Paul Giannamore: I don't want to crap on people's mission statements and visions and all that sort of jazz but you can't write that stuff and put it on a wall and repeat it and people are going to do it.
Patrick Baldwin: Alanis Morisette and her famous song, Ironic. Although none of the lyrics were ironic if you go back and listen to it carefully, you with the Mexican in your office choose of all places to go travel for vacation, Mexico City. Paul, please explain.
Paul Giannamore: Patrick, I came back from Mexico City. A nice little getaway. For anyone that hasn't been there, there are certain parts of Mexico City that are beautiful. The food is beyond reproach. They call it food there and I call it Mexican food. Speaking of the Mexican, Todd Leyse happened to be down here and brought him up. Todd came down to Puerto Rico. He was on his way to an associated meeting that they were supposed to have in Costa Rica, which they canceled. He's going to Costa Rica anyway so he swung through Puerto Rico and we had a nice dinner. I know you met him. There's something you forgot to tell me about Todd. I had never met him before.
Patrick Baldwin: He's a little tall.
Paul Giannamore: He is spectacularly tall. The dude is a monster. He blocks out the sun. He missed his calling in life. He should have been in the NBA. He’s a very tall guy. Todd's a great guy. He's given us a lot of comments over the years on the show. Todd, I appreciate that. It was great being able to break bread with you. Patrick, Todd said to me, “You guys do a piss-poor job of providing context on the Mexican.” He’s like, “He's not even Mexican. He's Peruvian.” Todd, you're right. We have and we will. Not today, but we will.
Patrick Baldwin: That has explicit writing whenever we get the Mexican on the show. Todd came through. They had an association meeting in Texas. I took him to Helberg Barbecue, which you've experienced. We don't break bread here, we have brisket. You had the beef rib when you came. Todd ate well. I brought him milk and cookies by request. It’s a little parting gift for him.
Paul Giannamore: Helberg was awesome. That was probably the best barbecue I ever had. As you well know, Waco is not on my priority travel list. Should I make it back there? It will be due to Helberg.
Patrick Baldwin: It tips the scales if you know what I mean. Before we get into the part of our interview with John Roberts, 3 or 4 times, I asked you on the interview episode with Tim Mulrooney, episode 80. Paul, what does the M&A going to look like this 2022? Let's see if I can staple jello here. Paul, put me on the spot. Texas curveball.
Paul Giannamore: You've asked that on the air and off the air. Everyone asked that. We're in an unprecedented time. I know people throw that word around often. Probably, during the pandemic, quite a bit. For me, it's always about weighing probabilities. When I look at this market as we go into 2022, I think about the fact that we got a macro environment. We got the overall economic environment. We've got what goes on in a particular industry.
Let's start on the micro-level. Let's look at the industry. We talked about, are we going to lose Terminix as an acquirer? If this deal closes 100%, we're going to lose it. Are we going to lose Rentokil as required in the United States? We're executing a deal with Rentokil. They are active in US deals, European deals, and Asian deals. Where am I seeing Rentokil more? I'm seeing them more in Europe and the rest of the world. I'm seeing them more in the rest of the world than I am in the United States.
I do believe that when this acquisition happens, Terminix is going to disappear. They're not going to be acquiring things. Rentokil will slow down in North America. What does that mean? As Tim mentioned, what he said about private equity is true. We have closed our fourth US pest control transaction. All four of those are being acquired by private equity-backed acquires, private equity-backed holding companies. It’s the first time I've seen four in a row, the first four of 2022.
When I look at a new sell-side process that has gone to market, we have four strategics. We have ten private equity firms. In the acquisition pool, there are fourteen buyers that will be receiving the materials on this business, ten of them are private equity and four are strategics. If you go back years ago, it would have maybe been one private equity firm on them. Now, it's dominated by private equity firms and we see what's going on.
