JustinIdea

Making Executive Compensation Reward Long-Term Performance

Now, I'd just like to say I don't know the intricate details of most executive compensation packages, but I'd like to pose this as an idea on how to align pay and the long-term performance of the company. One thing I think people get too hung up on is what the change is in 12 months of pay and stock prices. Why should chief executives have their pay based-on just 12 months of information? If you want a firm to last for the long-term, wouldn't you want to compensate them based-on long-term performance, such as improvement over the last 2, 3, 5, or 10 years? Then there's also the question of how much impact did the chief executive actually have on a firm. If an oil companies profits go up 4x because the price of oil went up 4x, there is no reason a chief executive should receive higher pay. But if profits go up 6x while oil prices go up 4x, then it would make sense for the chief executive to receive higher pay, so long as their competitors and peers saw lower profit growth.

So if you're on a compensation committee and want to create a compensation package that is good for both the chief executive and the shareholders, you should make sure to do a couple things:

1) Benchmark the performance of the firm
2) Reward the executive for long-term performance by staggering their stock options.

Point 1: Benchmarking
With benchmarking, it would be good to benchmark the firm against its competitors. If the company competes against many businesses across multiple products, it might get a little difficult, but would still be a good idea to ensure the benchmarks are done well. Other benchmarks that could be used would be new product offerings and how much growth they have generated, the productivity of the firm, the inputs or outputs of the firm (such as oil prices), and other performance measures that align with the firm's mission.

Point 2: Rewarding for long-term performance
You could also stagger the reward of the chief executive's stock options. For example:
In year 1: The chief executive receives 2 million stock options for performance. 20% of those begin on a vesting schedule starting with the day of compensation, the other options begin vesting after years 2, 3, 4, and 5, if their future performance targets are hit. For the options that begin vesting in the future years, the compensation committee will review the performance target again in each of those years over the entire time period of 2-5 years and will decide then on whether the stock options should begin to vest. If the performance targets are not achieved, the stock options will be destroyed.

In each additional year, the chief executive would also receive additional options that would follow under the same schedule and adjusted for their date of issue. This way the firm's incentives for the chief executive are aligned to create long-term value, instead of just short-term gains.

Inspiration: A Brighter Spotlight, Yet the Pay Rises (NYTimes.com)

Constructive Complaining

It can get pretty frustrating when people complain non-stop. Most of the time it's because they’re whiny and can seem to do anything but look at the negatives. It can also be pretty depressing talking to one of these people. Do they think you really want to hear about how they can’t stand the person down the hall talking all the time, or that they don’t think they’re smart enough to do anything productive? It might be good to ask them sometime.

While these people can be quite a drag on a day, there is a way to take what they do best and turn it into a great opportunity – constructive complaining. During the normal course of a day, I tend to complain a lot, but you’ll also find me doing a lot of writing. Why? Are these two correlated? Yes. Whenever I find something worthy of complaining about, the first thing I ask myself is how could I make it better. From just this simple question, ideas are incredibly easy to generate.

Here’s an example. I tend to focus in on the lyrics of the songs I listen to, so I work on weeding out songs with messages I don’t want to penetrate my subconscious. This process can be a pain when trying to keep track of all of the songs I listen and wanting to generate a playlist for a specific mood. So, I asked how could this be made better? One way I’ve thought of to fix it is to make tagging and labeling of songs much easier for someone. To allow a person to base it on their emotions if need be and then to be able to mix and remix songs that they associate with the emotions into playlists, because a song can be attached to multiple meanings for a person. This would make setting the mood much easier for an occasion or for helping you get pumped up or excited about something. Have a sad day and need to mope for a while? Just play some sad music until you get sick of it and want to be happy again.

Now implementation and execution is the only bottleneck to this method. You’ll generate so many ideas you just won’t have the time to work on them all at once. But in the end, is it better to have too many ideas with a few gems or too few and less of a chance of a gem emerging?

Holding true to constructive complaining, here’s something to keep in mind. When you hear one person complain, think business opportunity. When you hear many people complaining, think BIG business opportunity! Happy complaining! :D

A recession? How about some inflation with that

Good old Ben Bernanke has been working on quieting Wall Street recently, because the bankers lost money from some risky bets they made, and he now claims a recession is currently the worst thing that could happen to the United States. Last time I checked, if you're trying to get above average returns, you'll need to take on above average risk. So the fact that the banks lost billions of dollars on sub-prime mortgages should be nothing to get riled up about.

