Friday, August 27, 2010

Your Perception of Business Growth Is Wrong - BusinessWeek

Bloomberg Business Week

Smart Answers August 24, 2010, 10:45AM EST

Your Perception of Business Growth Is Wrong

Don't assume that bigger is always better, says B-school professor Edward D. Hess. Steady improvement is much more crucial than expansion

Small Business

Much of the perceived wisdom about business growth is mythology, says Edward D. Hess, professor of business administration and Batten-Executive-In-Residence at the University of Virginia's Darden Graduate School of Business. The former executive has spent years studying the concept of business growth and written myriad articles and books on the topic, including Smart Growth: Building an Enduring Business by Managing the Risks of Growth (Columbia Business School Publishing, 2010). He spoke about his latest research with Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

Karen E. Klein: What interests you about business growth?

Edward D. Hess: What most business people think about growth, like "grow or die" or "growth is always good," is not supported by research. Most business executives accept without question that bigger is always better and that they should have growth that is continuous and linear. But that's just flat wrong. The data show that consistent, above-average growth is the exception, not the rule.

How did you do the research for your new book on growth in private companies?

In 2008, as part of the Darden Private Company research project, we identified 54 high-growth private companies in 23 states. Their CEOs agreed to participate in surveys, interviews, and case studies. They included product and service businesses that had been in business 9.6 years, on average, and at the time had average revenue of $60 million.

One result of that research is the warning that growth can destroy a business. How did you determine that?

Many of the CEOs we interviewed were on their second try at building a successful business. Their first try had imploded because they took on too much growth and found that they had quality, people, management, and financial problems as a result.

Are you against growth in general?

I am not anti-growth, but I do know that growth that's not managed properly can lead to dilution of your customer value proposition and risks to your reputation and brand. I think you should approach growth not as an assumption but as a well-thought-out decision. Understand the difficulty involved and go into it with eyes wide open, knowing that you can stop at any time. We found that companies don't necessarily have to grow or die, but they must improve or die, meaning they have to continuously improve their customer value proposition or risk going out of business.

What is the downside if growth is not managed prudently?

If you take on too much growth, it can overwhelm your processes, people, and controls. What we recommend is managing the pace of growth with something like a gas-pedal approach. You push on it, then let up, and let your company catch up to that growth. You can't simply take on all the growth possibilities that walk in the door.

You make the case that growth is particularly risky for smaller companies. Why?

Smaller, privately held companies usually don't have the financial safety net to withstand quality control issues or negative publicity or a legal downside. They have to be even more sensitive to risk than the big companies, and they have to manage it better. Gold is glittery, and it can blind you, but small companies that take on too much growth and mishandle it can't always recover, because they don't have the resiliency of larger companies.

How does growth typically happen in a small company?

There are four basic ways to grow your business. You can [1] improve, [2] innovate, [3] scale, or [4] do acquisitions. Innovations and acquisitions represent low probability, high-risk growth. Improvements are a given—you must make them in order to stay in business.

Scaling, the key to growing a private business successfully, means doing more of what you're already doing with better distribution and more customers. But you can't scale correctly unless you've got the right processes in place and you've done the right hiring and training of your personnel.

Your research shows that hiring mistakes are one of the high costs of growth.

Yes. I was surprised at the number of times it took CEOs to find the right culture and competency in their technical hires. Many of them took two to five tries to get the right CFO in place. They couldn't properly evaluate individuals' competencies coming in, so that led to a lot of churning, which is very costly.

As a company grows, the people often do not grow as fast. Sometimes the personnel that manage fine at a company of 25 employees can't manage in a company of 75 employees. But continuously upgrading your staff creates loyalty and morale issues.

What's the solution?

One CEO told me, "I have learned that I have to hire slowly and fire quickly." Most people do the opposite. Also, in order for a company to grow, the entrepreneur must grow. He must learn to delegate, manage, lead, and change roles nearly every day. Many whom we interviewed found those transitions difficult.

The other thing we heard was that the bigger the company, the more time the entrepreneur had to spend solving emotional problems and personality conflicts. Many of them told us they did not enjoy that kind of thing and were not good at it. The basic entrepreneur is a pretty driven, my-way-or-the-highway type. Dealing with people takes emotional intelligence and a different set of skills, maybe a more feminine mentality.

Did you include female CEOs in your high-growth cohort?

At least 10 percent were women. One had taken on too much too fast, and she struggled. But the others were very successful—even though they were not all great relationship people.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Access Content Source: http://www.businessweek.com/smallbiz/content/aug2010/sb20100823_584240.htm

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http://dreamlearndobecome.blogspot.com This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.

Bumps In The Road - Fidelity Viewpoints

Fidelity Viewpoints — August 20, 2010

Slower economy? Yes, says our top economic analyst. Double dip or deflation? Unlikely.

With the economy in the doldrums and the stock market jittery, worries have mounted about a renewed recession or even the prospect of deflation. While acknowledging those risks, Lisa Emsbo-Mattingly, Fidelity's director of economic analysis, thinks the evidence is still pointing toward economic expansion, albeit at a slower pace. She thinks the dramatic comeback in corporate earnings has put stocks at attractive valuations relative to Treasuries, which may amount to an opportunity for investors with a long-term view.

Q: With growth slowing, do we risk another recession?

Emsbo-Mattingly: The slowdown in growth we saw in the second quarter and likely this quarter is typical at this point in the economic cycle. We are likely moving from recovery to expansion. In other words, the speed of economic growth has been taken down a notch. One of the key drivers of the softer growth picture has been the continuation of weak purchasing power on the part of the wage earner. If you look at wage growth relative to CPI (Consumer Price Index), it's been quite weak. So even though we don't have headline inflation, workers may feel poorer because their wages have not kept pace with prices.

One of the key components of this slowing in growth comes from the industrial sector. Indeed, it appears that the rapid growth in industrial production we saw off the bottom last year has begun to slow. The ISM Manufacturing Survey probably hit a near-term high in April. On a year-over-year basis, the index of leading economic indicators probably peaked in March. Does that mean that growth is negative? Absolutely not, in my view. It simply means the rate of growth has been slowing. We are encountering bumps in the road. But based on history, that is consistent with this phase of the expansion.

Q: And corporate profits are up.

Emsbo-Mattingly: Yes, the corporate sector has been doing quite well over the past year by getting more output per worker. The kind of productivity gains we've gotten recently has been what I call cyclical productivity: You cut headcount during the downturn but there’s been very little increase in headcount as orders have risen. The benefit of that is you can get big margin expansion. That's why corporate profits, as measured by the Bureau of Economic Analysis, were up 37% year-over-year in the first quarter, and operating earnings for the S&P 500 may be up 50% year-over-year in the second quarter. But the boom in profits is certainly not being felt by wage earners right now. I don’t think this state of affairs is sustainable. If the economy keeps growing, the wage earner is likely to begin to benefit more substantially from this recovery.

Q: So you expect companies will begin hiring?

