What is a good predictor of management performance? And does good management mean better performance? New research sheds light on these questions, and reveals some uncomfortable truths.
A new study was released this year, what we find really interesting is that it was performed in both lab settings and out in the field with real companies.
The findings in a nutshell:
- Manager quality matters about as much as workers’ overall productive capacity for organizational performance.
- The differences in managerial quality are economically meaningful (a one standard deviation improvement is associated with a 25% increase in sales)
- The two strongest predictors for managerial performance was economic decision making and fluid intelligence.
- Self-selected managers performed worse than randomly assigned managers.
- The strongest predictor of managerial performance in the lab — a test of economic decision-making — is also the strongest predictor in the field.
Let’s start with the first key observation: managerial quality matters. In fact, it matters as much as the workers’ overall productivity capacity. So how you select managers really matters. It is an enabler for organizational performance.
That means that the reverse is also true – inability to use the right predictors when selecting managers; for example, using personality traits, or appointing managers based on individual worker skill, can explain systematically low performance over time in an organization.
The two consistent predictors of managerial quality were economic decision-making skill and fluid intelligence. These are robust to a wide range of controls, including age, gender, education, work experience, emotional perceptiveness, and personality traits including risk preferences.
What is economic decision making?
Put simply, the ability to strategically allocate scarce resources in resource allocation tasks. For example, finding and resolving bottlenecks, resolving stock unavailability in due time.
What is fluid intelligence?
Fluid intelligence is the ability to solve novel problems, reason, and spot patterns in unfamiliar situations. It is different from a second major component of intelligence – crystallized intelligence (“knowledge you’ve learned”).
Illustration of promotion techniques and the mean manager effect. Note the negative effect of Self- promotion, the closeness between random allocation and using Peter’s principle (selection of managers based on previous worker productivity) and the two key effect predictors – Fluid IQ and Economic decision making. Credit; Weidman, Vecci et al.
What did good managers do?
What did good managers attend to? The study identified three key habits, good managers:
- monitored their workers to make sure bottlenecks are being addressed;
- matched workers to the tasks that best fit their skills; and
- keep workers motivated.
While the first two points may not be a huge surprise, the third often falls off the radar. The managers did not only pay attention to solving the task at hand, they also paid careful attention to worker motivation. Good managers instinctively knew that motivation underpins performance.
Potential uncomfortable insights
While there are more than one reason you might select a manager, let’s shed some light on a few uncomfortable findings that should draw attention to HR departments. These have to do with the selection mechanisms that were not identified which are correlated with performance. Self-promotion has already been mentioned, the others are:
- Managers who make the case of being a “people person” are less successful on the job. Now while worker motivation matters, the skill set required to be a good manager needs to primarily encompass Economic decision making and Fluid intelligence.
- Selection of managers based on personal attributes, or demographic traits. This should be concerning for organizations that blindly apply promotion policies based on diversification, for example. Now there may be other reasons while an organization may want to pursue that and let’s be clear that the concept of diversification was not the topic examined in the study. That said, managerial effectiveness was not strongly predicted by personality and demographic traits.
On the applicability in product development
The study observed performance in a retail environment. It included resources management under variable conditions. Does this have applicability in product development?
I would argue that it does. Product development involves handling scarce resources, but under even higher variability. Motivation and problem solving, put simply, you can’t do without either in product development. If anything, the payoff curve is more unilinear.
The result of bad management can be net negative performance, and the payoff of good management is measured not in a few percentage points, but by a factor of 2 to 10, especially over time.
So yes, the study has merit also in product development. The impact could be even higher.
References
Fluid and Crystallized intelligence, Wikipedia,
Ben Weidmann, Joseph Vecci, Farah Said, Sonia Bhalotra, Achyuta Adhvaryu, Anant Nyshadham, Jorge Tamayo, David Deming, “How Do You Identify a Good Manager?”, The Quarterly Journal of Economics, Volume 141, Issue 2