People to Algorithms: “Back Off. We want to make our decisions!”

AnalyticsDeadEnd_

“It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead.” from the Terminator (1984)

Analytics is the hottest, absolutely-must-have corporate buzzword these days. Out with the fuzzy and in with hard data. Leaders and Managers have been known to repeat Deming’s quip (and wrongly get credit for it at times) “In God we trust; all others must bring data” when faced with business proposals that are based on ‘intuition and gut-feel.’ Finance and Operations have been using advanced modeling techniques for years, fine tuning the art of showing that big revenue spike (or cost saving) just around the corner. (Hasn’t happened in the last 10 years, but next two quarters are going to be huge!) And now it’s the turn of HR. People Analytics is the next big frontier and machines are being primed to crunch numbers on human attributes and ‘go where no machine has gone before.’

Correct Data is good, Intelligent Analytics is even better. I have had enough experience with gut-feel and arbitrary extrapolation driven disasters in my life to have a deep respect for both Data and Analytics (with the qualifiers firmly in place). I also know that modeling human behavior (or worse projecting it into the future) is something best left to Ethan Hunt.

‘Let’s collect all possible behaviors about employees, get a bunch of statisticians and lock them in a room till they come up with a formula to predict who is good and who is not,’ sounds like a good idea. Only problem – seems people don’t like it. And not just any people – top notch engineers at Google who live and breathe data and analytics.

“Not only must Justice be done; it must also be seen to be done.”

Promotions are a big deal at any organization. It represents an acknowledgement of the company’s belief that you have done an excellent job in your current role and so are ready to take up further or different responsibilities. Nominating the wrong person for a role can be one of the most disengaging acts in an organization. The person(s) who lose out in the race often choose to leave the company and walk right next door to the competitors HQ.

Google has a rather elaborate process involving self-nominations, committees and appeal process for promotions of engineers. As you can imagine this process is costly, time consuming and can be tedious at times. With the rather noble intention of saving a bit of effort for everyone, the People Analytics team decided to explore the possibility of getting an algorithm, which they can use instead.

They did come up with one. And statistically it was awesome!

No possibility of bias, absolute transparency, much less effort, very accurate (based on fitment with past data). One might expect everyone (especially engineers) to love the ultimate solution to getting promotions right. All the disengagement rising from favoritism, bias, perception et.al. out of the window in one masterstroke.

Guess what happened.

The Engineers hated it!

“They didn’t want to hide behind a black box, they wanted to own the decisions they made, and they didn’t want to use a model.”

At the end of all the research, the ultimate takeaway for Google was that ‘people need to make people decisions’ Analytics serves an important role in providing the decision makers with data points and insights, but it can never replace them. It is highly unlikely that we will ever reach (or accept) a situation where algorithms and black boxes are seen as taking decisions (even if you put a human face on the screen). [See Prasad Setty talk about it in the video at the end of this post]

Speaking of algorithms and disasters: Remember the Black-Scholes Equation and 19 October 1987 (Black Monday)? And for those with shorter memories there is the Gaussian Copula function and the 2008 meltdown. And those are failures when modeling movement of financial instruments (and therefore indirectly just one aspect of human behavior which ultimately drives price of those instruments).

It has taken us decades finally realize the tyranny of the “Bell Curve” in performance evaluation though most organizations still are stuck to using what is essentially a convenient misuse of statistical formulation.

Hopefully business leaders will appreciate the pitfalls in giving into the lure of expecting everything to be boiled down to an algorithm. (Elon Musk is rumored to have referred to AI as “summoning the demon”) Even if I don’t quite share Elon’s assessment of the scenario of doom (yet), in my opinion hoping to click a button to decide people’s career path is bit of science fiction, wishful thinking and lazy management all rolled into one.

But if you are a math wiz, don’t care about what old geezers like me have to say about “free will” and social cognition, then your mission, should you choose to accept it …

(Unfortunately this blog post will not self-destruct in 5 seconds)

Acknowledgements and References for this post: 

Image courtesy of FreeDigitalPhotos.net 

Google came up with a formula for deciding who gets promoted—here’s what happened, Analyze This, QZ India, Max Nisen, November 20, 2014

Recipe for Disaster: The Formula That Killed Wall Street, Tech Biz, Wired Magazine, Felix Salmon, February 23, 2009

The mathematical equation that caused the banks to crash, Mathematics, The Observer, Ian Stewart, February 12, 2012.