Emsbo-Mattingly: Yes. Real GDP is down 1% from levels two years ago, while employment remains stuck at 2004 levels, down 5% from levels two years ago. The result has been the cyclical productivity boom of 2009 and the first quarter of 2010. But now things are changing. Second quarter productivity actually fell slightly. In my opinion, the ability of companies to continue to cut costs has largely come to an end. You can't get blood out of stone. Going forward, I believe nearly every increment in real GDP will show up as labor demand. Otherwise, companies may not be able to keep pace with demand. As long as the economy grows, even at an anemic pace, I think job growth will show a much stronger profile. I believe we are in the same point in the cycle as 1993 and 2003, when job growth kicked into a higher gear.

From recovery to expansion

Q: But in the meantime, the wage earner — the consumer — is cautious.

Emsbo-Mattingly: Right. From 2007 to the present, you've had a massive decline in household net worth, and consumers have responded by increasing their savings rate. They've been paying down debt, or defaulting on debt. But one way or another, they are de-leveraging. The financial service burden and the debt service burden, as measured by the Federal Reserve, is down to a decade-low.

Consumers’ high sensitivity to personal wealth was vividly displayed in the second quarter. The swoon in the stock market that began in April and became a violent and chaotic decline during the May flash crash led consumers to retrench and save more. While incomes were rising at a 4.1% annualized rate in the second quarter, nominal spending rose a very anemic 1.6%. The savings rate is now at 6.2%. That’s more than triple the savings rate just 3 years ago.

This large retrenchment of spending coupled with an end of new debt creation has begun to show up in improving credit trends. We’ve seen this retrenchment among households and companies. The result is an improvement in delinquency rates across almost all credit categories—in credit cards, auto loans, mortgages, high yield corporate bonds, investment grade bonds—as people and companies save and pay down debt.

Of course, the one exception is public debt. The public sector, especially the federal government, is increasing its debt dramatically, and that may have long-term economic consequences.

Q: In this de-leveraging process, do we run the risk of deflation – the so-called Japan scenario where growth stagnates for more than a decade, where everyone saves and no one borrows or spends?

Emsbo-Mattingly: Well, there's always been a risk of deflation when you have a massively leveraged economy and asset price declines. But, as I said, I think consumers and businesses have been unwinding debt, and private sector debt levels are now at manageable levels in terms of debt servicing.

As for asset prices, I'm positive on housing prices, not in the sense that they're going to be rising any time soon, but that they've stopped falling. Based on affordability, housing is actually cheap. And I'm very positive on equity prices because I think valuations are compelling.

To really fall into a Japan scenario, I think you need to have continued asset price declines. In that situation, people don't want to borrow or spend because they think prices will decline further in the future. And in Japan, that's what occurred. Despite declines, the Tokyo stock market never got really cheap. Land never got cheap. But I don’t think that’s the case here. It took 10 years for Japan to do what we did in the past two years.

Q: But even with this process, we've hit a speed bump. Can you explain what the Fed did recently to help the economy?

Emsbo-Mattingly: Well, if you go back to 2008, the Federal Reserve doubled its balance sheet, acquiring a lot of debt and injecting money into the economy in response to the freezing up of the credit system. Originally, its intention was to allow all the assets it acquired, like mortgage debt, to roll off its balance sheet as the economy recovered. But I think the Fed looked at money velocity and indicators on inflation, and saw that growth is still very weak and the risk of deflation was not insubstantial. If the Fed let its balance sheet decline, it would have actually been removing money from the economy and tightening implicitly. By reinvesting the assets as they mature, the Fed may avoid that implicit tightening. I think that's extremely positive.

Q: But in this slow-growth climate, do you think stock valuations are attractive?

Emsbo-Mattingly: If I look at the after-tax earnings yield of the S&P 500 versus the 10-year U.S. Treasury bond, the market is the cheapest it's been since 1979, and before that, since 1955. As you can see in the graph below, the spread between the after-tax earnings yield of the S&P and the 10-year Treasury bond is the widest it's been since 1979. In 1979, and before that in 1955, the stock market had double-digit returns (annualized rates) for the following five and ten years as that spread narrowed. At the height of the market in 2000, the earnings yield was actually below the 10-year bond yield.

S&P after-tax yeild

Now, one reason the after-tax yield is so high, or the market so low, may be uncertainty over tax rates: We don't know what the tax regime next year is going to be so everyone is reluctant to act.

Q: So the tax uncertainty may be constraining the market?

Emsbo-Mattingly: Think of it this way: What do I want to do with my capital if I'm a company? Do I pay it out in dividends? Do I make capital investments? Do I hoard it? Do I acquire another company? A lot of those decisions are determined by expected returns, and tax policy is a key factor in how I measure those expected returns. I think one reason the market has been so skittish has been uncertainty over the tax regime, and once you get clarity, people can move on.

Don't forget, companies are sitting on historic levels of cash on their balance sheets. At some point they have to act. They're not going to spend all of it at once, but they're going to spend a portion of it on something, even if it's a dividend – which may act as a stimulus to the economy. But in my opinion, they are less likely to act until they get greater clarity on tax rates.

Q: What else would it take to jump-start the market?

Emsbo-Mattingly: Well, aside from taxes, it would be very helpful to get a good employment report. And right now, I'm hopeful. The Monster Employment Index of online job listings shows listings up 21% year-over-year. The American Staffing Association, which produces an index of employment hiring trends at staffing companies, shows a 27% improvement versus a year ago. You've started to get private sector hiring because, as I mentioned, the productivity story is coming to an end.

One negative, however, is public sector employment, since states and localities are cutting jobs. Could that overwhelm the positive trends in private sector employment we're starting to see? It's definitely something I worry about.

And, of course, if we do have a double-dip recession, then unemployment will increase. I just don't think that we're going into a double dip. You don't have inventory buildup, credit cycle tightening, or irrational investor exuberance, which you typically have at a peak. I'm sure we'll get that at some point, but I don’t believe we're there yet.

Next steps

During uncertain times, it is important to have a longer-term view. Check your asset allocation to make sure it is appropriate for your time frame and risk tolerance.

Use our Portfolio Review tool to see if your investment mix is in line with your long-term goals.
Research stock and bond mutual funds.
Research stock and bond ETFs.
Let Fidelity professionals manage your investments with Portfolio Advisory Services (PAS).¹

Past performance is no guarantee of future results.

Investing involves risk, including the risk of loss.

1. Fidelity Portfolio Advisory Service^® is a service of Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company. This service provides discretionary money management for a fee.

The S&P 500^® Index is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

All indexes are unmanaged and performance of the indexes includes reinvestment of dividends and interest income, unless otherwise noted. The indexes are not illustrative of any particular investment and it is not possible to invest directly in an index.

Asset allocation and diversification do not ensure a profit or guarantee against a loss.

The information presented above reflects the opinions of Lisa Emsbo-Mattingly, Senior Economic Analyst, as of August 20, 2010. These opinions do not necessarily represent the views of Fidelity or any other person in the Fidelity organization and are subject to change at any time based upon market or other conditions. Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917.

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All rights reserved.

Insurance Takeovers Head for Biggest Year Since Peak of M&A Boom in 2007 - Bloomberg

Bloomberg

Insurance Takeovers Head for Biggest Year Since Peak of M&A Boom in 2007

By Zachary R. Mider -

Aug 27, 2010 12:01 AM ET

Insurance takeovers are headed for the biggest year since the peak of the last merger boom as financial-services firms from Bank of America Corp. to Aegon NV of the Netherlands jettison assets.

