High-Stakes Decision-Making

So . . . I'm going to give you a couple of business scenarios. Read them and think about whether you think the decisions made were good ones.

1) A company is convinced its CEO is going to jump ship and go to a rival corporation. This company's HR and recruitment departments are in shambles, and are incapable of finding another CEO at the same level of competence (at least not within a short amount of time). So if the CEO leaves, the company would have to promote from within, and the talent available is sub-par. If the current CEO leaves, the share price will probably fall precipitously. In the end, this company decides to overpay its CEO to stay; they may not get the full value of what they're paying for, but they consider it better than nothing.

2) A company has what is widely considered to be one of the best leaders in the industry. Its CEO is universally admired and has led this business to market dominance in the past. It has come to their attention that an equally-admired leader, the CEO of a rival company, is displeased with his company and is willing to a make a move. Furthermore, a third CEO is also interested in joining this company. The board of directors makes the decision to hire the other two leaders and put them in leading roles in the business as well. Though they are paying CEO salaries for all three, only one has the title (the other two are senior executives). The share price goes up a little, and this company is expected to dominate for years to come, but profits may be hurt by the high salaries they are paying their upper management.

What's your verdict? Did the companies do the right thing?

In my opinion, in this business context, company one did the right thing and company two did the wrong thing. Company one is overpaying one executive because they would be without a strong leader if they did not. They cannot replace the CEO, so they're throwing a little money at the problem to avoid a large loss.

Company two is also overspending, but probably not getting back what they're putting in. Adding only one of the CEOs would provide an increase to both share price and probability of dominance, but with each additional CEO they add (after the first one) that increase reduces - the company experiences diminishing returns. The probability of success, especially, is subject to dimishing returns, because there is only so much each additional leader can add. At some point you need specialists, subordinates, and "role players" to add value.

However, this post isn't really about business. It's about basketball (fooled ya! basketball again!). The first scenario is really the Atlanta Hawks' re-signing of Joe Johnson, and the second one is the Miami Heat signing Chris Bosh and Lebron James to play alongside Dwyane Wade. And in the context of basketball, most of the commentary has consisted of views opposite to the ones I gave in the business context.

NBA pundits are decrying Joe Johnson's maximum-dollar contract because they say he is not worth the money. What is being ignored is that because of the NBA's salary-cap rules, Atlanta couldn't sign a different free agent to replace him, but could re-sign him. So they took the only course available to them (other than getting nothing in return for his leaving) and overpaid him. And as a result they will sell tickets and have a chance at contending (at least in the short term, until two years from now when he can't hit shots anymore).

In Miami, everyone is looking at the Superfriends and thinking they will dominate, and what a coup for Miami. But even without Lebron James (typically viewed as the most talented of the three, especially by Lebron James) they would have contended for a title every year, and sold out the arena every night. What Lebron adds to Miami is much less than what he would add to an average team, yet Miami is paying him (nearly) as much. Diminishing returns.

So this is probably the last I'll write about basketball for a while (and a cheer went up across the land!). This has been a wild off-season with lots of changes, but some things never change - you will never win all of your games (even the Harlem Globetrotters lost once), you have to reconcile winning games with losing money, and as William Goldman said about movies, Nobody Knows Anything. Even me.