We’ll be closing two transactions, which will collectively be the largest private equity transaction in North American pest control. If you count Anticimex as a private equity-backed firm, which it is, it won't be. Nonetheless, we've got a different environment. On the micro-level, I am not extremely concerned about the disappearance of Terminix or Rentokil’s slowdown. From a support perspective, it would be a confusing time. If I'm Anticimex and I'm servicing all these other acquirers, I will double down on the fact that bidders are exiting. I'm not particularly concerned about the micro-environment.
What I am concerned about is the macro environment. I am concerned about the fact that in 2020 and 2021, we had a tremendous amount of fiscal stimulus. We had the PPP loans, which were effectively cash handouts to businesses across the board. We had checks going to millions and millions of Americans. That money flowed into GameStop, AMC, crypto, and Nasdaq. Guys are sitting at home dumping money into the casino.
That fiscal stimulus is going to roll off. We've got the Fed tightening. We had the Fed use the largest monetary bazooka in human history during the COVID crisis. Now, they're trying to reverse the policy. They're trying to tighten, which implies that they're going to be raising interest rates. As you and I have discussed, I don't believe they're going to be able to do that. It's going to maybe be a one and done. They're going to have to reverse course. Patrick, you watch the markets. Since the rhetoric has ratcheted up, what have the markets done?
Patrick Baldwin: Not looking good. There are some crazy drops we've seen, Amazon is up and down, Facebook or Meta, Pay Pal, Spotify. You told me about BrightView. That's in Tim's universe.
Paul Giannamore: Before we get into BrightView, one thing that I look at probably five times a day is the 2s and 10s, the yield curve. We see the yield curve flattening out dramatically. The two-year bonds are front running the Fed here. We're in an environment where we've got tightening monetary policy rolling off fiscal stimulus. We've got WTI oil. West Texas Intermediate is now at $90-plus a barrel, the highest it's been since 2014. We're seeing wage inflation.
You mentioned BrightView, they announced earnings and saw 7% wage and materials inflation. It caused them to miss her numbers. A lot of the earnings were focused on inflation and materials and wages. It is not only at the micro-level from buyers, at the macro level with the economy, and then on top of that, there'll be pressure on the actual target companies themselves. As we look at oil being the most expensive it's been since 2014 and only going up, we could potentially see $150 barrels of oil. We all remember what that was. Do you remember 2013 and 2014, Patrick, how expensive it was to send your guys out in a truck?
Patrick Baldwin: Yeah. That's when I bought a Prius.
Paul Giannamore: We've got energy inflation. We have the proliferation. The Oradour guys are encroaching on a lot of territories. They are paying huge signup bonuses. The commission rates are skyrocketing. We're getting a lot more competition. Marketing is becoming more expensive. There's a lot of pressure on business owners.
If we see margins deteriorate at the target company level and we see the macro environment go the wrong direction, there are a lot of risks on the horizon quite frankly. The question is if everything that the government did in 2021 and 2020 were good for the markets, extremely loose monetary policy, all these fiscal bazookas. It doesn't make logical sense that the opposite is bad for the markets. Only time will tell and we'll see what ultimately happens here.
In my mind, I try to weigh everything in probabilities. I look and I say to myself, “We have a lot more potential issues and concerns on the horizon in 2022 than we did in 2021. I don't know where the market is going. From a process perspective, in the first month and a half of 2022, things have been resilient. We're running as we were in Q4 of 2021. we're keeping our eyes on this. Patrick, we'll do a segue here to you. One of the main reasons why I wanted to have this discussion with John Roberts is because I was shocked and astounded that you tracked him down. Let's have a little chitchat about John Roberts.
Patrick Baldwin: You've only recommended a handful of books. You're not into the popular business books that get me all jazzed up but this was one. I bought it a couple of years ago. It sat there and I picked it up knowing that you've said, at some point, I should read it. I don't think you did that as punishment. Although in the first few pages, I found myself rereading this and trying to get my head wrapped around it.
This was a great interview with John Roberts. Also, you and I bounced around, should I ever go get a Master's degree? You gave me your opinion on that. If I was to get a Master's degree, it would be much better after having been in a business, running a business, going back, and learning things. I felt this achieved that, this conversation with John Roberts and reading his book.