Deals in the industry have jumped 60 percent to $44.8 billion so far this year, up from $28 billion in the same period of 2009, according to data compiled by Bloomberg. Bank of America, Aegon and Royal Bank of Scotland Group Plc have more than $10 billion in insurance assets currently on the block.

The financial crisis that crippled American International Group Inc. is providing a buying opportunity for competitors such as MetLife Inc. and Prudential Financial Inc., which were quicker to recover from the global recession and are seeking growth in new markets. AIG has sold more than 30 assets since its 2008 bailout, while RBS and Amsterdam-based ING Groep NV were told to sell insurance businesses as conditions of their government lifelines.

“There’s a lot of stuff on the market,” said Clark Troy, a senior analyst at researcher Aite Group LLC in Chapel Hill, North Carolina. “For deep-pocketed buyers with firm conviction, it’s a great time to be making acquisitions.”

While the year’s biggest insurance deal collapsed when Prudential Plc shareholders stymied the company’s planned $35.5 billion takeover of AIG’s biggest Asian unit in June, the total value of announced deals is still set to surpass 2008 and 2009, when there were $58 billion and $53 billion in takeovers, respectively, Bloomberg data show. That tally excludes a $40 billion U.S. government infusion into AIG in 2008.

Insurance transactions totaled $90 billion in 2007.

‘Hard Choices’

AIG, which is working to repay part of a $182.3 billion government bailout, has held talks with Newark, New Jersey-based Prudential Financial this year about selling two Japanese life insurance units, said two people with knowledge of the matter.

Prudential and AIG still have divergent views on the value of AIG’s Star Life and Edison Life units, said the people, who declined to be identified because the discussions are private. The divisions together had a book value of $4.8 billion as of June 30, AIG said in a regulatory filing.

Mark Herr, an AIG spokesman, and Robert DeFillippo, a spokesman for Prudential, declined to comment.

Insurers that were bailed out are being forced into “making hard decisions about where they want to play and where they don’t,” said Achim Bauer, an insurance partner at PricewaterhouseCoopers in London. “They are seeking to repay some of that money by selling businesses that are non-core.”

ING, RBS

ING is required to divest its insurance business by the end of 2013 as part of a restructuring plan to win European Union approval for its government rescue. While the company is preparing the business for one or two initial public offerings, ING is getting “a great deal of interest” from potential buyers, Chief Executive Officer Jan Hommen said on Aug. 11.

RBS agreed in November to unload its insurance businesses, including the Direct Line auto insurer, after receiving 25.5 billion pounds ($40 billion) of state aid. In 2008, RBS had sought as much as 5 billion pounds for the businesses.

Some asset sales are being driven by regulatory changes in the wake of the financial crisis, including the recent U.S. financial overhaul and reforms being contemplated by the Basel Committee on Banking Supervision, said David Havens, an analyst at Nomura Holdings Inc. in New York.

Bank of America, the largest U.S. lender, is being pushed by regulators to raise a net $3 billion this year. The bank’s Balboa Insurance unit, obtained as part of the Countrywide Financial Corp. acquisition in 2008, is likely to fetch roughly the amount of its policyholder surplus, which was $1.92 billion as of March 31, according to Havens.

More Capital

“The financial regulations in general are requiring firms to hold more capital, and you can achieve that concept either by raising more capital or reducing risk,” Havens said. “By selling off non-core units you can actually achieve both.

Aegon’s Transamerica Reinsurance unit, which helps life insurers pool their risks, has gotten interest from both competitors and investors, said Aegon CEO Alexander Wynaendts on an Aug. 12 conference call. It has book value, or assets minus liabilities, of 1.6 billion euros ($2 billion). Reinsurance Group of America Inc., the largest U.S. company that focuses on life reinsurance, trades at about 73 percent of book value, implying a value for Transamerica of $1.5 billion.

Some potential buyers, meanwhile, are seeking to free up their capital reserves to fund growth in faster-growing markets like Asia. Paris-based Axa SA, Europe’s second-biggest insurer, agreed in June to sell part of its U.K. life insurance unit to Clive Cowdery’s Resolution Ltd. for 2.75 billion pounds.

MetLife, based in New York, made the biggest purchase of an insurer this year when it agreed to buy AIG’s American Life Insurance Co. for $15.5 billion.

Deals are happening because there is “a greater level of stability in the system compared to where we were six or 12 months ago,” said Bauer at PricewaterhouseCoopers. “That provides a greater willingness on the part of both buyers and sellers to consider transactions.”

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net

Access Content Source: http://www.bloomberg.com/news/2010-08-27/insurance-takeovers-head-for-biggest-year-since-peak-of-m-a-boom-in-2007.html?dbk

Build Your Power Base from Small Beginnings - Jeffrey Pfeffer - The Conversation - Harvard Business Review

Harvard Business Review

Build Your Power Base from Small Beginnings

10:40 AM Wednesday August 25, 2010
by Jeffrey Pfeffer

People who wish they had more power in their organizations — power to bring their ideas to fruition, power to change policies that make no sense — often try to find the one "big move" that will land them in a position of authority. That's a long shot, and, in any event, it misses the reality that most power bases start out small. Which means it's possible for almost anyone, in any position, to begin building one, acquiring growing influence through unspectacular moves.

What's mostly required is showing some initiative and taking on projects that a) bring you into contact with a wide range of people within and outside of your organization; b) situate you in the midst of information flows; and c) aren't coveted because they seem mundane or trivial — but not to you.

Take the example of Matt, who joined the office of a large, prestigious management consulting firm that had been talking about doing more public sector work. Matt volunteered to organize a speaker series in which various public sector people would come to the firm's office — thereby linking the company and its professionals with a sector in which they needed more insight and stronger relationships. Matt got a budget, organized the series, and got plaudits from his consulting colleagues for linking them to an important market opportunity. He also enjoyed the gratitude of the (paid) speakers he brought in to do the talks.

Mike, another relatively powerless person, took on the task of organizing analyst recruiting at a hedge fund. Everyone agreed the fund needed strong analysts, but no one could get very excited about recruiting talent that would just leave in a few years anyway and go back to business school. Mike took on this routine, not very sexy task — and found that it brought him into contact with everyone in the firm as he arranged schedules and recruiting events. He also made connections with a whole network of analysts who would continue to remember him as their primary point of contact with the firm, and someone who had taken them seriously in an early stage of their career.

Melinda started building her power base after she joined a large internet marketing firm, having come from a financial services company. She noticed that the firm's divisions didn't have much contact with each other or any organized way of learning about the evolution of the markets in which they were participating. So Melinda organized a series of seminars that brought internet and other subject matter experts into the firm to do briefings. As she recruited participation by people from throughout the relatively stove-piped organization, and built bridges between the firm and possible customers and partners, Melinda became highly visible — and much appreciated.

These tales — and while we're at them, let's add Robert Caro's masterful description of how Lyndon Johnson leveraged a "nothing job," that of minority whip, to the point of becoming the youngest-ever Senate Majority leader — all share some common themes. [1] The first is the importance of filling a brokerage role. If you're in a position to bring together unrelated groups of individuals who benefit from being in contact with each other, that's a form of power. Ron Burt calls this "filling structural holes."

