Fryer's Blog in the Mountains

Corporate Behavior Rooted in Self-Interest?

Sky-high salaries, enormous bonuses, truckloads of stock options and a variety of expense perks, we continually hear about these as part of the compensation schemes for executives (see Forbes listing for this year), and it certainly makes the rest of us salivate.  These payouts are the direct result of compensation plans designed to drive corporate results, ones that allegedly benefit all stakeholders.  Seeing the potential monies at stake certainly drives home the question:  what might we do if we were in the CEO’s shoes?

As Pavlov taught us through his experiments with a dog and a bell, appropriately placed incentives can drive and condition behavior.  The corollary to that, however, is what Steven Levitt and Stephen Dubner discovered and reported on in their 2006 best-selling book, Freakonomicsand their 2009 follow-on, Superfreakanomics.  In Freakonomics, the example of the teachers who helped students through the standardized tests by cheating, due to financial incentives, corroborates Levitt and Dubner’s point.  They suggest that you need to look for the motivations and their underlying incentives; then the behavior will make sense.   Levitt and Dubner paint a picture of a horse chasing the carrot tied to the end of the stick, but maybe it’s not that simple. 

A recent article in BusinessWeek entitled The Dark Side of Incentives by Barry Schwartz caught my attention.  Schwartz discusses how financial incentives can many times strip away moral considerations in the decision-making process.  A study by James Heyman (University of St. Thomas) and Dan Ariely (Duke’s Fuqua School of Business), cited in Schwartz’s BusinessWeek article, showed that passersby were less likely to provide assistance lifting a couch from a van, if a token payment was offered.  This example, along with others in the article, comes from Schwartz’s book, The Paradox of Choice:  Why More Is Less.  Key to Schwartz’s thesis is the idea that people are not only motivated by money; they also have a moral conscience and want to do the right thing.  Unfortunately financial incentives can sometimes impair or cloud their moral imperative.

Levitt, Dubner and Schwartz have provided some interesting insights into the world of incentives and motivation.  With what we know now, can we change executive compensation, eliminating the excesses we’ve witnessed and better balancing corporate objectives with those of other stakeholders?  I’m not sure, but I’ve added Schwartz’s book to my list for Santa, hoping that it offers some ideas on prescriptions and remedies.

Ryck Marciniak

Guest Blogger

http://ca.linkedin.com/in/ryckmarciniak

Get a Mac for free by Switching From Windows and have enough money left to buy an iPod: The Cost of Software

About a year ago I bought a Mac mini for a variety of reasons.   And yes buying a Mac appears to cost more than a Windows machine, but does it really?    I had been running a virtual machine to preserve my software investment, but it was getting a little long in the tooth.  So I started looking to upgrade my Microsoft applications.   Talk about sticker shock.  Here's what I was running and what I ended up buying:

Microsoft Office - $349   vs. iWork $79 + OpenOffice $0
iWorks is much easier to use and Pages puts out much better looking documents.   It kind of works exchanging formats with Office.  When I need to edit complex Office documents from others, I fire up OpenOffice.  It works great.  Be warned that OpenOffice looks like it was written by a bunch of Sun Unix engineers.  It ain't pretty, but it works very well under the hood.

Microsoft Project Professional- $779 vs. Merlin 2 $210
Not only does Merlin read and write Project files with no problems, the UI is much, much better and easier (and more colorful) to use.

Adobe CS4 Standard upgrade - $499 vs. Adobe CS4 Standard upgrade $499
I use In Design and Illustrator a lot.  My CS2 is running on an XP virtual machine.  Turns out Adobe will let me upgrade from XP to OSX no problem.   Something Microsoft won't let me do (I'm running Office 2003) and move to Mac.

So here's the total cost of software: Microsoft $1,624 vs. Mac $788.  That's a difference of $836.   Which means you can get a Mac Mini for free and pocketed $237.

The main use I have for running XP now is to run my 2003 version of Microsoft Visio.  It's a fantastic product and there is no Mac alternative that I have found.  But that means the VM only needs to get fired up about once a month now.

Sprint Bait & Switch: Unlimited Data is not the same as Unlimited Data

I think Dan Hesse and Sprint have been doing a good job.   Until today.  Last week I called to upgrade 2 of my 3 year old phones.  I could put them on my plan and after rebates, etc. the cost would be $29.99.  Sounds good.  I went out a couple of days ago to look at the phones.

Today I called to order them, and guess what?  The cost is $179.99 each (no we won't give you the $150 upgrade credit we said we would) and I would have to upgrade my plan for a 50% cost increase.

You see, I have a phone which has a browser, runs applications accessing the Internet and GPS applications.  I have an unlimited data plan.   The new phone also has a browser, runs applications accessing the Internet and GPS applications.  But marketing will NOT allow the new phone to be put on my existing plan. Instead I have to buy a new plan for a lot more money.

Oh, did I mention Sprint is hemorrhaging customers?  Dan, read Seth's post on the value of existing customers.

update:  It's a week later and I didn't hear from Sprint.  So I wrote them again.  Found out that if you upgrade to a Windows Mobile phone, you don't have to change plans.  You're only penalized if you choose an Android or the new Palm OS phone.   

Start up basics: Managing the Money

As COE (chief officer of everything) you are also the CFO.   We're not talking about budgets today, instead, where did the money go?   Here are some things I have learned:

1) Set up a business bank account for company money transactions only.