Paul Giannamore: I'm not into popular books. I'm into extremely unpopular books. John Roberts is a fantastic guy to talk to. He was great. He told us about how unpopular his book was. Although it was the Economist Magazine Business Book of the year in 2004. That's how I found out about it, Patrick. I've wasted a lot of money on the Economist subscription over the years. It comes out weekly.
I ended up with stacks of magazines that I felt guilty that I didn’t read. I'm like, “Why am I paying for this? I’m wasting the print. I’m not even reading this stuff.” I used to always read it on the planes but I don't travel as much as I used to. On my trip, I had magazines from December 6, 2022 and December 17, 2022. I'm like, “Why do I even have this? It's old news.” I do like to read through the December issues. They talk about the various different books of the year. Some of them have been interesting books.
In 2004, I read The Economist’s review that said, “The best book of the year however goes to a slim volume put out by Oxford University Press that deserves to be a classic. The Modern Firm, written by John Roberts who’s an economics professor at Stanford Business School, lays out in wonderfully lucid and jargon-free language a framework for thinking about corporate structure.” I saw that in 2004 and I immediately ordered the book. Until you and I talked to John, I didn't realize that Oxford University Press only did a 5,000 book run and it was immediately sold out when The Economist says this is the business book of the year. I was happy to get that.
In 2005, I read maybe 10 or 15 pages and I thought, “This will be a great book to help get the fire started in Switzerland on a cold January night. Toss that thing in the fireplace to start it.” It is an impossibly difficult book. It’s probably one of the most difficult books I've ever read. I didn't pick it back up until a few years later when I was talking to Selim Bassoul, who was the former CEO of Middleby.
Selim became the CEO of Six Flags. I had worked on a transaction with him back in 2000. J-Bug, Jamie Clement, used to cover Middleby. That's the intersection between me, J-Bug, and Selim. Long story short, It was Selim who first mentioned it to me. Over the years, I talked to various CEOs who said, “It's a wonderful book. It’s extremely hard to read but it made me think about cause-and-effect relationships.”
This is an unpopular business book. 99.9% of people should not even attempt to read this without a lot of context. It's not a how-to book. You're not going to read it and say, “This is great. I'm going to go implement these things in my pest control business.” To me, how it's different is with the books that I hate, and it's me personally and some people love them and that's great, I don't like these paint by number business books. I don't like business books with checklists, butts and seats, and all sorts of platitudes and clichés.
When I go online, I hate to see a picture of somebody. They put pictures of themselves in some stupid quote. I don't like that stuff. I'm not a mindset type of guy. I want to understand the principles behind something. I don't need somebody to put together a checklist for me because I feel like that stunts my growth. I don't care what anyone else in the pest control industry is doing. I care about what I'm doing and I want to understand the fundamentals, the basics, and the principles. I want to come up with my own twist on that.
If I understand the principles, how something works, how if I do X, it causes Y, I can play with it make it my own. I find myself drawn to a lot of industrial organization, organizational design, and evolutionary economic type of literature because that's where a lot of the research is done. That's where the experiments are done. That's this type of book.
Immediately before doing this little book, Patrick, I had a chat. What we decided to do is we're going to talk a little bit about some of Patrick's favorite parts of the book, the interview perhaps. We're going to take a portion of this interview and publish it. This guy is a Stanford strategic management and economics professor.
He's getting up in years. He's retired now and the guy is still a researcher. He's flying to China and India. He's doing direct research. We're going to push the majority of this interview aside. We're going to provide some additional context for it. For now, I'm going to make it available for Potomac clients that want to learn about it. We're going to publish a portion of this. Patrick, I've rambled on and on. Enlighten us.
Patrick Baldwin: When you recommended this book, it was set on the shelf. I’m glad I picked it back up. I decided, “This would be an interesting interview to have.” It’s high level. It’s like drinking from a fire hydrant. I’m trying to wrap my head around it. As we did the interview, my brain was trying to process what he was saying.
Paul Giannamore: You’re going to burn up all your hair.
