Blogs & Comment

Business, football, and incentives

In both business and sport, a useful competitive endeavour is constrained by a set of rules for the benefit of both players and spectators.

I’m fond of sports analogies in helping to explain key issues in business ethics. In both business and sport, a useful competitive endeavour is constrained by a set of rules for the benefit of both players and spectators.

According to Roger Martin, Dean of the Rotman School of Management (where I’m currently a Visiting Scholar) the comparison is not just explanatory, it is prescriptive. According to Martin, for example, CEOs Should Be More Like Quarterbacks. In particular, he says, CEOs should be more like quarterbacks in the way quarterbacks stay focused on the real goal of the game — winning — rather than on meeting the expectations of those who speculate on the outcome of the game from the outside. QBs focus on real performance, measured in yards and touchdowns, rather than on performing well relative to the expectations of bookmakers. Likewise, Martin says, CEOs should focus on their companies’ real performance, rather than on how they perform relative to the expectations of stock analysts.

It’s tempting to run wild with sports metaphors, as the comments under Martin’s blog demonstrate. But we should not be tempted, just because we see one useful comparison, into thinking that CEOs should be like quarterbacks in all ways. You need to make the argument, on a point-by-point basis. Indeed the power of the comparison lies in abstracting away the ways in which CEOs and quarterbacks are not, and should not, be alike.

It’s also worth noting that Martin doesn’t think that the change in CEO behaviour that he advocates is going to happen magically, or even as a result of his own advice and efforts at persuasion. No, Martin is clear that CEO behaviour is only going to change in response to changes in incentives — in other words, changes in how they are paid:

…compensation is largely based in the expectations market in business and is strictly based in the real market in football. CEOs have a large portion of their compensation based on the performance of their company in the stock market, so CEOs spend their time shaping and responding to expectations. Quarterbacks have no part of their compensation based on the performance of their team against the point spread, so they focus completely on winning games.

Of course, that simple analogy needs to be fleshed out. Just what counts as “winning” in business, for example? And why are the opinions of external analysts such a bad way of measuring corporate performance? And finally, what would it look like to reward CEO’s for something other than improved stock performance, and would that lead reliably to better CEO performance on all dimensions, or just some?

(The ideas in Martin’s blog entry are drawn from his new book, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. Watch here for more comments on the ideas in that book in the coming weeks.)