The Great Managerial Transfer

I was reading this, from Paul Millerd, describing the wall that Millennials and GenX employees are hitting at work. He attributes that wall to three trends:

1. A baby boomer demographic that emerge into a healthy and growing workforce in the 1980’s and 1990’s and were able to succeed through high rates of growth and limited competition from older members of the workforce for good jobs

2. A baby-boomer demographic that is choosing to stay in the workforce longer than previous generations

3. A resulting emergence of bad jobs and pseudo career paths due to lower rates of organic growth throughout the economy and boomers deciding to work later in their careers

Scans.

The world of work has been shaped by the people in it. But I feel like there's more to the last point than meets the eye.

And then I was reading about Baby Boomer CEO exits – also shared by Paul, and links back to his post:

The number of CEOs leaving US companies surged in November, according to a new report. There were almost 100 exits for the month, roughly twenty more than were reported in October. The report...shows that these exits were not replacements or instances of “stepping down” to pursue other opportunities, either. For thirty-seven of the executives, retirement was the primary reason for leaving, the most retirements in a single month since January 2020.

In the post-Covid workplace, nothing is particularly straightforward, and fittingly, the “boomer blockade” has many layers. Age and tenure play a part in a couple of ways...for one, CEOs are leaving their posts “younger and after a shorter amount of time than in previous years.” The average age of a departing CEO is just over fifty-six, compared to sixty-two in 2021. And then there is tenure, which is becoming shorter in time, however slightly. So far this year, the average CEO of a US company serves just under ten years, compared to just over ten in 2019.

Which got me thinking about a story from The Firm, a book by Duff McDonald that chronicles the rise of McKinsey. (It's a good book, no matter what you think of McKinsey.) Why are those CEOs retiring younger? Probably because they can!

In the 1950s, a McKinsey consultant named Arch Patton (what a name!) basically invented a category of consulting: executive compensation. He did so initially at the request of General Motors, and wrote an article in HBR about his findings.

Basically, Patton surveyed a bunch of companies and wrote a report that argued that executives were underpaid compared to workers, but also noted, "There is, it should be emphasized, no way to tell for certain that this company would have been more successful with incentive compensation for its executives, or that company less successful without it." 🤣

After that HBR article (and 37 more that he would go on to write in HBR about the same topic), fees from executive comp projects expanded to become, in some years, 10% of McKinsey's revenue. By 1960, the number of companies with lucrative executive bonus plans more than tripled. And since the article was written, CEO compensation grew from 20x that of the average worker to 399x.

I'd never read Patton's articles until today. The most fascinating important bit in his original article is where he defends the need for expanded executive incentive pay is the section Basic Nature of Executive Jobs.

Although too few of them seem to appreciate the fact, every executive has two jobs. The first is the responsibility inherent in the position he holds for the long-term success of the company. The second is his responsibility for making contributions to profits that might be regarded as "beyond the call of duty."

It is this second phase of an executive's responsibility that supplies the dynamism necessary for the expansion of a business. It creates the atmosphere for competitive thinking of the type that produced Kleenex in the 5-cent package, put Coca Cola in bottles, made General Motors the largest producer of railroad locomotives, combined bandages and adhesive tape to make Johnson & Johnson's Band-Aid.

Throughout the article, Patton compares executives with entrepreneurs, and asks companies to use incentive pay to retain entrepreneurial folks in the executive ranks – to prevent them from wanting to start their own firm, or from going to a competitor. (This aligns with Alfred Chandler's Entrepreneurial-Operational split, fwiw.)

The transfer from individuals to teams

The tension at the heart of all of this – Paul's post on pseudo career paths and bad jobs for Millennials and beyond, CEOs retiring younger and wealthier, and life-changing compensation limited to the folks at the top of the org – is that the exceptionally valuable inventive work happens further from the center than it did in 1950, and it happens in high-performing teams (or networks), not in the office of a high-paid individual.

I'm not against incentive comp. It does the things that Patton thought it would – and when it's used to bring people and teams together (i.e. "global" HQ folks sharing in profits they help generate in "local" markets, and vice-versa), it can be a real force for coherehnce and cohesion in an org.

But I hope that the clearing of the "Boomer Blockade" leads to more than just turnover in who's at the top of the organization, who gets the 399x spoils – I hope it leads to a transfer of incentives from just the top to the teams creating value. More people should get to do this work. More people should get paid, and paid well for doing it.

And why not? The youngest Baby Boomers today are 59 years old. Millennials aren't turning conservative at the same rate as previous generations. So maybe the tipping point is on the way.

Anyway. Happy Friday!