Tuesday, March 07, 2006

Lalu has performed, where's his incentive?

Authored by Sameer Nair
I pick up my pink paper and am confronted with the following headlines.

Top line Growth of 18%, Profit Growth of 78 %, Cash Balances at a healthy 6900 crores, improvement in operational efficiencies.
Surely this is one stock that our analyst friends would have given a thumbs up to. And the CEO – he ought to have earned a hefty performance bonus. Running into Crores.

Sadly for this CEO it is not to be. He heads the railway ministry and is widely regarded by the media as this buffoon who, through a mix of caste dynamics and compulsions of coalition politics, has managed to get himself the important railway ministry.

The papers were quick to clarify overtly and otherwise that this performance was completely the result of a buoyant economy. Growth in freight is an obvious by-product. Lets not get carried away. The minister has nothing to do with it. I am sure the analysts are right.

But should not a similar question also be asked of private sector managers?

Surely the quadrupling of the Sensex over the last four years has had a lot to do with the robust revenue growth of Equity Brokerage Houses. A 300 basis point fall in interest rate that happened four years ago made it possible for banks to book huge gains through bond trading. And the bond traders walked away with crores.
My friend who works at the desk in one foreign bank later confessed that it was the kind of a year in which even a monkey put in front of the trading terminal would have found it tough not to make money.

This is certainly not an argument against performance-based pay. Without a doubt, such a system works wonders for the motivation of employees. The point is that one should be careful in defining performance. There has to be a distinction between luck and skill.

Our current definition seems to be that an MBA from a premier institute generally found in an expensive suit and red tie who has "performed", has done so because of skill, while the pyjama-clad, pan chewing minister from Chapra has been merely "lucky" to head the rail ministry in good times.


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Kartik Kannan said...

I really see a point in what you say. We have built up this image of laloo being a bufoon and a guy who is there to only symbolize red tapism and immoral politics.This web of our impressions is so huge that even though Laloo has proved himself with good results and numbers ...we still seem to be finding fault with him(Including me :-) )

Pankaj said...

I think Kartik is missing the point somewhat. After reading the post, he is ready to believe that Laloo is to be credited for the performance of railways. What Sameer is trying to explain, if I get him right, is exactly this behavior on our part - attributing success to an individual when it might very well be more due to a set of circumstances, or plain dumb luck - "right place, right time". The point is not whether Laloo should be rewarded - he is smart enough to get his own rewards. It is whether our heroes in the corporate world should be rewarded with 8-figure bonuses because, say, George Bush decides to inavde Iraq. :-)