Why some companies make the leap… and others don’t by Jim Collins
There are going to be times when we can’t wait for somebody. Now, you’re either on the bus or off the bus.
When we began the research project, we expected to find that the first step in taking a company from good to great would be to set a new direction, a new vision and strategy for the company, and then to get people committed and aligned behind that new direction. We found something quite the opposite.
The executive who ignited the transformations from good to great did not first figure out where to drive the bus and get people to take it there. No, they first got the right people on the bus (and the wrong people off the bus) and then figured out where to drive it. They said, in essence, “Look, I don’t really know where we should take this bus. But I know this much: If we get the right people on the bus, the right people in the right seats, and the wrong people off the bus, then we’ll figure out how to take it someplace
great.”
The good-to-great leaders understood three simple truths. First, if you begin with “who,” rather than “what,” you can more easily adapt to a changing world. If people join the bus primarily because of where it is going, what happens if you get ten miles down the road and you need to change direction? You’ve got a problem. But if people are on the
bus because of whom else is on the bus, then it’s much easier to change direction: “Hey, I got on this bus because of who else is on it; if we need to change direction to be more successful, fine with me.” Second, if you have the right people on the bus, the problem of how to motivate and mange people largely goes away. The right people don’t need to be tightly managed or fired up; they will be self-motivated by the inner drive to produce the best results and to be part of creating something great. Third, if you have the wrong people, it doesn’t matter whether you discover the right direction; you still won’t have a great company. Great vision without great people is irrelevant.
Now, you might be thinking, “That’s just good management – the idea of getting the right people around you. What’s new about that?” On one level, we have to agree; it is just plain old-fashioned good management. But what stand outs with such distinction in the good-to-great companies are two key points that made them quite different.
To be clear, the main point of this chapter is not just about assembling the right team – which is nothing new. The main point is to first get the right people on the bus (and the wrong people off the bus) before you figure out where to drive it. The second key point is the degree of sheer rigour needed in people decisions in order to take a company from good to great.
“First who” is a very simply idea to grasp, and a very difficult idea to do – and most don’t do it well.
NOT A “GENIUS WITH A THOUSAND HELPERS”
In contrast to the good-to-great companies, which built deep and strong executive teams, many of the comparison companies followed a “genius with a thousand helpers” model. In this model, the company is a platform for the talents of an extraordinary individual. In these cases, the towering genius, the primary driving force in the company’s success, is a great asset – as long as the genius sticks around. The geniuses seldom build great management teams, for the simple reason that they don’t need one, and often don’t want one. If you’re a genius, you don’t need a Wells Fargo-caliber management team of people who could run their own shows elsewhere. No, you just need an army of good soldiers who can help implement your great ideas. However, when the genius leaves, the helpers are often lost. Or, worse, they try to mimic their predecessor with bold, visionary moves (trying to act like a genius, without being a genius) that prove unsuccessful.
IT’S WHO YOU PAY, NOT HOW YOU PAY THEM
We expected to find that changes in incentive systems, especially executive incentives, would be highly correlated with making the leap from good to great. With all the attention paid to executive compensation – the shift to stock options and the huge packages that have become commonplace – surely, we thought, the amount and structure of compensation must play a key role in going from good to great. How else do you get people to do the right things that create great results?
We were dead wrong in our expectations.
We found no systematic pattern linking executive compensation to the process of going from good to great. The evidence simply does not support the idea that the specific structure of executive compensation acts as a key lever in taking a company from good to great.
We spent weeks inputting compensation data from proxy statements and performed 112 separate analyses looking for patterns and correlation. We examined everything we could quantify for the top five officers – cash versus stock, long-term versus short-term incentives, salary versus bonus, and so forth. Some companies used stock extensively; others didn’t. Some had high salaries; others didn’t. Some made significant use of bonus incentives; others didn’t. Most importantly, when we analyzed executive compensation patterns relative to comparison companies, we found no systematic differences on the use of stock (or not), high salaries (or not), bonus incentives (or not), or long-term compensation (or not). The only significant difference we found was that the good-to-great executives received slightly less total cash compensation ten years after the transition than their counterparts at the still-mediocre comparison companies.
Not that executive compensation is irrelevant. You have to be basically rational and reasonable and the good-to-great companies did spend time thinking about the issue. But once you’ve structured something that makes basic sense, executive compensation falls away as a distinguishing variable in moving an organization from good to great.
Why might that be? It is simply a manifestation of the “first who” principle: It’s not how you compensate your executives, it’s which executives you have to compensate in the first place. If you have the right executives on the bus, they will do everything within their power to build a great company, not because of what they will “get” for it, but because they simply cannot imagine settling for anything less. Their moral code requires building excellence for its own sake, and you’re no more likely to affect whether they breathe. The good-to-great companies understood a simple truth: The right people will do the right things and deliver the best results they’re capable of, regardless of the incentive system.
Yes, compensation and incentives are important, but for very different reasons in good-to-great companies. The purpose of a compensation system should not be to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there.
We were not able to look as rigorously at non-executive compensation; such data is not available in as systematic a format as proxy statements for top officers. Nonetheless, evidence from source documents and articles suggest that the same idea apply at all levels of an organization.
In a good-to-great transformation the old adage that people are your most important asset does not hold; people are not your most important asset. The right people are.
