Learnings from the most complex organisation of our times - The Nation State
The economic crisis of 2010 brought to light many hidden skeletons in corporate cupboards across sectors and across geographies. The most frightening of all those was the inability of corporates to retain the very engines of growth that were to propel them to the glory of bottomlines. This discussion is about those engines of growth—the human assets. By no means exhaustive, this discussion intends to raise a few questions regarding those human assets (if they could be termed likewise, in a dehumanised way, as agents of simplistic transactions by which they sell their skills in return for their livelihood) and how they ought to be compensated. Compensation, seen in that sense, is at the very heart of capitalist enterprise. Unfortunately, while capitalism has evolved into a complex system of production and consumption, compensation has failed to keep pace with developments on the ground. This discussion does by no means suggest that compensation has not received its fair share of industry and academia scrutiny. On the contrary this discussion points to the fact that despite the scrutiny, the real issue regarding compensation has not been addressed with requisite analytical rigour.
This discussion intends to draw attention to a few critical issues governing compensation and its philosophical and practical moorings. In doing so, it takes a closer look at an organisation, which has ruled the life and times of modern day human existence—The Nation State. Extremely complex in structure and function, the nation state has provided us with the framework for organising modern human life. Nimble and adaptive (across ideological divide—leftist, centrist, rightist, so on and so forth), it has evolved and it has survived wars, insurrections and upheavals of all sorts. Despite all that, it has emerged victorious. So much so that, today, it’s difficult to imagine an organising idea that could rival the nation state in any manner whatsoever.
Therefore, one is tempted to ask the question that how does a nation state compensate its constituents—the people? Is there something corporations can learn from nations states in terms of enhancing what Morieux calls engagement (Morieux 2009)?
The Nation State—a Cursory Glance
Nation states have been successful in manufacturing consent over the years of its existence. In the years that it has existed, it has also learnt to put down dissent. The raison d'être of the state (état) has always been clearly defined—survival. And any dissent has been challenged on the basis of raison d'état. The buy-in of the constituents in terms of voting and percentages of votes have often been criticised on the grounds of fallacious maths. In a democracy, often, a winning candidate garners less than Conference Board’s ominous numbers as cited by Morieux (Morieux 2009). Yet, the nation state has not only been able to fend off dissent, but in the aftermath of WWII delivered what could be seen as the ultimate compensation of all—the opportunity of being a part of the Welfare State—complete with a social safety net, education, healthcare and more. Seen analytically, it had delivered an irresistible incentive for John Smith to stay engaged.
In 2009, amid the thud of corporate behemoths crashing, John Smith was let go. He walked away, bitter about a social contract, which lay shredded to bits.
The Corporation and the Absence of a Grand Narrative
Post WWII, the nation state had delivered an ace. It was a narrative of hope and well-being. Despite years of existence, capitalist enterprise (a socialist enterprise is an oxymoron) is nowhere close to authoring a narrative as desirable. To make matters worse, ad hoc social welfare schemes run by the Big Three of the automotive business, for instance, have been re-christened as legacy costs. Yesterday’s leverageable assets have become today’s discardable liabilities. In sharp contrast, the world’s wealthiest and most powerful nation state, the United States, as of yesterday, approved yet another compensatory milestone—a healthcare bill that would draw an additional 32 million Americans into the healthcare net. John Smith would not shop around or ask Uncle Sam for a raise in some time to come.
The Corporation’s Achilles’ Heel
Corporations are commercial entities. They are mandated to make profits for their stakeholders. The bottomline is their raison d'être. Yet, they could have reframed their reason to exist in a manner that was more expansive than narrow bottomline considerations. Today’s world is notoriously complex with uncertainties that are way beyond the ken of even the finest minds in the corporate strategy function. Compounding the problem further, is the spread of global production and progressive disintegration of the value chains across industries. Susan Berger has authored an eloquent account of such a state being in a recent study (Berger 2005). For a corporate with global spread and dispersed functional roles ranging from logistics, to R&D, to Marketing, to strategy, how does one monetise the contribution of which function/division with fair bit of accuracy? And what is accurate in terms of compensation planning? Is today’s price point sustainable in tomorrow’s times? Would today’s pricepoint bring in the same margins tomorrow? What’s the current worth of the R&D innovation that gets captured as value, 10 years down the line? If that innovation brings in supernormal returns then, is it therefore not fair on the R&D’s part to demand enhanced monetisation of their contribution in 2020. And that brings one to the vexed question pertaining to the R&D department. Would the individual scientist who came up with the innovation be rewarded or does the department as a whole deserve the credit? The VP of the product development at that point in time could argue that without his brief the R&D chaps would not have got their machines cranking.
