01 Oct 2002
Faculty Research Symposium
Last spring, a special symposium was held on campus in celebration of faculty
research. The one-day event, sponsored by the Division of Research and Faculty
Development, brought faculty and administrators together for lively presentations by
colleagues and a panel discussion on The Market for Management Ideas, moderated by
Walter Kiechel (MBA '76/JD '77), senior vice president and executive director of HBS
Presentation topics ranged from strategic alliances in business and nonprofits to the
managerial emphasison unregulated pro forma earnings, to teamwork in health-care
organizations. Synopses of three of the presentations follow.
Pay Check: Equity-Based Compensation and Incentives
In 2000, CEOs were earning, by some measures, 458 times as much as ordinary workers,
a gap ten times larger than what it was in 1980. While the sums involved are clearly
staggering, the compensation packages that provide this wealth are poorly understood,
according to HBS associate professor Brian J. Hall. Often, Hall believes, these
packages are even counterproductive for the companies that offer them.
Hall's research is focused on the optimal design and incentive effects of
compensation plans built around equity-based pay and especially stock options, the
instruments most responsible for the huge numbers associated with CEO remuneration.
At the symposium, Hall noted that the median annual pay of a Fortune 500 CEO is
approximately $3 million in option grants, $1 million in bonus, and $1 million in
salary. But in addition, that same executive will, over time, have accumulated
holdings of stock and options typically worth some $20 million. While the bulk of
executive compensation used to consist of cash, in the form of salaries and bonuses,
executive wealth today is dominated by stock-option holdings. This, in turn, has led
to dramatic yearly swings in executive wealth, which are largely tied to huge changes
in company stock prices.
Noting that equity-ownership can create powerful and beneficial incentive effects,
Hall discussed the challenges and tradeoffs involved in designing equity-based pay
plans. For example, option pay is sometimes falsely viewed as costless to
the company and therefore leads to abuse and excess. In addition, designing equity
pay requires difficult decisions regarding risk-taking incentives, leverage, and
vesting since the goal of equity plans is to motivate long-run value creation in a
cost-effective way. The problem with equity-based pay is generally not that it
fails to motivate, said Hall. Rather, the problem is that it sometimes
motivates dysfunctional behavior.
Hall's research also points to some overlooked advantages of stock relative to
options. Although options create leveraged incentives, they also create more
fragile incentives relative to stock, he observed. Unlike options, stock
can't fall underwater. Stock is a much more robust incentive instrument, and is
less likely to be abused since its value is much more transparent.
Creativity in a Crunch
Does having a tight deadline spark creativity or stifle it? When HBS professor Teresa
M. Amabile and her research team first asked this question, the replies were all over
the map. There were plenty of examples of time pressure spawning creative thinking
— Apollo 13, for instance — but there were also many occasions where not
having enough time squelched creative thoughts.
Given that creative thinking is a fundamental component of contemporary
organizations, Amabile decided to address the question as part of her ten-year
longitudinal study on creativity. Now in her sixth year of this research, Amabile
discussed some preliminary findings about the relationship between time pressure and
creativity at the faculty research symposium, highlighting points that she also
published in the August 2002 Harvard Business Review.
For the time-pressure study, Amabile endeavored to trap creativity in the
wild by surveying employees at seven companies across three industries. She and
her researchers identified 22 teams that were working on creative projects and asked
each of the 177 team members to complete a brief electronic diary every day during
the course of a creative project. We wanted to observe creativity as it was
happening within teams that are supposed to be doing creative work, explained
One of the most interesting discoveries thus far, said Amabile, is that the research
suggests that workers are incorrect in their frequent belief that they are more
creative when they are working under deadline pressure. A dearth of time pressure,
however, does not inspire creativity either. Very high levels of time pressure
should be avoided if you want to foster creativity on a consistent basis,
observed Amabile. At the other end of the spectrum, very low time pressure
might lull people into inaction. Under those conditions, encouragement from top
management to be creative — to do something radically new — might stimulate
A clear message for managers, noted Amabile, is to focus on focus.
If a time crunch is absolutely unavoidable, she concluded, managers
can try to preserve creativity by protecting people from fragmentation of their work
and distractions; they should also give people a sense of being Œon a mission —
doing something difficult but important.
Nobody's Perfect. Now What?
We all make mistakes. But when slipups have life-or-death implications — as is
often the case with health-care professionals — the stakes are obviously much
higher. In her research on the process behind the detection and correction of such
errors, Associate Professor Amy C. Edmondson studied eight teams of caregivers from
two different teaching hospitals to explore how group and organizational behaviors
affect error rates in administering drugs to hospitalized patients.
Edmondson surveyed the social and organizational properties of each team, measuring
factors such as leadership behaviors of nurse managers; adequacy of training,
information, and equipment; team characteristics (stability, composition, quality of
relationships, and performance outcomes); and individual satisfaction and motivation.
Her results were somewhat unexpected: Teams with higher scores for these factors also
had higher detected error rates. Do better-managed teams make more mistakes? Not
People are more likely to own up to their shortcomings — and, one hopes, to
learn from them — if they feel psychologically safe reporting them
in an open, supportive work environment.
The survey's findings were further supported in observing and interviewing
hospital employees on the job. In the unit with the highest detected error rate
(unbeknownst to the researcher conducting the interviews), coworkers described the
nurse manager as accessible; relations between nurses and physicians were
characterized as respectful and collaborative with high job
satisfaction. As one participant reported, There is an unspoken rule here to
help each other and check each other.
In another unit, the reported error rate was many times lower. The nurse manager,
described by nurses as an authority, not a coworker, expressed the belief
that mistakes should be learning experiences, but also noted that people are
nervous about being called into the principal's office to talk about them.
People don't advertise error, reported one nurse. If
there's no adverse event, then don't report it.
The ability to identify and discuss problems, Edmondson told her audience, is
directly related to whether a leader creates a climate of fear or of openness. When
it comes to reported error rates, teams that look best on paper may be most in need
of improvement. Given the fallibility of human beings, creating a work environment in
which it is possible to learn from one another's mistakes should be a key
priority for managers in any field.
Edmondson tested her theory further in two subsequent studies, one in a manufacturing
company and the other focused on cardiac surgery teams. She found that differences in
psychological safety indeed predicted a team's ability to learn and cope with
change effectively — a consistent result across very different organizational
contexts. Striving for perfection, it seems, may be less productive than fostering
the ability to acknowledge one's shortcomings.