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 Publishing.

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 Amabile.

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 creativity.”

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 necessarily.

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.


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