We Get What We Reward
Unfortunately, one of the most tragic aspects of human progress is that we only learn the real lessons the hard way. Or as Will Rogers famously said: “Good judgment comes from experience, and experience comes from bad judgment.”
Obviously, 2008 was a tragic year in world economic affairs. As the dust settles, we are like archeologists trying to understand what happened, primarily from studying the wreckages of once-impressive enterprises. With time, the clarity and precision of our understanding will no doubt be enhanced and, hopefully, we can at least avoid making the same mistakes in the future. Rest assured, we will make new ones. Such is life. And that’s a good thing. How boring life would be without the anxiety of the declines followed by the exhilaration of achieving new heights previously unimagined. One just wishes that the pain associated with the falls could be better prevented.
One aspect of this crisis that is particularly troubling is the asymmetric nature of the burden of pain. When looking at the past five years of Wall Street bonuses and other forms of financial rewards, it is clear that most of the financial industry executives are likely to be net positive out of this ordeal: The size of their accumulated rewards prior to the crises most likely outweighs their more-recent loss of stock options, direct compensation and short-term humility. Compare this to the many more innocent investors, homeowners and other businesses that have lost a significant part of their net worth without having had the ability to cash in as the financial agents did.
As an entrepreneur, corporate executive, board member and investor, I have during my career always been fascinated with the financial industry. Clearly, the capital markets play a central role in any modern economy. Providing access to capital is the lubricant of our global economy. Without it there will be no forward motion. But what is the price of this lubrication? I have spent most of my career in the restaurant industry, and food, it could be argued, is of similar importance to human nutrition as capital is to economic prosperity. But we don’t pay restaurant operators nearly what we pay bankers.
In the aftermath of this financial tragedy, we ought to have a constructive public discussion centered on what contributions in society should have the highest rewards. To be clear, this is a discussion — I am not advocating regulation or a committee deciding who makes what; I am not allocating blame, either. People make what they make, and the broader society tends to deserve the bankers, businesses, government and media it deserves. Yet another sobering reality of life.
There are many vectors in society that are mysteriously undervalued. Why do we pay so little for great teachers when we know that a better-educated future population would most likely make all of us much richer? Why do we only spend 3 percent of our trillions of dollars in health care investments on prevention when we know that 80 percent of our chronic diseases, which account for a significant percentage of our total health care bill, could often be naturally avoided? Why did we not invest in — particularly in the aftermath of 9/11 — energy solutions that could not only mitigate risks of global warming but also reduce our vast spending on wars fueled by oil that, to a large extent, is consumed by us? There are many more examples, of course.
One could envision many interesting voices passionately arguing for and against different aspects of this issue. The most common voice heard is that we should let the markets sort it out. But who are the markets? Aren’t we the markets?
Clearly, there is only one solution. As Jerry Garcia so wonderfully put it: “Somebody has to do something, and it is incredibly pathetic that it has to be us.” We all —everybody — have to engage and care about where we put our money, where we shop, what banks we do business with, what we ask from our financial advisors and how we value the most important parts of our lives. When you step aside, it does seem bizarre that we appear almost obsessed with shaving off a dollar or two from many items we buy weekly, when we nearly ignore all of the thousands of dollars that are flushed away by people we don’t know in banks and institutions we don’t visit. When did you last visit with the people who manage your 401(k)?
While I don’t have a solution to the problem itself other than to raise the topic and hope that a constructive dialogue ensues, I’d like to contribute two themes that I believe in, and one of them so much that I have devoted my career to it
The first is the time horizon for our financial expectations. I do believe that the longer the horizon, the fewer the problems — within reason. Sure, there are exceptions to every rule, but in general we all value people who spend a large amount of time creating something of great value. Longevity cures a lot of ills. Anything that has stood the test of time is likely to stand a bit longer, and therefore the risk of a large reward for the creators feels more deserved. I learned this from a union leader in Sweden many years ago when we discussed wealth. He told me: “I don’t have any problem with a neighbor of mine, whom I see every day working hard in his yard, having a much nicer yard than I do. I am not jealous. I am impressed. In fact, he inspires me to work harder in my own yard.” I do think it is important for society to reward people the most that we value the most. That creates less friction, less partisanship and less division.
The other theme is one of purpose — a purpose bigger than your product. As mentor, friend and author Charles Handy once said: “Where there is no vision, there you find short-termism, for then there is no reason to compromise today for an unknown tomorrow.” One possible starting point of self-reflection for members of the financial industry is to try to identify their purpose beyond annual bonuses and returns only. If they saw their industry as the true Jiffy Lube of capitalism perhaps many of the more extreme risks and behaviors that today so clearly have exacerbated our crisis could have been avoided. If mortgage industries saw their job as providing homes, not loans, then perhaps we’d have a different housing market.
There is nothing wrong with making money. But making money is always an outcome of what you do — not just an income. If we continue to reward income more than outcome I am rather certain that we won’t like the result.
Author and columnist Thomas Friedman recently said in The New York Times: “We’ve fallen into a trend of diverting and rewarding the best of our collective I.Q. to people doing financial engineering rather than real engineering. These rocket scientists and engineers were designing complex financial instruments to make money out of money - rather than designing cars, phones, computers, teaching tools, Internet programs and medical equipment that could improve the lives and productivity of millions.”
Last 5 posts by Mats Lederhausen
• It's Quality, Not Quantity - June 12th, 2009
• Business' Increasing Proximity Risk - March 16th, 2009
• Trust - January 24th, 2008
• Does Your Purpose Outweigh Your Products? - October 17th, 2007