Will the machines take over? Why Elon Musk thinks so, Science, The Christian Science Monitor, Anne Steele, October 27, 2014

Rewards that go boink! (or the folly of cash as an incentive)

Money_Trap_Mark Hanna:   The name of the game, move the money from your client’s pocket into your pocket.
Jordan Belfort:   But if you can make your clients money at the same time it’s advantageous to everyone, correct?
Mark Hanna:   No

(Dialogue from the movie ‘The Wolf of Wall Street’, 2013)

I have an article on how to ‘Engage the employee with the right reward’ up on People Matters where I continue to advocate the need for companies to find the right strategy towards rewarding their employees – doling out cash bonuses just doesn’t cut it.

This post however, is more about what I left out of that article (thanks to word-count limits and the need to stay focused on the theme). At the very beginning of the article I mention in passing how the financial collapse of 2008 exposed the flaw of a cash-bonus-linked-to-sales strategy. What I did not write about was the erosion of trust that the greed of a few caused. And lets fact it – this is true about any industry, not just banking. There are plenty of examples in other sectors like call-center employees cutting short or worse hanging up on customers, because their variable pay was linked to number of calls attended rather than issues successfully resolved, engineers using short-cuts to get automobile products out faster without adequate testing or known flaws leading to catastrophic failures or in some cases deaths.

The death spiral for the company arising out of perverse incentive structures is actually quite simple:

Wrong incentive structure -> Incorrect actions by employees -> Short term spike in sales/output->A select few get rich on commissions/bonus->Medium Term/Long Term problems come home to roost->Best case – the company/product brand takes a hit, Worst case company goes belly-up.

Jordan Belfort:   My name is Jordan Belfort. The year I turned 26 I made $49 million dollars which really pissed me off because it was 3 shy of a million a week. – (Dialogue from the movie ‘The Wolf on Wall Street’)

Pre-2008 some bankers just went (massively) overboard in pushing their banks hurtling down that spiral and got the whole industry in a mess since everybody ended up doing the same shenanigans to get massive bonus payouts.

Joseph Stiglitz in his excellent article ‘In No One We Trust’ talks in depth of this erosion of trust and says

“…We had created a system of rewards that encouraged short-sighted behavior and excessive risk-taking. In fact, we had entered an era in which moral values were given short shrift and trust itself was discounted.

… Bank managers and corporate executives search out creative accounting devices to make their enterprises look good in the short run, even if their long-run prospects are compromised.”

So do we take the money-is-root-of-all-evil approach and pay people in food coupons? No. Absolutely not, but neither can leadership of companies afford to take the ‘lazy’ route to establishing a rewards strategy but just resorting to cash payouts as a percentage of profit/sales/top-line. (Remember Enron anyone? Even as the company was imploding, its executives were rewarded with large bonuses for meeting specific revenue goals.) The problem here is not only the flawed rewards structure, but something much deeper. Something for which the whole organization exists in the first place – the very raison d’etre.

The real challenge for leadership in establishing a rewards strategy – goals:

Before you worry about ‘how to reward employees’, the greater challenge is in establishing ‘what’ you are rewarding them for. “Organizational Goals!” you say and full marks to you. Employees in an organization are working on their individual goals which eventually must meld together to achieve the organizational goal.  Employees at Enron were also being paid to achieve organizational goals but in hindsight it’s obvious those goals were all wrong!

Things can also go horribly wrong when impossible goals are set because, leaders shoot their mouth off or get visions of grandeur. Let’s take a short trip back in time. It’s the late 1960’s. The Ford Motor Company was fast losing ground to more fuel efficient cars the Japanese were cranking out. Lee Iacocca, a very smart man with lots of successful launches to his credit, (and the then CEO of Ford), announced the challenge of producing a new car that would weigh less than 2000 pounds and cost less than $2000 and would be available in the market in 1970. The result: skipped safety checks on the Ford Pinto that led to cars catching fire and eventually resulted in massive law suits.

 So we now realize that organizations have a more fundamental problem – with goal setting. That goal usually filters down from the top – which brings us to an interesting conundrum. Going back to what Stiglitz has to say in his article.