So what if the United States does go into recession as the jobs data and other indicators may be pointing to? Shouldn't the Fed lower rates? If the United States was isolated from the world, yes, it should. But the U.S. isn't an island without any trade. We might not be completely globalized, but trade still makes up about 20% of our economy.

What ever happened to the talk about inflation? Inflation must have disappeared right? Well, no, not at all. A falling dollar makes foreign imports cost more in the United States. Look at toys, clothes, and other products rising in cost unless the companies want to absorb the currency exchange costs. While that might be manageable, a falling dollar coupled with inflation in China makes a bit of a perfect storm. With Chinese inflation now hitting 11-year highs, companies will be less likely to be able to absorb the pressure on their profits and will need to pass on the price increase. Some are already asking for 20-50% more. Hopefully the Fed will get its act together, raise rates, and keeps stagflation from hitting the United States.

Social Advertising

From business's point of view social ads are the holy grail of marketing.  Being able to give ads to people based-on their previous behavior, not only from shopping with your company but with others, is the Fort Knox of personal data.  This information potentially allows marketers to give consumers marketing messages through the most influential marketing channel, social networks, and based-on the users profile, giving away their preferences.

But it's also the holy thorn of marketing.  When someone posts information on a social networking site, they expect their information to not be shared outside of the privacy controls they've set.  When this data becomes shared, people feel violated, lowering their trust in the service that is rendered.  Privacy rights groups then storm the gates of the government demanding greater protections for consumers and for federal investigations of the service providers.  The EU, with it's stronger privacy protections, will already be on its way to analyzing the security and privacy implications of the services, make recommendations, then get ready for its next set of legal battles.

They say there's no such thing as bad pr, but when the consumers trust in a set of dominant services is on the line, it is bad pr.  Companies should be careful when treading in the territory of personal privacy concerns.  Maximum transparency about one's policies and allowing for people to control the disclosure of their information will create maximum trust.  Trust is the glue of relationships and commerce.  It's not meant to be abused.

"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently." - Warren Buffett

A Sustainable Policy

Last week it was great to see Al Gore acknowledged for his efforts in promoting the building of a more sustainable society.  With a decrease in pollution and energy consumption, we will have fewer incidences of illnesses such as asthma and thereby decreasing the amount we spend on health care, more money to spend on things aside from energy, greater domestic and international economic growth, and a more peaceful world because money will not flow en mass to dictatorships built off of fossil fuels, especially ones that finance international terrorism. 

One big problem with proposed policy measures is that they do not allow for both parties to get what they want from the table.  The Democrats want to help the environment, public health, etc., and the Republicans want to promote growth by lowering taxes.  To increases its chances of success, a policy should take into account these agendas.  One such as this:

1. A cap-and-trade pollution system where the government sells credits that companies can buy for their needs.  The cap would need to be lowered each year to promote further decreases in energy used. 
2. Requiring all business that produce goods in the United States or that sell goods to American consumers to participate in the system and to take into account a life-cycle analysis of their products.
3. Requiring companies listed in the United States and those that want to have government pensions buy their stock to disclose their carbon footprint.
4. Eliminating the corporate income tax in exchange for participation.

A policy such as this will promote business to adopt more energy efficient measures and reward the most energy efficient companies by allowing them to sell their credits and then not have to pay a corporate income tax.  The elimination of the corporate income tax would further spur innovation and accelerate the development of a more sustainable environment.

This acceleration of innovation will create millions of jobs in research, development, production, marketing, financing, and servicing these new products and make American-made products more competitive in the global economy.  These new employment opportunities along with the money the government makes by selling the credits will also offset the revenue lost by the elimination of the corporate income tax, keeping our national debt from increasing due to the program.

Using Songs to Segment?

If you think about it, the music you listen to can say a lot about your inner thoughts and desires, personality, and what you relate to.  Its the emotional outlet that people tend to share a lot, especially when younger.  Could this provide a worthwhile way to do customer segmentation?

Pandora and Last.fm have a huge store of songs that people have favorited/bookmarked/etc. and what music they listen to at different points in time.  If you look me up, you'll probably find I like to listen to a lot of club music now.  You could throw me in the segment of a person that likes to go out, dance, and socialize a lot.  With a little more demographic information (maybe age, education, and location), the company could then tailor ads to product categories of interest to me.  Ads that might target me could be networking events going on in the area, nice clothing, or sports cars.

These ads wouldn't be able to pick-up whether I like to trade stocks or if I read business news ever day, but it might provide a nice way to find out what people want to spend discretionary money on.  Who knows, with a large enough user base it might say more.

