance clarity (12): all countries, manufacturing 22 All countries, manufacturing firms (100 to 5000 employees), 9821 observations Average 2.67

Nick Bloom and John Van Reenen, 591, 2011 My favourite quotes Interviewer: “How many production sites do you have abroad? Manager in Indiana, US: “Well…we have one in Texas…” Americans on geography Production Manager: “We’re owned by the Mafia” Interviewer: “I think that’s the “Other” category……..although I guess I could put you down as an “Italian multinational” ?” The difficulties of defining ownership in Europe

Nick Bloom and John Van Reenen, 591, Wrap up 1) Large variation in targets practices – best organizations set broad, clear and balanced targets which are tough but feasible 2) Variation common across all industries we have looked at – manufacturing, retail, schools, hospitals, clinics and charities 3) As with monitoring potential for improvement is extensive, especially in smaller organizations and developing countries Next lecture we will focus on incentives – hiring, firing pay and promotions