Quarterly Earnings Kill People-Based Innovation…

Guess what? All innovation is people-based.


Do a quick search in The New York Times and The Wall Street Journal and you will find numerous articles by very smart people pronouncing that only “innovation” will lead to an economic recovery.


Yet, it’s ironic to read these articles at the same time that Hewitt releases its most recent quarterly global employee engagement survey. In the first quarter of 2010, the trend lines of companies reporting increases and declines in engagement converged and crossed. For the first time in 15 years, the companies experiencing declines far outpaced those reporting improvement. Houston, we have a problem. As Hewitt correctly states in their report,

“This highlights the growing tension between employers—many of which are struggling to stabilize their financial situation—and employees, who are showing fatigue in response to a lengthy period of stress, uncertainty and confusion brought about by the recession and their company’s actions.”


Now we could argue the point about employers are “struggling to stabilize their financial situation” when 3,000 non-financial firms hold an estimated $1.6 trillion (yes, trillion with a “T”) in cash and equivalents, but I want to focus back on one simple question:


How do companies across the globe expect to innovate on the backs of an increasingly demoralized workforce that’s stressed, overworked, undercompensated, unrecognized, lacks career opportunities, and doesn’t trust leadership?

As I said before, how do we square this circle?

Now, I’m not an expert on innovation strategy, but I’m pretty sure that it’s not, “Be sure to overwork and undercompensate your employees. Make them really afraid. And then, when they no longer trust you, put everyone in a room and let the magic begin!”


So, what’s the answer?

Let’s go back to the articles begging for more innovation written by those very smart people. What do they say?

John Lechleiter, CEO of Eli Lilly, wrote in The Wall Street Journal (7/9/10), “The evidence is certainly mounting that we are facing today nothing short of an innovation crisis.” So what does he propose that we do to address this challenge? More investment in higher education, more dollars dedicated to R&D, revamping the corporate tax policy, and improving intellectual property protection.


And “Finally, and most important, talent…a priceless resource.” Okay, John, let’s hear what you have to say about how to reenergize a disengaged workforce to support innovation…education policy improvement, immigration law reform, and create a well-funded research infrastructure in academic and government labs.

Therein lies the problem: While not unimportant, none of the innovation fixes that Mr. Lechleiter proposes directly address the crisis of a deeply disengaged global workforce. In fact, his suggestions don’t even indirectly help improve morale, reduce stress, improve trust, or reduce fear in the near term much less the long-term. I can only assume that either:

  1. He has no idea that this disconnect exists (my preferred explanation),
  2. He does know but doesn’t understand how or have the political will to address it (lame, but still preferred) or
  3. He knows and doesn’t care (okay, I can’t even go there).

Less depressing and disconnected from reality is the article written by Edmund S. Phelps in The New York Times (8/6/10). Phelps, a Noble Prize winner in Economics from Columbia University, believes that “sustained business investment…rests on innovation.” After recommending the creation of a state-sponsored network of merchant banks to invest in innovative projects, tax exemptions for start ups and tax credits for hiring low wage workers, he begins to get at what I think is the real crux of the problem:


“Improve corporate governance by tying executives’ compensation to long-term performance rather than one-year profits, and by linking fund managers’ pay to skill to picking stocks, not in marketing their funds.”

Why is executive compensation and fund manager pay the heart of the issue? Because right now the way the market is set up, senior leaders and fund managers are not rewarded by the market for investing time, talent and money into people-related innovations that would reengage the workforce.

For example, let’s say that a CEO decides to rollout a company-wide wellness and work+life flexibility strategies. I don’t mean building a gym or creating formal flexible work arrangement policies that no one will use. I’m talking about strategically changing the culture and operating model to allow employees to bring the best of themselves to work and the rest of their lives every day. (For more on a strategic approach to wellness and work+life flexibility, check out here and here).

Research shows that investments that create great places to work do pay off in the long-term, but in the short-term the money spent will be a straight expense. It will hit and reduce the bottom line. This is not good news for all but the most visionary, confident senior executives. Why? This brings back us to the “market,” and the way it values and rewards companies.


Longer-term executive compensation versus short-term helps promote the investment in initiatives that may not pay off for a year or two; however, that assumes you have a Board of Directors that will support the leader if the stock price falls because of a short-term hit to the bottom line. In other words, the issue isn’t just rewards but whether or not a senior executive keeps his or her job.

Unfortunately as leadership expert, Wally Bock, points out in a recent post there are traders and there are investors. Too many fund managers (especially hedge fund managers) are quarterly driven traders. They are aided and abetted by an outdated valuation system used by market analysts that struggles to place a value on intangibles such as people-based investments.

These trader-investors put pressure on Boards which, in turn, influences senior leaders. This reinforces the same “unvirtuous” cycle that rewards layoffs for short-term gain, no matter how devastating the impact on cultures and, in turn, innovation.


Under pressure from the market and from the Board, the quarterly focus devalues the investment in people-based initiatives, such as wellness and work+life flexibility. Even though these strategies would reengage a stressed and demoralized global workforce.

If super smart people believe that innovation is the only way out of this Great Recession, then they need to make the restoration of employee trust, motivation, commitment and well-being as high a priority as tax code changes, R&D and education reform.

That will only happen if Boards of Directors govern in a way that supports senior executives who tell the market “traders” to back off. Hopefully, with long-term compensation and Board support, these leaders will make the people-focused investments that create an environment in which innovation can once again thrive.


Because, in the end, all innovation comes from people. Somewhere we lost track of that.

What do you think?

(Update: Interesting article addressing the same issue was recently published in Knowledge@Wharton newsletter “Shooting the Messenger: Quarterly Earnings and Short Term Pressure to Perform”  Reinforces many of the points made in this post. Comments are insightful)


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