As the reader can see, the corporation has not been able to reconcile the individual incentive and collective responsibility paradox. The question that remains unanswered, is that who do you give credit (therefore reward) to? A small constituent, a larger, division or the CEO (much reviled today, from a moralistic perspective on compensation). Is there a rational formula by which the CEO’s compensation could be worked out? And what’s rational is economics anyway? As one knows, even stock picking by brokers often lends itself to herd-like responses ignoring analytical prescriptions.
Coming back to the corporation, one can see how it has been a miserable failure in articulating the reason why John Smith should stay engaged or why Pierre shouldn’t vandalise the assembly line. Many years ago, the nation state sold John Smith the idea of democracy. He was told, unequivocally, that he has a say in running the country. Till today, John Smith knows that’s a priceless incentive to stay engaged. His paycheque, on the contrary, comes with a definitive monetary figure. The corporation can’t offer any better.
The Corporation’s Grand Conundrum—the Individual or the Collective
To remain competitive in the long run, the corporation needs to reconcile between individual well-being and collective well-being. It’s not an easy task. However, it’s not impossible either. A few steps could serve as rudiments of a roadmap that could be given a fuller expression.
Firstly, in today’s scenario, the worker, the management and the shareholder all need to be told that the corporation is a social organisation like any other. It operates at the confluence of markets, civil society and the government. Its powers aren’t mythical. It isn’t infallible (Lehman Brothers wasn’t). It’s strength lies in its collective and shared vision and not in some single VP’s rare wisdom. Compensation specialists could take a cue from the Gini Coefficient that acts as a theoretical barometer of the socio-economic chasm between a nation state’s grudge stratum and the happy stratum. Simply put, runaway inequality isn’t good for social harmony in a nation state. If so, then why should a corporation encourage runaway inequality in compensation—it isn’t good for collective morale.
Secondly, compensation in a corporation could be reframed in terms of imparting new skills to all. Modern society puts an enormous premium on education. A fatter paycheque for John Smith is unlikely to make Pierre happy unless he’s also the recipient of a similar largesse. However, if John Smith and Pierre are given an incentive to reskill themselves, they gain and the corporation gains too by their newly acquired knowledge.
Thirdly, make the individual’s destiny integral to the collective’s. Money is a poor match for emotion. Compensation planners must design engagement programmes by which the shopfloor worker’s voice booms as much as the CEO’s. A disgruntled John Smith knows that he could have a fair shot at changing the President of the country. He doesn’t think likewise about his non-performing CEO. That’s the inspiring power of democracy. Corporations don’t have anything as powerful on offer yet.
The economic crisis of 2010 brought to light many hidden skeletons in corporate cupboards across sectors and across geographies. The most frightening of all those was the inability of corporates to retain the very engines of growth that were to propel them to the glory of bottomlines. This discussion is about those engines of growth—the human assets. By no means exhaustive, this discussion intends to raise a few questions regarding those human assets (if they could be termed likewise, in a dehumanised way, as agents of simplistic transactions by which they sell their skills in return for their livelihood) and how they ought to be compensated. Compensation, seen in that sense, is at the very heart of capitalist enterprise. Unfortunately, while capitalism has evolved into a complex system of production and consumption, compensation has failed to keep pace with developments on the ground. This discussion does by no means suggest that compensation has not received its fair share of industry and academia scrutiny. On the contrary this discussion points to the fact that despite the scrutiny, the real issue regarding compensation has not been addressed with requisite analytical rigour.
This discussion intends to draw attention to a few critical issues governing compensation and its philosophical and practical moorings. In doing so, it takes a closer look at an organisation, which has ruled the life and times of modern day human existence—The Nation State. Extremely complex in structure and function, the nation state has provided us with the framework for organising modern human life. Nimble and adaptive (across ideological divide—leftist, centrist, rightist, so on and so forth), it has evolved and it has survived wars, insurrections and upheavals of all sorts. Despite all that, it has emerged victorious. So much so that, today, it’s difficult to imagine an organising idea that could rival the nation state in any manner whatsoever.
Therefore, one is tempted to ask the question that how does a nation state compensate its constituents—the people? Is there something corporations can learn from nations states in terms of enhancing what Morieux calls engagement (Morieux 2009)?
The Nation State—a Cursory Glance
Nation states have been successful in manufacturing consent over the years of its existence. In the years that it has existed, it has also learnt to put down dissent. The raison d'être of the state (état) has always been clearly defined—survival. And any dissent has been challenged on the basis of raison d'état. The buy-in of the constituents in terms of voting and percentages of votes have often been criticised on the grounds of fallacious maths. In a democracy, often, a winning candidate garners less than Conference Board’s ominous numbers as cited by Morieux (Morieux 2009). Yet, the nation state has not only been able to fend off dissent, but in the aftermath of WWII delivered what could be seen as the ultimate compensation of all—the opportunity of being a part of the Welfare State—complete with a social safety net, education, healthcare and more. Seen analytically, it had delivered an irresistible incentive for John Smith to stay engaged.