“So C.E.O.’s must be given stock options to induce them to work hard. I find this puzzling: If a firm pays someone $10 million to run a company, he should give his all to ensure its success. He shouldn’t do so only if he is promised a big chunk of any increase in the company’s stock market value…”

 Research has shown that the motivation that people will have to do the right thing or blow the whistle when things are not quite going the way they should is greatly enhanced when they feel they are working for a larger purpose than just monetary gain. When the only incentive one has is money, it tends to create the ‘stretch goal’ trap. Bigger goals – Bigger reward – Bigger bank balance! Forget everything else, all ‘that’ is somebody else’s problem. The ‘Big Whale’ trades, the LIBOR fixing scandal, the recent record fines paid by JP Morgan, Enron, the list just goes on and on.

“Of course, incentives are an important component of human behavior. But the incentive movement has made them into a sort of religion, blind to all the other factors — social ties, moral impulses, compassion — that influence our conduct.” (Stiglitz)

Setting the correct goals is thus fundamental to achieving the desired output from employees. Goals that are too narrow; are too many in number or have an inappropriate time horizon which eventually result in, higher risk taking and unethical behaviour by employees in an attempt to meet those goals.

So how do we set the right goals?

This, dear reader, is the trillion dollar question. The ultimate question of life, the universe and everything – the answer as we all know is 42! There we have it. Problem Solved. :)

With due apologies to Douglas Adams, there is no one correct answer for this. With incorrect incentives, the chances of the goals themselves being set wrongly go up exponentially. Add to that the fact that goals when applied to teams with have varied levels of challenge for its members.

In their Working Paper, ‘Goals gone wild’, Lisa D. Ordonez et al. point this out –

“Perverse incentives can also make goal setting politically and practically problematic. When reaching pre-set goals matters more than absolute performance, self-interested individuals can strategically set (or guide their managers to set) easy-to-meet goals. By lowering the bar, they procure valuable rewards and accolades. Many company executives often choose to manage expectations rather than maximize earnings. In some cases, managers set a combination of goals that, in aggregate, appears rational, but is in fact not constructive. For example, consider a self-interested CEO who receives a bonus for hitting targets. This CEO may set a mix of easy goals (that she is sure to meet) and ‘what the hell’ difficult goals (that she does not plan to meet). On average, the goal levels may seem appropriate, but this mix of goals may generously reward the CEO (when she meets the easy goals) without motivating any additional effort when the goals are difficult.”

Goal setting and the consequent rewards strategy are closely intertwined. Your rewards strategy might be well thought out, meaningful and beautifully executed but if they are being handed out for the wrong goals, it will still be meaningless in the long run. Rather than taking the easy way out of boiling the organizations goals down to the revenue numbers and profit figures of billions of dollars, its time leaders spent more time establishing meaningful goals that are aligned with the long term interest of the organization and all its share-holders.

The alternative of continuing with status-quo on goals and incentives is a scary proposition. Already there are rumblings of real estate and investment bubbles building up in South East Asian economies as a consequence of the Fed tapering. Another large financial shock just might be the proverbial last-straw on the camel’s back. On the positive side, we might get a few more entertaining movies.

References and acknowledgements for this post:

‘In no one we trust’, Joseph E. Stiglitz, NYTimes, 12 December 2013, Goals gone wild: The systematic side effects of Over-Prescribing Goal Setting, Lisa D. Ordonez and others, HBS Working Paper, 09-083, Image used in this post courtesy of Free Digital Photos.

Annual Appraisals: It’s time to move on!

Centrality_Crowd_

To martyr yourself to caution/ is not going to help at all / because there’ll be no safety in numbers / when the right one walks out of the door

[Lost for Words, Pink Floyd]

Every year, around March-April there is a flurry of mails from HR reminding people to complete their appraisal inputs. Team members are exhorted to fill in their self ratings by the deadline, and then managers are hounded by HR to complete their ratings of their teams. A few days later all the managers are invited to a day-long meeting to do the dreaded ‘curve fitting’- since the logic goes that ratings of individuals on teams no matter how good or small should fit a normal distribution. (Those meetings can sometimes turn violent too when the fitting doesn’t go too well) Weeks later the ratings are communicated to the employees and that’s when the resignations start. A popular joke goes that moving companies record their maximum revenue for the year in the weeks right after annual appraisals are completed in companies.

Continue reading “Annual Appraisals: It’s time to move on!”