Patrick Baldwin: That's where my hair went. He did make a bald joke. I appreciate that.
Paul Giannamore: He's like, “I'm old but I've got more hair than you got.”
Patrick Baldwin: You encouraged me when I was about 1/3of the way through the book. You said, “It gets better.” It feels like you're climbing uphill reading it. I don't usually find myself rereading paragraphs or pages. I was happy to do that to get my head wrapped around what he was saying. It’s not a bad thing. It's high level. You said, “It gets better.” It felt that way. You get at the halfway mark of the book and the puzzle starts to fit together.
I appreciate that you gave me the encouragement. I want to encourage our readers. If you pick up a copy of The Modern Firm, keep going, keep at it. I don't know if I told you this but you sat on the board of the company in Bravo. We've talked about in the past how you've developed teams, incentives, and the infrastructure of it. Also, these managers, technicians, and salespeople have the autonomy to develop their own incentive structures and pay comp. As I was reading The Modern Firm, is this where you got that idea?
Paul Giannamore: 100%. A lot of the inspiration for the way I think about those things comes from this book and others. I talked about this a little bit in the interview with John, I tend to break a business down into strategy, people, architecture, routines, and culture. I loved the discussion with John Roberts about culture because he hit some nails on the head when he talked about BP and what was accepted in BP’s culture versus Amoco’s culture. We think about culture as norms and rules of acceptable behavior within a company.
A lot of this stuff, instead of using monetary incentives, we use monetary incentives but we've tried to modify performance through the use of culture and creating a culture. It’s not like, “Here are 29 core value mission BS.” I don't believe in these. I don't want to crap on people's mission statements and visions and all that sort of jazz but you can't write that stuff and put it at a wall and repeat it and people are going to do it. It's interesting when you listen to John talk about culture at BP and what ended up happening.
In my mind, culture in an organization stems from the decisions that the founder makes. How does the founder deal with issues? How does the founder deal with ethical issues? How does the founder deal with customers? How does the founder talk to customers? What I see is, “I am Paul. I own Paul’s Pest Control. It's just me. I'm answering the phone. I'm going out into the field. I'm servicing the customer.” Over time, I need help.
Let's say I hire a technician. If the technician doesn't have a lot of bad habits and has been trained by some moron and I do my job right, that technician was modeling my behavior. He's determining what's right and wrong and how to behave within the firm based on my behavior. If I’m annoying to the customers, I'm training him to do that.
Slowly by slowly, the founder influences the culture by the decisions that he or she makes and the early employees begin to model that. I have seen this. I have worked with companies that have five employees over a ten-year period until they have 105 employees. You can look at how the founder has acted, how the managers act, and how that shapes culture as to what's acceptable or not.
When you speak about culture, there are a lot of things. I know we're getting way off the topic here, Patrick. I want to talk about this for a second. You and I always talked about doing a podcast or doing a Buzz episode on culture. It's one that I love to talk about because I research it a lot. One of the things that we always talk about is my wife is from the Gaza Strip. It’s not a great place to be from and not a great place to live. We live in Puerto Rico. We spent a long time in Geneva, Switzerland. Two opposite places.
Why is Puerto Rico objectively a craphole from a work perspective? Why are developing countries always developing? Why do they never develop? Why do most never develop? Singapore and Hong Kong have developed. Look in Latin America, why are these countries at best middle income? It's not always the legal and regulatory framework. It's the cultural norms. It's the culture of the people.
My wife and I, one of the conversations we had in Mexico is I was there years ago and I was commenting on the things that I remember being the same and the things that are different. Economic development is largely related to the path dependence within a culture. In the United States, you can change laws and do whatever the heck you want but there's a certain path dependence.
When the Soviet Union fell, it took a long time to institute. They had to go from communism to corporatism to market economies. That took a long time and it required people to die. People had to pass away and no longer be with us so the new generation learns new things because there's a path dependence. The Soviet Union disappears but you still have the path dependence of the culture of the people.