[2] The second theme is the recognition that everyone wants the glamour jobs, the things that seem exciting and strategic. But organizations — sort of like armies — depend on many mundane tasks to reach their goals. Organizing analyst hiring may not get the blood racing in the way that making hedge fund investments does, but if no one does it, there won't be any analysts. Taking on these low-profile but vital tasks tends to be easier to do as there is less competition to own them. And you will get lots of thanks for doing them from the people who recognize their importance but are too busy doing high-profile work to focus on them.

[3] Third theme: seemingly administrative tasks often bring you into contact with lots of people inside your company and make you central in the flow of communication. Being central in information flows is a source of power, and becoming known to many people is very useful, also. In the hedge fund, Mike had a reason to be in contact with everyone in the firm about the analyst hiring process. Melinda soon sat at a hub of communication because people, as they became interested in the seminars, wanted to make suggestions about whom to invite. She also became someone with a network of contacts across a largely-disconnected company. As Lyndon Johnson undertook the seemingly routine tasks of scheduling votes on uncontroversial issues and was in touch with people to get information on their voting preferences on important issues, he not only provided an important service to his fellow Senators, he was in regular contact with them — and became the source of information about what was going on.

So be on the lookout for assignments your colleagues don't want to bother with, but that have these valuable features. Others have built power bases from such small beginnings — and so can you.

Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at the Graduate School of Business, Stanford University, where he has taught since 1979. His forthcoming book from HarperBusiness is Power: Why Some People Have It and Others Don't.

Access Content Source: http://blogs.hbr.org/cs/2010/08/the_humble_roles_that_confer_r.html

Thursday, August 26, 2010

Preparing for Regulatory Changes, U.S. Companies Act on Corporate Governance, Compensation Priorities

WorldatWork Newsline

Preparing for Regulatory Changes, U.S. Companies Act on Corporate Governance, Compensation Priorities

Aug. 17, 2010 — U.S. public companies have been acting aggressively to streamline corporate governance practices and establish their executive compensation priorities, according to Shearman & Sterling's eighth annual "Corporate Governance Surveys" of the 100 largest U.S. public companies.

This year's surveys are again based primarily on an in-depth analysis of the 2010 proxy statements of the 100 largest U.S. public companies. These proxies were filed months before the recent signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which calls for sweeping regulatory changes, including changes to U.S. corporate governance and executive compensation practices.

"Corporate governance and executive compensation changes have been anticipated for quite some time, and many companies were already ahead of the curve before Dodd-Frank even became part of our regulator lexicon," said John Madden, the Shearman & Sterling partner who founded the firm's corporate governance advisory group.

The general corporate governance survey findings reflect continued development in corporate governance policies and practices, driven in large part by shareholder activists and institutional investors. This year's survey includes a review of 41 top institutional investors that made corporate governance and proxy voting guidelines publicly available. Key findings include:

Majority voting in uncontested director elections has been implemented in some form by 82 of the 100 largest companies, up from 75 last year and 11 as recently as 2006.
Despite amendments to NYSE Rule 452 implemented last year (which eliminated broker discretionary voting in director elections), no director standing for re-election at one of the 100 largest companies failed to receive majority support this year.
The number of top 100 companies at which the CEO is the only member of the board of directors who is not independent increased significantly, rising to 59 this year from 49 last year.
The number of top 100 companies with classified boards, of which there were 54 in 2004, declined to 20. Of those 20, more than one-third were either in the process of declassifying their boards or received approval from their shareholders this year to do so.

On the executive compensation side, the survey indicates that the link between risk disclosure and executive pay has become much tighter. According to the 2010 proxy statements, 86 of the top 100 companies addressed the impact of the company's compensation programs on its overall risk profile, even if not required to do so. In addition, although not required, 61 of these companies voluntarily affirmatively stated that their compensation policies and practices do not create material adverse risk. Other key findings:

71 companies disclosed that they maintain an executive compensation clawback policy (an increase from 56 companies in 2009 and 35 in 2007 — representing a 103% increase in four years). This will become increasingly significant, as the new Dodd-Frank Act mandates clawbacks if a material restatement would have affected the amount received.
There was a decrease in the overall number of compensation-related shareholder proposals; however, advisory say-on-pay policies continued to be the most prevalent proposal. In addition, the survey suggests that companies cannot assume that their say-on-pay advisory resolutions will pass. For example, three public companies (including one top 100 company) failed to win majority support in the 2010 proxy season.

Access Content Source: http://www.worldatwork.org/waw/adimComment?id=41374

New 'say on pay' law could temper CEO pay - MarketWatch

Aug. 26, 2010, 8:00 a.m. EDT

Dodd-Frank's 'say on pay' could impact executive pay

SEC to write rules giving institutional investors a non-binding say on CEO pay

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) -- One of the lesser-known elements of the sweeping Dodd-Frank Act aimed primarily at reforming the nation's banks is directing the Securities and Exchange Commission to write rules that could temper the compensation of executives across multiple industries.

At issue is a requirement in the statute that directs the SEC to give institutional investors -- starting in 2011-- a vote on the pay packages of top executives at U.S. corporations. While the vote is non-binding and corporations are not required to follow the wishes of shareholders, the provision is expected to have a transformative impact on the relationship between CEOs and institutional investors, in part, because of the embarrassment a company could experience if investors give its executive pay a strong negative vote.

For the nation's top chief executives, much is at stake -- in 2009, the median total compensation for S&P 500 CEOs was roughly $7.5 million, down from approximately $8.2 million in 2008, according to Equilar Inc., a Redwood City, Calif., based executive compensation research firm.

In addition to a say on pay, the SEC adopted a controversial director election rule Wednesday giving shareholders the power to nominate one or two director candidates onto corporate boards using an inexpensive method. Read about new director election powers for investors.

Stephen Davis, executive director at the Millstein Center for Corporate Governance at Yale University's School of Management, argues that institutional investors are likely to use both say-on-pay rules together with new director election powers interchangeably.

"If boards fail to persuade shareholders that the compensation plans they are providing to CEOs are sensible then, going forward, directors could lose their seats to shareholder nominees because they are not being responsive," Davis said.

John Olson, a partner at Gibson Dunn & Crutcher LLP in Washington, said he expects an antagonistic relationship to emerge between activist shareholder groups and some corporate managers, in part, because there isn't a consensus in the U.S. as to what are desirable pay practices.

Olson said he expects that over time, pay packages in the U.S. will become homogenized and heavily influenced by standards set by institutional investor groups and proxy advisory companies such as RiskMetrics Group, formerly Institutional Investor Services.

RiskMetrics and a couple other proxy advisory firms are expected to make recommendations to a large chunk of the U.S. institutional investor community about whether to accept a particular pay package.

Temple University professor Steven Balsam said a recommendation by one of the proxy advisory firms against a pay package will drive a massive amount of institutional investors to oppose it as well.

"The proxy advisory companies are going to wield a lot of the power," Balsam said. "If a company believes that RiskMetrics is going to reject their plan they will go to RiskMetrics, behind-the-scenes, and say, 'What can we do to get your approval?'"

Gibson's Olson said that corporate boards will tailor executive pay packages to meet advisory firm standards so they don't receive negative votes.

Not everyone agrees. Harvard Law School Professor Lucian Bebchuk contends that shareholders understand that compensation packages should differ based on unique expectations at each firm.