In 2009, amid the thud of corporate behemoths crashing, John Smith was let go. He walked away, bitter about a social contract, which lay shredded to bits.
The Corporation and the Absence of a Grand Narrative
Post WWII, the nation state had delivered an ace. It was a narrative of hope and well-being. Despite years of existence, capitalist enterprise (a socialist enterprise is an oxymoron) is nowhere close to authoring a narrative as desirable. To make matters worse, ad hoc social welfare schemes run by the Big Three of the automotive business, for instance, have been re-christened as legacy costs. Yesterday’s leverageable assets have become today’s discardable liabilities. In sharp contrast, the world’s wealthiest and most powerful nation state, the United States, as of yesterday, approved yet another compensatory milestone—a healthcare bill that would draw an additional 32 million Americans into the healthcare net. John Smith would not shop around or ask Uncle Sam for a raise in some time to come.
The Corporation’s Achilles’ Heel
Corporations are commercial entities. They are mandated to make profits for their stakeholders. The bottomline is their raison d'être. Yet, they could have reframed their reason to exist in a manner that was more expansive than narrow bottomline considerations. Today’s world is notoriously complex with uncertainties that are way beyond the ken of even the finest minds in the corporate strategy function. Compounding the problem further, is the spread of global production and progressive disintegration of the value chains across industries. Susan Berger has authored an eloquent account of such a state being in a recent study (Berger 2005). For a corporate with global spread and dispersed functional roles ranging from logistics, to R&D, to Marketing, to strategy, how does one monetise the contribution of which function/division with fair bit of accuracy? And what is accurate in terms of compensation planning? Is today’s price point sustainable in tomorrow’s times? Would today’s pricepoint bring in the same margins tomorrow? What’s the current worth of the R&D innovation that gets captured as value, 10 years down the line? If that innovation brings in supernormal returns then, is it therefore not fair on the R&D’s part to demand enhanced monetisation of their contribution in 2020. And that brings one to the vexed question pertaining to the R&D department. Would the individual scientist who came up with the innovation be rewarded or does the department as a whole deserve the credit? The VP of the product development at that point in time could argue that without his brief the R&D chaps would not have got their machines cranking.
As the reader can see, the corporation has not been able to reconcile the individual incentive and collective responsibility paradox. The question that remains unanswered, is that who do you give credit (therefore reward) to? A small constituent, a larger, division or the CEO (much reviled today, from a moralistic perspective on compensation). Is there a rational formula by which the CEO’s compensation could be worked out? And what’s rational is economics anyway? As one knows, even stock picking by brokers often lends itself to herd-like responses ignoring analytical prescriptions.
Coming back to the corporation, one can see how it has been a miserable failure in articulating the reason why John Smith should stay engaged or why Pierre shouldn’t vandalise the assembly line. Many years ago, the nation state sold John Smith the idea of democracy. He was told, unequivocally, that he has a say in running the country. Till today, John Smith knows that’s a priceless incentive to stay engaged. His paycheque, on the contrary, comes with a definitive monetary figure. The corporation can’t offer any better.
The Corporation’s Grand Conundrum—the Individual or the Collective
To remain competitive in the long run, the corporation needs to reconcile between individual well-being and collective well-being. It’s not an easy task. However, it’s not impossible either. A few steps could serve as rudiments of a roadmap that could be given a fuller expression.
Firstly, in today’s scenario, the worker, the management and the shareholder all need to be told that the corporation is a social organisation like any other. It operates at the confluence of markets, civil society and the government. Its powers aren’t mythical. It isn’t infallible (Lehman Brothers wasn’t). It’s strength lies in its collective and shared vision and not in some single VP’s rare wisdom. Compensation specialists could take a cue from the Gini Coefficient that acts as a theoretical barometer of the socio-economic chasm between a nation state’s grudge stratum and the happy stratum. Simply put, runaway inequality isn’t good for social harmony in a nation state. If so, then why should a corporation encourage runaway inequality in compensation—it isn’t good for collective morale.
Secondly, compensation in a corporation could be reframed in terms of imparting new skills to all. Modern society puts an enormous premium on education. A fatter paycheque for John Smith is unlikely to make Pierre happy unless he’s also the recipient of a similar largesse. However, if John Smith and Pierre are given an incentive to reskill themselves, they gain and the corporation gains too by their newly acquired knowledge.
Thirdly, make the individual’s destiny integral to the collective’s. Money is a poor match for emotion. Compensation planners must design engagement programmes by which the shopfloor worker’s voice booms as much as the CEO’s. A disgruntled John Smith knows that he could have a fair shot at changing the President of the country. He doesn’t think likewise about his non-performing CEO. That’s the inspiring power of democracy. Corporations don’t have anything as powerful on offer yet.