A Philosophy of Gray

I know in many instances it is more efficient and effective to place all of your bets on one strategy, especially when working on a start-up company with limited cash.  Although when going about life, I find it interesting how people like to be one thing instead of adopting a bi-pole philosophy.  If you approach life from only one angle, then you will surely be able to capitalize on all of the opportunities that present themselves along that angle, and you will become more specialized at that view.  But at a point, the amount that you gain from that angle no longer matches the energy and effort you put into it.  You will also miss other opportunities that present themselves and it will be harder to make yourself flexible to meet new situations.

I've adopted a philosophy of gray, where I work on using both poles at the same time to maintain my flexibility to react to new situations as they present themselves.  I work on keeping these poles in constant competition and cooperation, so that I can mix and match them as necessary.  For example when solving a problem, I work on deducing the core problem that everything else seems to hinge on, then finding through induction how changing this bit many different ways may alter the system.  This is both an art and science as the questions you need to ask for a given situation are not set in stone and the path to exploring it zig-zags a lot.  There are also many dependencies that you need to account for when solving these problems.  Granted, sometimes this strategy does not work as there might not be a core problem, and in those situations I work on finding a tool set that does.

An analogy for a philosophy of gray is to view everything that you are and can do as a tool.  For example, I'm an ENTJ, the field marshal.  This doesn't mean that I always act like all of these traits.  Sometimes I seclude myself into a cave, other times something I see sends a feeling of passion through me, or I might sit back and watch what is going on in the world.  Instead of saying this is all I am, why not view each letter as a tool?  Sometimes being surrounded by people is the best way to regain my energy, other times a good book will do.  Sometimes I need to judge quickly, other times I need to take a step back and smell the flowers. 

This entire thought process came to me, because of how many self-help books there are proclaiming how you should lead your life a certain way - granted if I wrote a book about this I'd be in the same league, haha.  A friend of mine has been reading a lot of these books and is convinced that

1. that the world is moving in a direction where it will require you to be right-brain dominant to lead.
2. and conversly, being left-brain dominant will not allow you to become a leader in the world of the future. 

I argued that he'd be most valuable if he was both right and left-brain dominant and knew when to use each of them to his advantage.  Without a combination of logic and creativity, it's more difficult to ask the tough questions and generate spontaneous ideas that you can back-up with documented research.

I personally enjoy the flexibility that being gray allows. :)

ALPFA National Convention

I got back to Seattle from a trip to the ALPFA National Convention last night and must say the convention was awesome!  Having 2400+ Latinos from the business world at Disney World in Orlando made for awesome networking, friends, dancing, and after parties! :)

The convention started off Friday night with a Salsa Competition that I took part in with my friend Nerelys.  The first time we had danced together was last Wednesday, and it showed a bit on the dance floor by the judges comments, haha.  Saturday was pretty slow until the reception that night with salsa dancing following immediately afterwards. 

Sunday was a lot of fun.  I was on the University of Washington KPMG Case Competition team, and we gave our presentation on a fictitious company called InfoMemo that needed to raise $15 million from investors to do the marketing and sales for a hybrid pda/laptop it had developed.  I worked on applying what I've learned from reading Logic+Emotion and Presentation Zen.  The part I presented was the Financial Analysis section, and I received a lot of compliments for the two, colorful tables I had (the case competition was mostly for accounting students, so lots of text and big quotations tended to be the norm). [link to  slideshow]

One thing I learned during the presentation was that you can use your nervousness right before you present to your advantage.  People will tell you that if you sense your heart rate increasing that you should take a couple of deep breaths to settle down, although I've noticed this tends to decrease your energy level during the presentation and make you less animated.  I've given quite a few presentations, but right before it was handed-off to me, my heart rate doubled and I became pretty nervous.  I took one deep breath, noticed it didn't do anything, said "screw it", and gave my presentation.  By not trying to calm myself down, I believe my presentation was much more animated than it would have been, due to the combination of adrenaline and extra oxygen in my body. 

Sadly, we didn't end up making the finals for competition, but this did allow us to go out and dance the night away, without worrying about waking-up at 6am (3am Seattle time, my usual bedtime).  Monday night, we went to Epcot for the case reception, mingled with the other college students, and were able to watch the fireworks display outside on a private boardwalk.  The one thing I wish they would've added was a dance after the reception, because it was a perfect time for all the students to get to know each other, and good quarter or half of them were under 21 and not able to take advantage of the club scene at Pleasure Island.