I get off the topic. It's an important thing for people to think about. It's not all about buzzwords and vision statements and mission statements. There are some important things when you're building the culture of a business. You're starting out as a founder and you need to think about every decision that you make in front of each and every one of your employees because you are creating a framework that's either going to allow you to outperform or it's going to make you a mediocre business. A lot of people who work for Rentokil, Terminix, and so forth don't think about that. It's hard to grow a business if you don't build the right culture. Would you agree or disagree, Patrick?
Patrick Baldwin: I agree. I'm glad you asked me an easy question and not, “Why do developing countries never develop?” I’m like, “I don't know.” Going back to John Byrne’s episode, I love when immigrants come to America and they're put in a different environment in which they thrive. They know how to knuckle down and succeed. I love those stories. I couldn't tell you why some emerging countries never developed them.
Paul Giannamore: Patrick, I'd like you to research that and have a report on my desk. If you can handle that for me, that'd be great.
Patrick Baldwin: As soon as you publish the commentary, I will do it.
Paul Giannamore: Speaking of commentary, Todd was down here and I said, “I am going to start writing again and publishing.” He looked me in the eye and said, “Paul, don't lie to me.” I said, “I'm going to try that though.” I have so many things. I've got one on the computer talking about private equity, the difference in the private equity deals versus the strategic deals because everyone's always asking us questions. We've got all this biocide stuff that we put together that we're going to talk about on a future episode, Patrick. God willing, I will start writing the commentary again.
Patrick Baldwin: Give me a heads up so I can work on this emerging developing country thesis.
Paul Giannamore: How many emails do we need to get from readers asking me to benchmark what percentage of revenue hookers should be on a pest control P&L? Everyone wants to know. I got to remember that. With the skin trade, we got to look into the books and see what we can do. Inquiring minds want to know and we're going to figure this out, Patrick. Maybe we should have PMP Magazine do one of their poles instead of polls.
Patrick Baldwin: It's on fire.
Paul Giannamore: Patrick, my mom is dead. She doesn't listen to the show. She never even knew it existed even when she was alive. Your sweet mother has to listen to this stuff so I apologize.
Patrick Baldwin: She loves it. You're her favorite between the two of us. Hats off to you. I know how that feels.
Paul Giannamore: Are you going to talk about some of your favorites? Let's hear them.
Patrick Baldwin: Two things here, the first step is for the leaders themselves to act in accordance with the values and to model the behavior that is wanted. A CEO who personally handles the sampling of customer complaints on a regular basis is indicating in a forceful way how important customer care is. The leaders should also celebrate and reward those who act in appropriate ways and correct those who do not.
Case in point, you did it from self-selecting who you hire but they're watching and modeling that leader along the way. We've talked about all the way back to John Myers’ episode, episode 30, which was about the CEO being out in the field watching, going along, riding with them, and being out in the trenches with them. You could do that on a daily basis. Give me 1, 2, 3, or 4 customer complaints, I’ll all handle. If I can do it, you can do it. You don’t know that was coming.
The next one is the firm does the same things and the same ways as the competition cannot be better than its rivals. The head-to-head competition that will ensue will guarantee it gets to keep little of any value it might create. This means that inherently, there must be something distinctively different about a successful firm strategy and organization. For this reason, solving the problems of strategy and organization is an act of real creativity that involves finding something new and different that works.
Paul Giannamore: We've talked about this on The Buzz, the fundamental question strategy, how are we going to compete in the market? How do we organize those routines and all the resources of the business to make our business operate in a different manner? In pest control, what's the lever? There are some key levers in pest control.
Patrick Baldwin: To me, this even talks about benchmarking. You've talked about benchmarking against historical yourself versus looking around and benchmarking against others. What are the key levers in pest control? I don't know.
Paul Giannamore: If you sit down, John Roberts breaks it down in the book. He doesn't use spark, he uses park. I added the S on the front of it. Think about your strategy, people, architecture, routines, and culture. You've got a lever in culture, for sure. It's something that not many people think about. Those that do think about it are often thinking about this happy-go-lucky BS when it comes to missions and visions and all that stuff.