However, he argued that there are some compensation arrangements that investors can agree are undesirable and should be removed from all U.S. corporations. A golden parachute pay-package for a CEO that is retained as a top executive by an acquiring firm, is a good example of the kind of compensation provisions that could be removed, he said.

"There are a number of arrangements and features that have been recognized as undesirable, nonetheless they still remain common. The new reality will encourage companies to move away from them," Bebchuk said.

Michael Garland, director at Change to Win Investment Group, a labor-backed advisor to union funds, said voting on compensation will help moderate pay packages and force companies to provide better disclosure.

Temple University's Balsam said he worries the 'say on pay' votes could create a one-size-fits-all approach to pay, which could cause problems. He contends that a 40-year-old CEO needs a different kind of golden parachute package than a 70-year-old.

"The 40-year-old needs more because he has more to lose. He needs a job," Balsam said.

The U.K. experience

Many regulatory observers believe the U.S. system will soon resemble, in part, the system that already exists in Britain, where investors have long had the right to an annual vote on executive compensation. That said, companies there rarely experience a negative vote from institutional investors because pay packages have already been negotiated well in advance between shareholders and companies in private.

The Financial Industry Regulatory Authority is taking another crack at a proposal that addresses how much financial information parties must exchange during arbitration disputes.

British executives have hardly starved -- nearly a quarter of FTSE 100 chief executives received total 2008 pay packages in excess of 5 million pounds (or about $9.15 million at the time), according to the U.K. newspaper Guardian.

Yale's Davis argues that the U.K. model has lead to a closer alignment of pay for performance. "There is less pay for failure there," Davis said.

Davis, who evaluated the U.K. say-on-pay model as part of a 2007 report, said it would be a mistake to focus on the ballot results for the votes in the U.S.

"The important point to learn from the U.K. experience is that say-on-pay seems to stimulate dialogue between boards and investors because directors have to convince their shareholders that that what they are doing is sensible," Davis said.

One exception to the mostly behind-the-scenes U.K. negotiations environment is a recent battle at U.K-based Tesco plc (LONDON:UK:TSCO) , where participating shareholders cast 38% of their votes against the retail grocer chain's pay report at the company's annual meeting in July. That effort was driven, in part, by U.S.-based Change to Win Investment Group. The strong vote of opposition was directed in part at Tim Mason, the chief of the supermarket-chain's U.S. business, Fresh & Easy, who received £4.2 million for leading the loss-making unit.

Say-on-pay also is already a reality in some parts of the U.S. Financial institutions that received funds from the $700 billion bank bailout package have been required to submit top executives compensation plans to a shareholder vote. Some corporations, including Microsoft Corp. (NASDAQ:MSFT) , have decided to voluntarily have a say on pay.

Three or one years?

A last-minute addition to the statute requires shareholders to vote on whether they would like to see a 'say on pay' every year, every two years or every three years. Davis points out that the U.S. institutional investor community is divided on the subject. "For me, it's about whether you trust the board or not," he said.

Corporations are pressing shareholders to agree to let there be only one 'say on pay' vote every three years. David Katz, partner at Wachtell, Lipton, Rosen & Katz in New York, said investor advocates are pushing for executive compensation to be based on a three-year metric as means to have CEOs focus more on long-term performance rather than short-term gain. "How can shareholders evaluate those kinds of packages with an annual vote?" he said. "Corporations can be more responsive to shareholders if you give them three years to do it."

However, Harvard's Bebchuk worries that a once-every-three-years vote would limit the ability of investors to influence pay packages. He said it is very possible that shareholders could agree to a once-every-three year vote at companies where boards set up pay packages with big rewards for short-term results.

"The concern I have with a once every three year vote is that if a board puts in place a package which is strongly disfavored by shareholders in year one then the possibility that shareholders would have a say on it two-and-a-half years down the road might be an insufficient deterrent," he said.

Anne Simpson, chief of California Public Employees' Retirement System's Corporate Governance division, said CalPERS hasn't formalized an official policy position on how frequently they would like to see votes on pay. But she added that CalPERS could be persuaded that an annual vote is not necessarily needed.

"We see good reason for flexibility and having votes aligned with a long term strategy for pay," she said. "But we have accepted the proposal that annual voting is not necessarily in line with a long-term approach."

Saturday, August 21, 2010

Worry Isn't Work - Dan Pallotta - Harvard Business Review

Harvard Business Review

Dan Pallotta

Worry Isn't Work

11:08 AM Friday August 20, 2010 |

Many of us have grown up thinking that if we are properly self-punishing then we are somehow being responsible. "What, I'm a nervous wreck — how could I possibly take on more?" On the other hand, if, God forbid, we are feeling carefree, we have this nagging sense that we're being downright irresponsible, certain that if we don't get right back to self-flagellation then the other shoe is going to drop. And hard. We don't correlate our sense of responsibility with what we are actually producing. We correlate it with how hard we are being on ourselves.

Thus anything that's fun cannot possibly be work, and everything that's unpleasant is.

I can hunch over my computer screen for half the day churning frenetically through e-mails without getting much of substance done, all the while telling myself what a loser I am, and leave at 6:00 p.m. feeling like I put in a full day. And given my level of mental fatigue, I did! I can spend my Saturday afternoon worrying about financial ruin to the point of exhaustion, and my inner critic is satisfied. But clear my mind with a 30-minute meditation, go for a 45-minute morning walk, or leave the office for an hour to decompress and get a healthy lunch — all of which would make me more productive for the day — and the voices inside my head start screaming, "Infidel!"

(Those of you who don't suffer from this tendency toward self-criticism, please comment and let the rest of us know your secret.)

We can trace a lot of our modern dysfunction to our Puritan roots. Historian Perry Miller wrote that "without some understanding of Puritanism...there is no understanding of America."

Historian Stephen Innes noted, "In no other colony could the most industrious women and men, who throughout their lifetimes had striven to 'improve [their] Time and Talents for God's glory,' daily lacerate themselves with accusations of 'selfishness...' and the overwhelming conviction that they were...the most 'unproffitable' of the Lord's servants."

Historian Amanda Porterfield observed that "American missionary thought involved a strong investment in self-criticism that was rooted in the biblical concern about the need for awareness of sin and, more specifically, in the Puritan preoccupation with self-assessment."

Sound familiar?

The Puritans had a strong work ethic. They also burned witches at the stake and massacred Native American women and children. We need new role models.

Unfortunately, the high-pressure business school atmosphere isn't the best place to look. The fantasies are just different; hyperanxiety about failing grades gets conflated with being responsible and getting an education. The pressure the VC culture puts on start-ups does more to induce stress than creativity. And don't get me started on the nonprofit sector. It's the sacristy for self-criticism.

Worry isn't work. Being stressed out isn't work. Anxiety isn't work. Entertaining a sense of impending doom isn't work. Incessant internal verbal punishment isn't work. Indulging the great unknown fear in your own mind isn't work. Hating yourself isn't work.

Work is the manifestation of value, and anyone who tells you that a person whose mind is 50% occupied with anxiety is more likely to manifest value is a person who isn't manifesting much.

