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When Sh#t Happens - The Impact of Random Events on CEO Performance...

Truth - we've talked about performance so much in the human capital biz that there's a dark little secret that we don't want to acknowledge.

Sometimes, sh#t just happens.  When it happens, it has nothing to do with someone's skill level. Or maybe it does.  As it turns out, the secret to measuring performance in any job is probably understanding what that person could control, and allDrunkard things being equal, how that person reacted from a performance standpoint.

Why is this on my mind?  I was at the beach last week and one of the books I read was "The Drunkard's Walk": How Randomness Rules Our Lives". I've always been fascinated with the impact of probability and chance on world events and our personal lives, and as it turns out, random events and the science of probability is very much at play when you start comparing employee A vs. employee B when they're in the same job.

Prepare to be blown away if you open your mind just a little bit.  From "The Drunkard's Walk": How Randomness Rules Our Lives":

"Let's apply the idea of the Bernoulli process to an example I mentioned briefly in the another chapter - the situation in which two companies or employees compete head to head.  Think now of the CEO's of the Fortune 500 companies. Let's assume that, based on their knowledge and abilities, each CEO has a certain probability of success each year (however his or her company may define that).  And to make things simple, let's assume that for these CEOs successful years occur with the same frequency: 60% (Whether the true number is a little bit higher or a little lower doesn't affect the thrust of this argument).  Does that mean we should expect, in a given five-year period, that a CEO will have precisely three good years?

No. As the earlier analysis showed, even if the CEOs all have a nice cut and dried 60% success rate, the chances that in a given five-year period a particular CEO's performance will reflect that underlying rate are only 1 in 3!  Translated to the Fortune 500, that means that over the past five years about 333 of the CEOs would have exhibited performance that did not reflect their true ability.  Moreover, we should expect, by chance alone, about 1 in 10 of the CEOs to have five winning or losing years in a row. What does this tell us? It is more reliable to judge people by analyzing their abilities that by glancing at the scoreboard.  Or as Bernoulli (KD note - this is a forefather of the law of probability) put it, "One should not appraise human action on the basis of results."

Going against the grain in this way requires character.  For while anyone can sit back and point to the bottom line as justification, assessing instead a person's actual knowledge and ability takes confidence, thought, good judgment and well, guts.  You can't just stand up in a meeting and yell, "Don't fire her.  She was just on the wrong end of a Bernoulli series (i.e. small sample size). Nor is it likely to win you friends if you stand up and say of the fellow who just sold more Camry's than anyone in the history of the Toyota dealership, "It was just a random fluctuation."

Think about that for a second.  With all talent factors being equal, the law of probability shows that in the CEO example above, 1 of 10 CEOs will have 5 winning or losing years in a row.  Ugh.  That kind of makes the performance scene more convoluted than it already was.

It's easy to think about some random events that impacted CEO performance in the past.  Recessions, 9/11, etc.  What we tend to discount is that there are less global random events that impact the same set of CEOs every month.

If you have any interest in the odds of chance in various gambling games or want to intellectually think about performance issues including the lens outlined above, I highly recommend "The Drunkard's Walk"  It's a good read and Mlodinow does his best to keep it interesting, but be prepared for a thicker than normal grind in this read.  After all, it's about probability theory.

When you think about it, part of what HR pros do is elongate the performance process in bad situations to ensure a big enough sample size.  The next time you hear someone say, "HR just wants to slow me down and won't let me fire the dead weight", you say the following:

"I think they're just protecting you against the wrong end of a Bernoulli process".

Believe that...

Comments

Philip Turnbull

I borrowed this book from my brother quite awhile ago and read it in a day. Great read and it really gets you thinking. It may be about probability but I didn't find it a tough read at all.

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