I like books like John Roberts’ book. There are stacks of them behind me that are similar to this. Why I like these books is they make you think about, “Culture isn't some BS list on the wall of our values.” Here's how you create a culture. Here's how you modify a culture. Here's how the culture can change the behavior and performance of your entire firm.
Another big lever is the incentive structure, that's a big one. Group versus individual, long term versus short term, so on and so forth. There's a lot of thinking behind that. That's a huge lever. As we talked to John, a lot of managers and pest control are incentivizing the wrong things. They're incentivizing A hoping for B. Your workforce is your people, your team.
One company that I'm on the board of that we always talk about is the company Bravo. We tried to create somewhat of a strange culture. When I say strange, it’s got to be different from everyone else and the people have to be self-selecting to be part of that. We've got some different incentive structures. I had this conversation before and I told you about this. It was a guy who is a huge Buzz listener and we had a chat.
We were talking about the episode where you and I were talking about the company Bravo. When we originally built a commercial salesforce, we did what everyone else did. We're like, “We pay commercials.” Sales commissions, that's the way it seems to be done. When we started to think through it, we said, “If somebody is selling a $1,000-year account, it's easy for the sales guy. He wants to get the sale. Let's go down to $950.” That ate up 1/3 of our profit. We thought about, how do we educate everyone from the top on corporate finance? How do we run it all the way down to the ranks and make sure they understand numbers and then target the incentive structure on profitability as opposed to sales?
I was making a joke with John when we were talking. He said, “Incentive structures have to be on specifically measurable things.” You can't have a huge smörgåsbord because it's confusing for everyone. When it's too many things, people give up there. They’re like, “I don't care. I don't even know what I'm supposed to be doing here.” We had that problem. When you go through a business and you think about all the different levers you can impact in an organization, you want to incentivize, “You get XYZ for great reviews.” We can make a list of 1,000 things in the pest control business but then the employees are like, “I'm not even sure what I need to focus on.”
I don't remember if he talked about it much in the book but we did talk about it in the interview, the whole yin and yang nature of an incentive. If you're going to incentivize individual behavior, that causes the individual not to work as a team. If you incentivize team incentives, you've potentially got a commune and corporate welfare. It's important to think about how do you balance that out? How do you make sure you have some incentives for personal performance? You've got some individual incentive so it's not communist Canada. I could say that about California in New York too. You've then got the group incentive so you balance it out, yin and yang.
Patrick Baldwin: I appreciate you using the word commune. I thought you were making another David Koresh joke. Thank you.
Paul Giannamore: Patrick, I never spoke to John Roberts. He was a wonderful guy to talk to. I enjoyed my discussion with him. It‘s a book that's been influential to me over the years. Albeit it was painfully difficult to deal with, it was great to talk to the guy who wrote it. He spent almost three hours with us. Our conversation could have gone on and on if I would have understood half of what he was talking about.
Patrick Baldwin: That's my line. Dylan and I are going to pick a favorite section out of here that most of us can understand. The rest of it, you're going to have available to your clients. Should they email The Buzz at PotomacPestControl.com and say, “I want access.”
Paul Giannamore: They can do that.
Patrick Baldwin: Without further ado, let's step into The Boardroom with John Roberts.
Paul Giannamore: Let's do this, Patrick.
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Paul Giannamore: John, I want you to critique my thought process. This is what this is all about. When I think about a small business, a $10 million pest control company, for example. Let's say I’m the founder and now I am the CEO of this business. My job is designing the organization and I am setting a strategy. When I think about the design of the organization, the incentive structures within that organization become important.
As I start to look down my org chart, one of the things that I look at is my senior management. I want them to have a similar horizon that I have, a similar duration when I'm looking at results. I want them to be focused on the long term. I want there to be significant alignment between me, the owner, and my management team. As I start getting closer to the front line, the individuals that directly interact with the customers, I tend to focus on shorter-term direct feedback loop type incentives.