It's OK to take care of yourself. To take time to exercise. By all accounts, exercise improves brain function. It's OK to eat well, and to slow down enough to eat consciously and appreciate the food. Proper nutrition improves brain function as well. Go on vacation. Meditate. Take a break each week for an hour to see a therapist, or a movie, or stop in a church, if that's your practice. Sit quietly on your porch in the evening and reflect. Chaining yourself to your desk is no more correlated to productivity than mental self-annihilation.

After all, who is likely to be the more productive contributor to the company, and to the world — the person who is healthy, rested, well-balanced, full of energy, and clear of mind, or the sleep-deprived, overweight, heart-attack-waiting-to-happen, psychologically unexamined, self-critical maniac? Who is more likely to be present enough to see the next breakthrough? Who is more likely to analyze problems clearly, for what they really are, instead of what they are assumed to be?

We have to rethink what it means to work and to be productive. We have to disentangle self-hatred from responsibility, self-criticism from self-care.

What does re-thinking mean in this case? Start thinking of being hard on yourself as being irresponsible. Start thinking of wasting half of your brain power on fantasies about your own destruction as self-indulgent. Conflate self-negativity with laziness. Start thinking of time for yourself as being responsible. Start thinking of a healthy mid-day meal as essential to your productivity, time away from your desk as productive.

In short, start thinking the opposite of what we've been taught since, well, since the Puritans. We stopped burning witches at the stake four hundred years ago. It's time we stopped doing it to ourselves

Dan Pallotta is a leading expert on innovation in the nonprofit sector and a pioneering social entrepreneur. He is the founder of Pallotta TeamWorks, which invented the multiday AIDSRides and Breast Cancer 3-Days. He is the author of Uncharitable: How Restraints on Nonprofits Undermine Their Potential.

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http://dreamlearndobecome.blogspot.com This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.

Wednesday, August 18, 2010

The 7 Interview Questions You Must Ask | BNET

The 7 Interview Questions You Must Ask BNET

BNET.com

The 7 Interview Questions You Must Ask

By Brian Libby February 27, 2007

There are no magic bullets when it comes to job interview questions, but the way you structure your queries is important: It's the interviewer's job to create a framework for the discussion and prevent it from running off the rails. Every company's needs are different, but a good basic strategy is to ground the interview in questions about past job performance. Then throw in some situational questions to evaluate practical decision making, and learn a little bit about how the job fits in with a candidate's biography.

Question #1: "How about those Yankees?"

Purpose: Develop the rapport needed to get the interview off the ground.

Every interview should begin with an icebreaker. It helps nervous applicants calm down and builds a sense of trust. If you have a 45-minute interview, you should spend at least the first five minutes trying to connect on a neutral topic. Make the person feel at ease and you'll solicit better information—and much more honest responses.

Alternate Version 1: "Did you go to the industry conference last week?"

Alternate Version 2: "Were you affected by the heat wave/cold snap?"

Alternate Version 3: "Did you have a good holiday?"

Question #2: "Talk about a time when you had to overcome major obstacles."

Purpose: Get a clear picture of the candidate's past performance.

Variations on this question should actually comprise your next several questions. Don't hesitate to guide the candidate through the variety of tasks (both tangible and theoretical) necessary to perform the job, and listen carefully to how he or she has handled such challenges. Pay attention to intangibles: some people are better at performing in interviews than on the job. If your candidate continually plays the role of hero or victim, that's a red flag that you're probably not getting the whole story.

Alternate Version 1: "Tell me about a time when you wrote a report that was well received. Why do you think it was successful?"

Alternate Version 2: "Describe a time when you hired (or fired) the wrong person."

Alternate Version 3: "If you had to do that activity again, how would you do it differently?"

See Also: How to Conduct a Job Interview

Question #3: "What interests you about this position?"

Purpose: Find out how the candidate feels about the job and the company.

People apply for jobs for plenty reasons besides the obvious ones. Asking a candidate why he or she wants the position gives insight into their motivation. The answer may be personal (such as a narrative about what spurred them to seek a new job), or it may connect the candidate to the company: her experience with the brand, the mission statement, or the organization's role in the community. Any of these answers (or some combination) are acceptable—a personal answer can communicate trust, and a connection to the business indicates loyalty and a sense of ownership.

Alternate Version 1: "Where does this job fit into your career path?"

Alternate Version 2: "If you had to convince a friend or colleague to apply for this job, what might you tell them?"

Alternate Version 3: "What motivated you to apply for this job?"

Question #4: "Is there intelligent life in outer space?"

Purpose: Find out what kind of thinker the candidate is and how he deals with surprises.

This is your curveball, designed to make the candidate ad-lib instead of just reciting well-rehearsed answers. How much will he or she play along? As long as it's not too short or too long, virtually any response is a good one. But pay attention to attitude, the way the candidate approaches the problem, and the ease or difficulty they have in coming up with a response.

Alternate Version 1: "How many phone books are there in New York City?"

Alternate Version 2: "How do they get the cream filling inside a Twinkie?"

Alternate Version 3: "Why do people climb mountains?"

Question #5: "Imagine we've just hired you. What's the most important thing on your to-do list on the first day of work?"

Purpose: Learn about the candidate's judgment and decision-making skills.

This is an example of a situational question, which is like a behavioral question in that it's designed to assess judgment, but it's also like a curveball question because it illuminates the candidate's thought process. You want to see whether he demonstrates the competencies and priorities that are important to the job.

Alternate Version 1: "Say a coworker tells you that he submitted phony expense account receipts. Do you tell your boss?"

Alternate Version 2: "How would you handle an employee whose performance is fine but who you know has the potential to do better?"

Alternate Version 3: "What would you do if you got behind schedule with your part of a project?"

See Also: 10 Mistakes You’re Probably Making in Job Interviews

Question #6: "Why did you get into this line of work?"

Purpose: Measure the fit between the candidate's values and the culture of your company.
It risks a long, drawn-out answer, but this type of question will help you select candidates that fit your company's culture. It's not about finding people like you, or people with similar backgrounds that led them to your company, but about getting a sense of their values and motivations. Concepts like values and culture can be subjective and difficult to define, but you should be looking for someone whose work ethic, motivations, and methods match the company's. This isn't a quantitative measurement so much as a qualitative one. Coke and Pepsi may seem the same to people outside the soft-drink industry, but each houses people with different approaches to making cola and running a business.

Alternate Version 1: "What do you like best about your current job?"

Alternate Version 2: "When did you realize this would be your career?"

Alternate Version 3: "What keeps you coming to work besides the paycheck?"

Question #7: "But enough about you. What about us?"

Purpose: Find out if the candidate has done his or her homework.
It's a cliché to end an interview with the standard, 'So, any questions?' But the fact remains that you really do want to let the candidate ask a few things of you. Reversing roles communicates that the company seeks an open a dialogue, and it helps you ascertain just how curious and knowledgeable a candidate is about your company. If he doesn't ask any questions about the job or the business, it's a safe bet his heart isn't in it. Listen for insightful questions that demonstrate a sophisticated understanding of the circumstances of the job, the company, the competitive landscape, or the industry.

Alternate Version 1: "Where do you think the company should be in ten years?"

Alternate Version 2: "What's your opinion of our new product?"

Alternate Version 3: "Have you seen the company's new ad campaign?"

