Loonshots

Author: Safi Bahcall

ISBN: 9781250185969

Read: 6/18/21

Recommendation Rating: 8/10

SUMMARY

Great take on understanding how people, organizations, and cultures interact to make crazy ideas work. The author lays out conditions that encourage crazy ideas. Especially liked the ideas around incentives and how to reduce “return on politics” in organizations.

MY NOTES

Loonshot n. a neglected project, widely dismissed, its champion written off as unhinged.

Vannevar Bush rescued the US military in WWII, dominated by a powerful franchise, in a crisis caused by failure to innovate. He lead a team of scientists and innovated many of the inventions that helped win the war. Theodore Vail did a similar feat by leading AT&T to invent the vacuum tube and changing the world of technology forever. They both used similar processes. The author analyzed these and synthesized into the Bush-Vail rules:

1. Separate the phases
   • Separate your artists and soldiers
   • Tailor the tools to the phase
2. Dynamic equilibrium
   • Love your artists and soldiers equally
   • Manage the transfer, not the technology
3. Spread a system mindset
   • Keep asking why the organization made the choices it did
   • Keep asking how the decision-making process can be improved
   • Identify teams with outcome mindsets, and help them adopt system mindsets

Moses trap: when ideas advance only at the pleasure of a holy leader, who acts for love of loonshots rather than strength of strategy.

The Bush-Vail rules create a structure that can help defeat chaos, stagnation, and the Moses trap.

The Magic Number: M = [E*(S^2)*F]/G, where E = equity fraction, S = management span, F = organizational fitness, and G = salary growth rate up the hierarchy. Management span is the number of people each manager is over. Salary growth rate is average % increase for promotions. Equity fraction is the amount of stake someone feels in future income growth with the company. High organizational fitness company reward systems discourage politics and employees are well matched to their roles. For typical real-world values of the control parameters there is, in fact, a sudden change in incentives around the magic number 150. At that size, the balance of forces in the tug-of-war changes, and the system suddenly snaps from favoring a focus on loonshots to a focus on careers.

Large companies usually do a bad job of using stock options or bonuses. They often use a steep equity grant curve: they award large stock options or cash bonuses at the highest levels (as much as 100% of base salary), and tiny amounts at junior and mid-levels (below 10%). That creates exactly the wrong incentive for the most vulnerable part of the organization – the dangerous middle.

The steep equity curve creates a middle-manager version of Survivor: a giant jackpot for those who succeed in crushing their colleagues and staying alive.

The most difficult job in redesigning incentives may be the business-world equivalent of the Hippocratic Oath: first do no harm. It is surprisingly easy to unintentionally create perverse incentives.

There is no perfect incentive system. But even more common is a useless system, in which rewards are handed out that do nothing. It’s amazing how often large companies compensate junior or mid-level employees on company earnings. If your project can move earnings by no more than a tiny fraction of a percent, how does a company-earnings bonus motivate you?

Bring a knife to a gun fight: appoint a Chief Incentives Officer, well trained in the art of aligning value, who is solely focused on achieving a state-of-the-art incentive system. How much might politics decrease and creativity improve if rewards for teams and individuals were closely and skillfully matched to genuine measures of achievement?

Tap into the power of non-financial rewards: peer recognition, reduced commute times, choice of assignments, freedom to work on a passion project.

A good incentives office will also seek the maximum return from a limited resource: the most motivated teams for a given compensation budget.

A wide management span helps nurture loonshots: it encourages constructive feedback from peers. Narrow spans for “soldier” groups.

Creative talent responds best to feedback from other creative talent.

Raise the magic number: reduce the return on politics, use soft equity (non-financial rewards), increase project-skill fit, fix the middle, bring a knife to a gun fight, fine-tune the spans.

For a loonshot nursery to flourish, inside either a company or an industry, three conditions must be met: phase separation (separate loonshot and franchise groups), dynamic equilibrium (seamless exchange between the groups), and critical mass (a loonshot group large enough to ignite).

Loonshots flourish in loonshot nurseries, not in empires devoted to franchises. Being good at loonshots and good at franchises are phases of an organization.