As you talk about in your book, you've got the agency problem where the employee may or may not bear the brunt of the cost or reap all of the reward or a substantial portion. There's a yin and yang in the incentive structures. One of the things that business owners often struggle most with is setting up appropriate incentive structures because it's easy to incentivize perverse behaviors. There was an academic paper and it was hoping for A while rewarding for B. Do you remember ever reading that?
John Roberts: Roughly if that's the title. I can't remember it exactly either but that's the idea.
Paul Giannamore: It was an interesting paper about all the things. It talked about the Vietnam War and a variety of different things. It’s hoping for one thing but entirely rewarding for something else. When we have discussions with our clients, with business owners, inevitably, almost every one of the discussions is I always talk to my people about, “We need to be doing A, B, and C.” Instead, I'm getting X, Y, and Z. If you look, they're monetarily incentivizing X, Y, and Z. There is a question baked into this.
One of the discussions I always get involved in is you have monetary incentives, economic incentives. John, as you know, there's a tremendous amount of research that's gone into Maslovian-type psychology and intrinsic motivation versus extrinsic. Although you touched on it in your book, your book was far more focused on economic incentives perhaps because of your economic background. What do you think about that now? It's been over fifteen years since you've published.
John Roberts: My thinking has changed quite a bit on that. I haven't thrown away anything that I said before. I'll stand by all of that. There are some better ways of modeling the incentive problem in terms of poor measures. In what I had written, poor measures were noisy ones. There could be poor measures because there are confounding effects.
I've come to recognize that intrinsic motivation and social effects are much more important than I thought of them. In my people, architecture, routines, and culture, a lot of that comes into the culture. You might lump under people whether you look for hard-driving, individually oriented people or more people who are more given to teamwork and cooperation. Investment banks love the lone wolves. They live on what they kill. That's no way to run a normal corporation.
No matter how big or small it is, you need people to cooperate a lot for things to go well. You can induce a little bit of that by explicit performance pay the reward for being cooperative. That's difficult to measure. You can't effectively provide incentives for something like that, not monetary incentives. Perhaps at the group level, you can, especially if you can get the workers to neutrally monitor to get them to think that we're all in this together. If you misbehave, you hurt the team and hurt the team's rewards. Attempts to gather goodies for yourself at the expense of the team is not acceptable to us. We'll let you know that you're misbehaving and maybe be quite forceful about it. That's one aspect.
For example, there's been some interesting work on taking people who are working in checkouts like grocery stores. Those people vary a huge amount in how effective they are and how hard they will work for you on their own. Putting one year slackers or laggards in a position where he or she can see the top reformer has the effect of pulling up the performance of the laggard being exposed to how to do it right. It's not even that the top performers are looking at them. They're there and aware of the top performer and feel social pressure perhaps all internalized to perform because that person is performing.
Things like that are starting to come into economics in a much bigger way than they were when I wrote this book. They're certainly come to influence my thinking a lot. One of the companies I talk a lot about in the book is British Petroleum, BP. Everything I wrote about them was pretty laudatory. We then had Deepwater Horizon, which was the drilling system that blew up in the Gulf and loaded the Gulf with crude.
Paul Giannamore: Is that when you said, “There were a handful of other companies I could have written about.”
John Roberts: I got a lot of feedback, “What about this? You fool.” My reading of that is that it was a cultural problem. BP, British Petroleum, when it was a British company with operations outside of the UK, strong incentives were put in place by John Browne for performance. Social incentives through grouping individual assets, individual pieces of the business together were called peer groups that were used to share information and mutual monitoring.
One of the strong elements of the culture at BP was when the boss came to you and said, “I want this in terms of output and this in terms of capital expenditure.” If you couldn't do it and you knew you couldn't do it, you pushed back. If you were being straight, the other members of the peer group, the other guys who are running oil fields at similar levels of development to yours, could back you up and would tell the boss, “You're asking for something that can't be done.” The boss would back off.
They then bought Amoco. Amoco was an American company. It had been the standard oil of Indiana at one point. Amoco worked in a different way that was very much top-down, do what you're told, and make your numbers. You didn't fight your objectives. They were there and the boss said, “Make them.” You did whatever you could to make them. There was tremendous pressure put on the people who are running Deepwater Horizon or any other of these assets to bring down costs and keep capital expenditure down.