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Tuesday, August 17, 2010

Lack of Promotion, Poor Communication, Overwork Cited as Reasons U.S. Professionals Will Quit Their Jobs This Fall

WorldatWork.com

Lack of Promotion, Poor Communication, Overwork Cited as Reasons U.S. Professionals Will Quit Their Jobs This Fall

Aug. 11, 2010 — Two in five U.S. professionals are considering quitting their jobs after summer vacation, according to research from Regus, a provider of flexible workplace solutions. Survey respondents indicated lack of promotion, bosses that do not communicate the company's goals and being overworked as the top reasons they would consider diving back into the job market this fall.

According to the survey, 40% of respondents would leave a company if they felt they were lacking communication with management. For 37% of respondents, a lack of opportunity for career advancement and promotion was the top "get me out of here" factor, while feeling overworked would lead another 34% of respondents to quit.

Other factors found in the survey include:

Feeling a lack of company vision (31%)
Lack of believe in colleagues' competence (28%)
Lack of administrative support (26%)
Rude colleagues (21%)
A boss that takes credit for employees' work (20%).

The survey also asked workers what companies could do to avoid a depletion of top talent. Aside from pay increases, 41% of U.S. workers declared that private medical insurance as at the top of their wish list, and 34% called for a 2.5% pension increase.

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Monday, August 16, 2010

August 15, 2010 Happiness Newsletter

Happiness Newsletter August 15, 2010

Being Happy

By Lionel Ketchian

The term "Excessive Happiness" was used in the movie Patch Adams. The truth is that there is no such thing. Having excessive Happiness is like having excessive money. Imagine someone telling you that his or her problem in life is having excessive money. I can just hear them say; "I have excessive money, and I don't know what to do." Having money is not a problem, neither is being happy.

Do you know what "Being Happy" really is? Let me tell you! Being happy means finding out that you are OK. As Goethe said: "As soon as you trust yourself, you will know how to live." You may have had many problems and disappointments in your lifetime. Being happy is a method of reassuring yourself. You have the wisdom to think clearly about what has happened. Trust yourself and make choices that will get you where you want to go. Being happy means having value in your life. Having value allows you to live the life you choose.

You do not have to allow yourself to be forced into acting the way your family, friends, and loved ones feel you should. Being happy allows you the ability to take action. Become comfortable with who you are. Your purpose for living will be revealed to you at long last. Your goals become easier to set and attain. Your plans for living become "the perfect day," and this in turn becomes "your perfect life."

Being happy means taking charge of your life and becoming responsible for yourself. Take back the very personal job of deciding what is good for you, run your own show. Being happy means realizing that you cannot truly be happy unless you are in control of yourself. Being happy also means not trying to control other people. Many times you have no control over the situations, events, and experiences in life, which is why you have to become a human being who is being happy.

Being happy means doing what you can, when you can to effect a change, rather than waiting for something to change on it's own. Being happy means finding solutions to a problem, while making the best choice for now. Being happy means never volunteering to see yourself as a victim. While being happy you become pro-active to allowing your wisdom and common sense to make the change you want to see. Planning what you will do in the next moment rather than reacting to the moment from your past conditioning.

Being happy makes you feel you can change the world! You are taking control of yourself from the inside out. Being happy allows you to deal with what you cannot change, recognizing the situation is only temporary and if you really want the change it will happen. Being happy allows you the patience to wait for what you want, because you will be getting it soon. Being happy allows you to experience being stronger, smarter, freer and more fully yourself.

Being happy is the essential quality for being responsible and taking charge. Being happy gives you the ability to successfully cope with meeting challenges. Being happy allows you to show yourself how you can do things you never thought possible. Being happy gives you the energy and power to take command of any situation. Being happy gives you a CAN DO attitude even when you didn't think you could.

Being happy allows you to gain access new habits with which to empower yourself. Being happy allows you to tap into the power TO DO IT! Being happy allows you to deal with difficult people. Being happy allows you to deal with anger when it arises. Being happy allows you to cope with fear and anxiety because you can go through and deal with them feeling more empowered.

Being happy allows you to stop feeling guilty, to let go of the past. Being happy allows you to forgive people and stop labeling them. Being happy allows you to free yourself from self-doubt and despair.

Being happy allows you to change for the better, it frees you from NEEDING others to HELP YOU. Being happy allows you to learn new skills because there is nothing holding you back any longer. Being happy allows you to come to the decision that unhappiness is not an option. Being happy allows you to experience more of who you really are. Being happy allows you to learn more about your life, your relationships, and your potential. Become the person you have dreamt you could be!

Being happy is the most powerful decision you can ever make. Being happy gets you what you want out of life. As Henry David Thoreau said: "There is no value in life except what you choose to place upon it and no happiness in any place except what you bring to it yourself."

Being happy is the only way to find happiness. Being happy allows you to keep the experience of happiness. As D. H. Lawrence said: "The living moment is everything." It is not about wanting to "Be Happy." That is about a future time. It is about "BEING," in this very moment, a present state of reality. When you learn the benefits of "Being Happy," you will become a Happy Human Being!

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Saturday, August 14, 2010

Can Money Buy Happiness?: Scientific American

Scientific America

Can Money Buy Happiness?

New research reveals that reminders of wealth impair our capacity to savor life's little pleasures

By Sonja Lyubomirsky

Money can't buy you love. Worshipping Mammon foments evil ways. Materialists are shallow and unhappy. The greenback finds itself in tough times these days. Whether it’s Wall Street bankers earning lavish multi-million-dollar bonuses or two-bit city managers in Los Angeles County bringing in higher salaries than President Obama the recessionary economic climate has helped spur outrage and revulsion at those of us collecting undeserved lucre.

Wealthy people have a bad rep. Sure, there are philanthropists like Warren Buffet and Bill Gates, who have given billions of their net worth away and have made the world a better, healthier, safer place. But, sadly, they are an exception. American families who make over $300,000 a year donate to charity a mere 4 percent of their incomes. The statistic should not be surprising, as studies by University of Minnesota psychologist Kathleen Vohs and her collaborators have shown that merely glimpsing dollar bills makes people less generous and approachable, and more egocentric.

Now come a new set of studies that reveal yet another toll that money takes. An international team of researchers led by Jordi Quoidbach report in the August 2010 issue of Psychological Science that, although wealth may grant us opportunities to purchase many things, it simultaneously impairs our ability to enjoy those things.

Their first study, conducted with adult employees of the University of Liège in Belgium showed that the wealthier the workers were, the less likely they were to display a strong capacity to savor positive experiences in their lives. Furthermore, simply being reminded of money (by being exposed to a picture of a huge stack of Euros) dampened their savoring ability.

Quoidbach and his colleagues’ second study was even cleverer. Participants aged 16 to 59 recruited on the University of British Columbia campus were entrusted with the not unpleasant task of tasting a piece of chocolate. Before accepting the chocolate, however, they were obliged to complete a brief questionnaire. For half of the participants, this questionnaire furtively included a page with a picture of Canadian money (allegedly for an unrelated experiment), and for the other half, it included a neutral picture.

Although the ostensibly irrelevant photo was unlikely to have elicited more than a cursory glance, it had a pronounced effect on the volunteers’ behavior. Those “primed,” or subconsciously reminded, of money ended up spending less time consuming the chocolate and were rated by observers as enjoying it less.

