Stack of golden George Washington dollar coins,. (c) 2007 Bill Koslosky, MD (CC BY 2.5)

Why Rewarding Competitiveness Is Stupid If You Want To Make Money

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Here’s a repost from 2006 that didn’t make it over. It describes a set of studies that so disturb the basic religion of MBA that it required replication across the world to get published. With minor revisions.

American business rewards competitiveness.

That may seem like a know-nothing statement. Markets reward people with the best product. Most people in America believe that markets are a place of true competition. Conservatives believe that they should be pure competition, with little or no restraints. So it shouldn’t be surprising that American business loves competitors.

So regardless of your political orientation, you probably think that this is a good thing.

The problem is that business isn’t a competition. It’s about making profit.

It’s not that there aren’t scenarios where making profit means “beating the competition”. But that’s still not seeking to “win” first and foremost.

Choosing competitiveness over profit-seeking is a serious problem in business today. Managers would rather compete in some sort “Game of Business” rather than return value to their shareholders. Even when given the stark choice between “beating the competition” or making a big profit, managers will regularly choose the former even though that is not in the best interest of the shareholders.

The research is amazingly consistent that managers will choose winning over making money. The Wharton School’s J. Scott Armstrong and his colleagues have been investigating this for years, finding this same controversial result time and time again. Business people don’t seem to understand that business is not about beating anyone. It’s about performing and creating profit.

[If you want to read more on this, Armstrong and Kesten Green (the guy who showed that game theorist didn’t predict as well as college kids role-playing) have a forthcoming paper on the topic: “Competitor-oriented Objectives: The Myth of Market Share” currently as a working paper.]

The upshot is that business managers often reward and promote not the best performing employees (as measured by profit production) but those who are the most competitive vis a vis others in the same marketplace. Managers will reward competitive employees with promotions and money even when their actions have cost the company money. They look for that man or woman who has “the killer instinct” rather than for those that consistently make money.

This is why companies don’t measure performance very often. They don’t want to know that someone is increasing profit. Thinking like the hyper-competitors that they are, they want to see how the person did against the other companies. Market-share has come to rule, even when market-share did not lead to increased profit. Even when it led to actual losses.

They will even reward those who are competitive against their own fellow employees. Some managers even set things up so that workers have to compete against each other, rather than setting up rewards based on performance as measured by long-term profit gain. (Long term can be defined relatively.)

This remains true in light of the overwhelming evidence that cooperation is better for profit than a pure competition mindset. You make more money helping each other than you do by playing some sort of weird sport game with your company. It’s true in evolution and it’s true in business.

If you are someone who cooperates with your peers, using it to create stronger value, you are likely to get fired because you are not competitive enough.

Image Credit: Presidential $1 coin program. (c) 2007 Bill Koslosky, MD (CC BY 2.5)

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