With the Amoco takeover, there ended up being a lot of Amoco people who were running assets including Deepwater Horizon. The pressure came to increase performance and they didn't push back. They accepted unattainable goals or goals that were only attainable by cheating a bit on safety. It’s not just worker safety but the-thing-will-blow-up safety. They cut corners.
That would have been much less likely to happen with a heritage BP guy because he wouldn't have accepted those orders. He would have pushed back and he would have gotten support from his peers. My impression is that the American managers were reluctant to push back. They made their careers by making the numbers that they were told to make. Corners got cut and that's a big part of what happened with Deepwater Horizon. They tried to do the impossible. They tried it by cutting corners.
I have not talked to the individuals concerned. I've tried that idea out on some top executives at BP. I've tried it out Tony Hayward who was the CEO when that happened and on another man who was the managerial brains of the operation for many years. That sounded plausible to them. That's a place where the culture had a huge impact on behavior and performance. Recognizing something like that makes me much more sensitive to other forms of incentives, other forms of motivating other concerns than strict monetary incentives.
Paul Giannamore: You're saying that is part of the norms within the business as to what's acceptable and what isn't, which is embedded in the culture.
John Roberts: Right.
Paul Giannamore: John, you've said a lot. Let me ask a few questions. One of the things that often comes up in my line of business is we talk about long-term versus short-term incentives but we also have group versus the individual. You were talking about the laggard checkout person by mere exposure to higher performers was able to improve performance. Is it a self-policing mechanism within a group? When you have group incentives, you worry about the freeloader syndrome.
Patrick, myself, and you, we're all on the job. We're technicians in a pest control firm. If we're getting an individual incentive bonus, that's one thing. If the boss man starts incentivizing the three of us, I might be inclined to slow down a little bit. Of course, you two are doing all the hard work. Is it the fact that you guys are going to be on my ass saying, “Paul, don't be lazy.” As managers, how much mind do we have to pay to the freeloading syndrome? How do we determine whether or not we should be giving group incentives to frontline employees versus individual incentives? Is there an emphasis we should put on one over the other? How do we do that calculus?
John Roberts: That's going to vary with the business. It's going to vary with particular jobs that you're looking at. The reason for giving group incentives is that you want to encourage cooperation between the individuals because you want to induce behavior that's oriented to the group that involves the group working together in some way. Otherwise, there's no reason to do it.
The question is how do you balance that against your desire to get people to work individually hard, which was what you were referring to directly? That's a complicated and difficult question. There's a reason that consultants get paid the big bucks, it’s to come in and solve that problem for you. You have to remember that you've got to give comparably intense incentives for both activities in pursuit of individual performance and sharing of the group. You've got to give comparably intense incentives if you're going to give any at all because if you pay for one and hope for the other, you get what you pay for.
Paul Giannamore: What you're saying is if we're going to contemplate giving some group incentive, it should almost yin and yang and balance. Incentives shouldn't be asymmetrical. If we're going to give a group incentive, we should also think about balancing that out with an individual incentive. Is that right?
John Roberts: Yes. That sounds right to me. In that case, it may be better not to provide any explicit incentives. If you can't measure cooperation, if you don't know if the group is behaving well, you may be throwing that money away because you're not able to measure whether you're getting anything so you don't know what you're paying for and you can't pay for it properly. If you don't pay for that, you won't get it except to the extent that you can count on social concerns to get the people to cooperate with one another.
Paul Giannamore: The question with group incentives is, at what point does it become almost like a corporate welfare plan that becomes expected?
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Dylan Seals: Buzz readers, Dylan here. I hope you enjoyed this episode. Paul would like to make this entire interview with John Roberts available to you. All you have to do is email him at Pest@PotomacCompany.com. We will get the entire unedited interview out to you. Thank you for joining us. We look forward to seeing you soon.
John Roberts
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John Myers – past episode
PotomacPestControl.com
Pest@PotomacCompany.com