2) Only 1 person has checks.  You never know when your co-founder may decide to write himself a check to cover a credit card bill (actually happened to me).

3) No debit cards.   Ever.   You need a paper (or electronic paper trail).   

4) Get bill pay service (should be free) to automatically write and record checks.  

5) Download and use a simple expense report form that everyone uses.

6) Before any check is processed there must be a corresponding invoice or expense report form.

7) Use dropbox and create a banking folder.  All statements, bills, etc. go in here.  Now you have a backup of these transactions and if you want to use an accountant, you can share it with them.

I also like to use a separate credit card which has good tracking when I travel or buy anything.  That way you always have an electronic receipt.   I prefer American Express.  One of the better deals is getting a Costco True Earnings American Express Business card.  It's free with your Costco membership.  As long as you only use this for business activities, finding receipts to support those expense reports is quite easy.

Part 2:  If you're Venture backed you need to submit financial reports to your investors on a periodic basis.  I tried something a little different this year and it seems to be working.  First off, buy the latest Quickbooks.  For our purposes, doesn't matter which level.   Next, make sure you have a good spreadsheet for your capital showing who paid what, when, for the number of shares of stock.

Instead of doing it yourself and messing it up, or hiring a bookkeeper to mess it up, I'm doing it myself with a black belt in Quickbooks looking over my shoulder.  Since they work remotely, this works well.   We spent an hour setting it up.  And if I need a little help each month, he charges a very reasonable rate in 15 minute increments.   In the beginning, doing it yourself, and spending $15 - $30 / month for a coach makes a lot of sense.  

When you need to do your taxes or hire a full blown accountant, everything will be in perfect order.

Intuit Quickbooks + Mac + Flash = Disaster

I had been running Quickbooks on XP.   I upgraded to Quickbooks 2010 for Mac so I wouldn't have to fire up the virtual machine and save some memory.  Installed great.

It's when I went for some support that things started heading south quickly.   Since this is a new company I know I needed some help getting the charts of accounts set up and equity accounts and all that fun stuff.   I signed up for an hour of consulting.   

Then the wheels started to come off.  Intuit has this nifty flash based utility for scheduling time.  But it doesn't run on Safari on a Mac.   Luckily I had Firefox and it did come up. 

I'm amazed that people don't test out their systems on different browsers running on different operating systems.  Especially an outfit like Intuit.   Just remember to have a very good test plan before you release anything.

Snow Leopard Upgrade on Mac Mini: No Problem

It was with great apprehension when I decided to upgrade my OS.  Remembering the pain of several XP upgrades I suppose.  I backed up everything and made a bootable drive just in case.   Installed the disk, told it o.k.

Two hours later it was done, rebooted my machine and everything worked perfectly.

I was flabbergasted.  

It just worked.  And that's a worthy goal whenever we do software development.

Experience vs Experts

Experts are great when you have a well defined problem and need a quick solution.   Which is why I like union journeyman electricians.  But not so hot with ill-defined problems you tend to find in start up companies.  Experts tend to be very deep in their field but not very wide.  The classic "if all you have is a hammer, the whole world looks like a nail".

Experienced people are much better at ill defined problems.  They have a large tool kit of pre-made partial solutions from which they can build a custom solution.   In the food world Sandra Lee prepares fantastic meals, but not from scratch.  She calls it " semi-homemade cooking".   I never realized Bisquick was so versatile.

It's very frustrating to deal with both ends of the spectrum in a startup:  On one hand you have the talented "build everything from scratch", which constantly re-invents the wheel and takes forever, and on the other side you have the "experts" who have one solution for everything.   Finding that experienced middle is a task in itself.  

But once you find them, keep them close and keep them happy.

Citibank Increase Credit Card Rates by 50%, Citigroup loses 27 cents per share last quarter

Found out today Citibank increased their Master Card rate to 29.99% from 19.99%.  That's prime plus 26.74%.

So, they are making 800% return on money they lend you.   But if you "opt out" (read cancel) your card, you can continue paying off at the 19.99% rate.

We give Citi $45B in taxpayer TARP money and they return the favor by burning us.   

And Citigroup wonders why they lost 27 cents a share.   Maybe people aren't as clueless as Vikram thinks.

Funding a Start up: Lessons from The Brothers Bloom

I watched the Brothers Bloom a couple of days ago.   Quirky but entertaining.   It the story of two brothers who become the worlds best con men.  (no, raising money is not a con job)  Three things were interesting about their approach:

1) The older brother Stephen would build a complete storyboard of the con, usually consisting of 15 parts.

2) They would spend a lot of time understanding their target (mark), hopes, dreams and desires.

3) The last part was always an exit, but the mark would have their dreams realized, so even though they were in reality conned, the mark never complained, because they got everything they wanted.

Business is always personal.  First off, do have to have a well developed thought out story about the journey an investor will have with you?   The next step is the one most founders ignore.  Understand your investors hopes, dreams and desires.   Does your story deliver on those?  If not, no deal.  And finally have a good exit where everyone gets what they want and need.   If you don't deliver on this, you'll be a one trick pony.

This is hard.  But it does work.   

JP Morgan Chase Online Support Crash

Chase seems to be having another problem with their IT.  They have this nifty secure internal email system to which they will reply within 4 hours.   I started a discussion the other day about why they cut my credit card limit by 80% without telling me.   (I thought that was pretty rude).   

Anytime I try to send a message, the system logs me off before sending.  That's one way to control customer support costs I suppose.