Tuesday was the grand finale with a career fair in the morning and a gala at Epcot at night.  I was surprised at how quickly many of the recruiters asked you what kind of position you wanted with them, instead of getting to learn about you more.  About half of them asked me within the first two sentences they spoke to me.  Not being interested in getting a job, I instead told them about how I'm working on Mavenry.  For a couple of the companies, I was genuinely interested in learning more about their products and services, and I was further surprised that none of them pitched me about their services after I told them I was working at a start-up.  You would think they'd like the idea of someone paying them, instead of them paying someone else, *shrug*.

The gala that night was a blast!  The program went a little longer but it was a lot of fun being able to meet a table of people from E+Y and Silicon Valley.  Towards the end, we were able to go out and watch the fireworks display again on a private deck.  This time it seemed we were much closer and the fireworks aimed more directly at us.  I get excited when I see well orchestrated fireworks displays and felt a bit giddy inside at the sight of it.  Once inside, we saw a couple more awards handed out, some prizes given away, and then it was time to dance the night away (for my fourth time, haha). 

I can't wait until I'm able to travel more and attend conventions and conferences like this more frequently.  It's awesome when you're able to meet so many smart, determined, fun loving people in one place.

It's a Marketing Problem

This past Sunday I went to Mind Camp 4.0 at the Tukwila Community Center, and I had an absolute blast at it.  The day was set-up as an open conference, where people post what they would like to teach others and each individual chooses what they would like to listen to for each one-hour segment.  There were some really great discussions there.  Some of the ones I went to involved where can you take web 2.0 next, what you need to take into account when starting a company, advertising rates for websites, and education in the State of Washington. 

At the event, there was no loss of good ideas.  One of the cool one's that I saw was NoonHat, where you post the place you're at and the radius within which you would like to catch lunch.  The site then pairs you with others that want to catch lunch in the same vicinity and time.  Another was Uncluttr, which makes finding books on Amazon a lot more intuitive and simple.  If you want inspiration for some new ideas, something like Mind Camp is a great event to attend.  I think the discussions helped to spark about a dozen ideas in my head during the 12 hours I was there.

The one thing I saw missing from a lot of the discussions was the business side.  It's great to have cool little technologies and demo them for others, but it's another discussion to find ways to make money off of them, and sadly a lot of the ideas didn't have a concrete monetization model.  Another area was business risk, which is something that came up in talking about where to take web 2.0 next.  With ~90% of the people being more tech-oriented, ways to lower business risk that have been used in other areas of the economy weren't brought up until I started to chime in.  Then how do you gain your users?  Working off your initial network will only take you so far, so quickly.  To gain a large user base quickly, you'll need to find other ways to market it to increase user adoption and understand what type of scaling problem you have with respect to your users. 

Without a strong business model, most of these cool ideas will flounder or allow their creators to make a few dollars a month off of Google Adwords, and they won't become widely adopted.  The plummeting costs to develop web applications has thrown out the technical problem when developing 98% of web applications, a site like Farecast being in the 2%.  It's easy to copy and paste someone else's code or make a social networking site with one new "killer" feature.  Even when the technical problem is eclipsed for those 2%, what you're left with is a marketing problem, and solving that problem requires a different mind set than developing the cool feature did.

The Ultimate Convergence in Computing

I won't deny that I became extremely excited when I saw Microsoft announce the Surface computer.  But my mind couldn't help but wander and see if there was a way to improve upon the concept and the entire idea of how humans should be able to interact with computers.  Is playing around on walls, floors, and tables the best way to interact with computers, or is there an even better way?  I personally don't think it will be the end all, even with an OLED covered house with walls that are as dynamic as those in Disney's Smart House movie.

Why limit yourself to a surface to do computing at all?  Even better, why make the internet a separate space where things are done?  The internet in the end, as my friend Anders says, is merely another way for humans to communicate.  So what could the ultimate convergence become?  In science fiction movies like The Matrix, humans have to plug into a machine to be able to connect to a "virtual reality".  Why should virtual reality be any different from reality?

Device convergence is great and everything, but I believe the ultimate convergence in computing will be when virtual reality and the internet are completely integrated into reality.  When you are walking down the street, you won't pull out your cell phone to find a place to go.  You will see the possibilities appear before you.  You won't even need a cell phone to carry on a conversation.  Instead of having a character in SecondLife as an avatar to interact with others, you will see other people, who are not physically there, walking around and will be able to interact with them.  You might not even be "there".  (Of course, teleportation would make getting there a lot easier. :-) ) 

With virtual reality and the internet completely integrated into reality, the possibilities are truly infinite.