How to explain these results? The researchers argue that because wealth allows people to experience the best that life has to offer, it ultimately undermines their ability to savor life’s little pleasures. Once we’ve had the opportunity to drink the finest French wines, fly in a private jet, eat foie gras with edible gold leaf, and watch the Super Bowl from a box seat, coffee at Starbucks with a friend, a sunny day after a week of rain, or an unexpected Reese’s peanut butter cup on our desks just doesn't provide the same jolt of happiness it used to. Indeed, a landmark study of lottery winners showed just that: People who had won between $50,000 and $1,000,000 (in 1970s dollars) were less impressed by life’s simple pleasures than people who experienced no such windfall.

Of course, Quoidbach et al.'s findings may have alternative explanations. Maybe seeing banknotes triggers feelings of disgust (due to associations with greed or just with germs) or stirs up our money worries, and those feelings of disgust, anxiety, or unease may be enough to lose our appetites just a little and curb enjoyment of the chocolate bar.

Despite those possibilities, I find the researchers' arguments compelling. In a book I'm writing, I devote an entire chapter to the costs of materialism and wealth. The single biggest culprit, I argue, is that having money raises our aspirations about the happiness that we expect in our daily lives, and these raised aspirations can be toxic. They say you can never go back to holding hands, but it's also hard to go back to economy class (from business), to sleeping on a futon with a bunch of roommates (from your comfortable master bedroom in a split level), or to eating at chain restaurants (after regularly partaking of the cuisines of Mario Batali and Bobby Flay).

Unfortunately, raised aspirations don’t only lead us to take things for granted and impair our savoring abilities. They steer us to consume too much, tax the planet's resources, overspend and undersave, go into debt, gamble, live beyond our means, and purchase mortgages that we can’t afford. Not long ago, I read a newspaper article that quoted the shocking statistic that 20 percent of Americans trade in their automobiles every two years. Every two years! We acquire the new Toyota Camry or Lexus SUV or Jaguar, and for the first few weeks or months, the ride is thrilling. But, as we all know too well, the thrill wears off not long after the new car smell fades.

If attaining wealth or earning pay raises so unfailingly elevates our aspirations, are we doomed never to reap money’s pleasures and rewards? Can people who make partner, write a best-seller, or invest wisely ever enjoy a simple piece of chocolate? Of course, they can. Indeed, in my mind, one of the biggest misconceptions about money is that it can’t make us happy – or rather, that the joys it offers can be only faint and fleeting. As it happens, a growing social science of money is showing how we can compensate for some of its damaging effects by getting the most out of our spending. The conclusion is that if we want to buy happiness, we need to wring as many rewarding and stretching experiences from our purchases as possible. The most effective empirically-supported ways include:

spending our money on activities that help us grow as a person (taking guitar lessons, investing in an entrepreneurial venture), strengthen our connections with others (dinners with colleagues, car trips with friends, roller blades for mom and child), and contribute to our communities (catering a fundraiser, donating to the needy);
shelling it out on activities and experiences (e.g., rock climbing expeditions, wine tasting family reunions) rather than material possessions;
spending it on many small pleasures (e.g., regular massages, weekly delivery of fresh flowers, or frequent phone calls to our best friend in Europe) rather than on one big-ticket item (like a new car or flat-screen TV); and
splurging on something that we work extremely hard to get and have to wait for (whether it’s a concert, trip, or gadget) and relish the feeling of hard-won accomplishment and anticipation as we wait.

Finally, our money will be even better spent if we take the time to appreciate the objects of our spending (the vacation, gadget, or smiles of the people we have helped); if we make efforts to inject novelty, variety, and surprise (e.g., buying activities that bring unexpected opportunities or adventures); and if we strive to compare less with others (e.g., focusing on how much I enjoyed the Paul McCartney concert rather than on how much better my neighbor’s seats were, or recognizing that my roller blades give me no less pleasure even if my sister has an even fancier pair). As researchers (including Ken Sheldon and myself) have argued, these are all factors that slow down or pre-empt the process that leads us to take our purchases for granted and allow us to derive the maximal possible happiness from them.

Both empirical research and anecdotal observations testify to the many pitfalls of thinking about money. And now we know from Quoidbach and his colleagues that merely scanning a wad of cash can impair our ability to savor life’s small delights. If this all seems like pretty strong evidence that money cannot pay for happiness, then we are not looking at the problem in the right way. The truth is that money’s pitfalls can be overcome with a little effort and forethought.

A famous Lexus ad pronounced, “Whoever said money can’t buy happiness isn’t spending it right.” Happiness is a choice. We can choose to become never-satisfied janitors of our possessions, or we can use our money in ways that improve our worlds and, as a bonus, supply us with genuine and lasting well-being.

Are you a scientist? Have you recently read a peer-reviewed paper that you want to write about? Then contact Mind Matters co-editor Gareth Cook, a Pulitzer prize–winning journalist at the Boston Globe, where he edits the Sunday Ideas section. He can be reached at garethideas AT gmail.com

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Friday, August 27, 2010

Your Perception of Business Growth Is Wrong

Don't assume that bigger is always better, says B-school professor Edward D. Hess. Steady improvement is much more crucial than expansion

Small Business

Slower economy? Yes, says our top economic analyst. Double dip or deflation? Unlikely.

Q: With growth slowing, do we risk another recession?

Q: And corporate profits are up.

Q: So you expect companies will begin hiring?

Q: But in the meantime, the wage earner — the consumer — is cautious.

Q: In this de-leveraging process, do we run the risk of deflation – the so-called Japan scenario where growth stagnates for more than a decade, where everyone saves and no one borrows or spends?

Q: But even with this process, we've hit a speed bump. Can you explain what the Fed did recently to help the economy?

Q: But in this slow-growth climate, do you think stock valuations are attractive?

Q: So the tax uncertainty may be constraining the market?

Q: What else would it take to jump-start the market?

Next steps

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Insurance Takeovers Head for Biggest Year Since Peak of M&A Boom in 2007

Build Your Power Base from Small Beginnings

Thursday, August 26, 2010

Dodd-Frank's 'say on pay' could impact executive pay

SEC to write rules giving institutional investors a non-binding say on CEO pay

The U.K. experience

The Financial Industry Regulatory Authority is taking another crack at a proposal that addresses how much financial information parties must exchange during arbitration disputes.

Three or one years?

Saturday, August 21, 2010

Harvard Business Review

Dan Pallotta

Wednesday, August 18, 2010

The 7 Interview Questions You Must Ask

Question #1: "How about those Yankees?"

Question #2: "Talk about a time when you had to overcome major obstacles."

Question #3: "What interests you about this position?"

Question #4: "Is there intelligent life in outer space?"

Question #5: "Imagine we've just hired you. What's the most important thing on your to-do list on the first day of work?"

Question #6: "Why did you get into this line of work?"

Question #7: "But enough about you. What about us?"

Tuesday, August 17, 2010

Monday, August 16, 2010

Saturday, August 14, 2010

Can Money Buy Happiness?

New research reveals that reminders of wealth impair our capacity to savor life's little pleasures

Further Reading

© 1998 - 2010 FMR LLC.
All rights reserved.