In determining “the right people,” the good-to-great companies placed greater weight on character attributes than on specific educational background, practical skills, specialized knowledge, or work experience. Not that specific knowledge or skills are unimportant, but they viewed these traits as more teachable (or at least learnable), whereas they believed dimensions like character, work ethic, basic intelligence, dedication to fulfilling commitments, and values are more ingrained.
RIGOROUS, NOT RUTHLESS
The good-to-great companies probably sound like tough places to work – and they are. If you don’t have what it takes, you probably won’t last long. But they’re not ruthless cultures; they’re rigorous cultures. And the distinction is crucial.
To be ruthless means hacking and cutting, especially in difficult times, or wantonly firing people without any thoughtful consideration. To be rigorous means consistently applying exacting standards at all times and at all levels, especially in upper management. To be rigorous, not ruthless, means that the best people need not worry about their positions and can concentrate fully on the work.
To let people languish in uncertainly for months or years, stealing precious time in their lives that they could use to move on to something else, when in the end they aren’t going to make it anyway – that would be ruthless. To deal with it right up front and let people get on with their lives – that is rigorous. Rigour in a good-to-great company applies first at the top, focused on those who hold the largest burden of responsibility.
To be rigorous in people decisions means first becoming rigorous about top management people decisions. Indeed, I fear that people might use “first who rigor” as an excuse for mindlessly chopping out people to improve performance. “It’s hard to do, but we’ve got to be rigorous,” I can hear them say. And I cringe. For not only will a lot of hardworking, good people get hurt in the process, but the evidence suggests that such tactics are contrary to producing sustained great results. The good-to-great companies rarely used head-count lopping as a tactic and almost never used it as a primary strategy.
It would be a mistake – a tragic mistake, indeed – to think that the way you ignite a transition from good to great is by wantonly swinging the axe on vast numbers of hardworking people. Endless restructuring and mindless hacking were never part of the good-to-great model.
HOW TO BE RIGOROUS
We’ve extracted three practical disciplines from the research for being rigorous rather than ruthless.
Practical Discipline # 1: When in doubt, don’t hire – keep looking.
One of the immutable laws of management physics is “Packard’s Law.” It goes like this: No company can grow revenues consistently faster than its ability to get enough of the right people to implement that growth and still become a great company. If your growth rate in revenues consistently outpaces your growth rate in people, you simply will not – indeed cannot – build a great company.
Those who build great companies understand that the ultimate throttle on growth for any great company is not markets, or technology, or competition, or products. It is one thing above all others: the ability to get and keep enough of the right people.
Practical Discipline # 2: When you know you need to make a people change, act.
The moment you feel the need to tightly manage someone, you’ve made a hiring mistake. The best people don’t need to be managed. Guided, taught, and led – yes. But not tightly managed. We’ve all experienced or observed the following scenario.
We have a wrong person on the bus and we know it. Yet we wait, we delay, we try alternatives, we give a third and fourth chance, we hope that the situation will improve, we invest time in trying to properly manage the person, we build little systems to compensate for his shortcomings, and so forth. But the situation doesn’t improve. When we go home, we find our energy diverted by thinking (or talking to our spouses) about that person. Worse, all the time and energy we spend on that one person siphons energy away from developing and working with all the right people. We continue to stumble along until the person leaves on his own (to our great sense of relief) or we finally act (also to our great sense of relief). Meanwhile, our best people wonder, “What took you so long?”
Letting the wrong person hang around is unfair to all the right people, as they inevitably find themselves compensating for the inadequacies of the wrong people. Worse, it can drive away the best people. Strong performers are intrinsically motivated by performance, and when they see their efforts impeded by carrying extra weight, they eventually become frustrated.
Waiting too long before acting is equally unfair to the people who need to get off the bus. For every minute you allow a person to continue holding a seat when you know that person will not make it in the end, you’re stealing a portion of his life, time that he could spend finding a better place where he could flourish. Indeed, if we’re honest with ourselves, the reason we wait too long often has less to do with concern for that person and more to do with our own convenience. He’s doing an okay job and it would be a huge hassle to replace him, so we avoid the issue. Or we find the whole process of dealing with the issue to be stressful and distasteful. So, to save ourselves stress and discomfort, we wait. And wait. And wait. Meanwhile, all the best people are still wondering. “When are they going to do something about this? How long is this going to go on?”
The good-to-great companies showed the following bipolar pattern at the top management level: People either stayed on the bus for a long time or got off the bus in a hurry. In other words, the good-to-great companies did not churn more they churned better.
The good-to-great leaders did not pursue an expedient “try a lot of people and keep who works” model of management. Instead, they adopted the following approach: Let’s take the time to make rigorous A+ selections right up front. If we get it right, we’ll do everything we can to try to keep them on board for a long time. If we make a mistake, then we’ll confront that fact so that we can get on with our work and they can get on with their lives.”
The good-to-great leaders, however, would not rush to judgement. Often, they invest substantial effort in determining whether they had someone in the wrong seat before concluding that they had the wrong person on the bus entirely. Nonetheless, when the good-to-great leaders knew they had to make a people change, they would act.
But how do you know when you know? Two key questions can help. First, if it were a hiring decision (rather than a “should this person get off the bus?” decision), would you hire the person again? Second, if the person came to tell you that he or she is leaving to pursue an exciting new opportunity, would you feel terribly disappointed or secretly relieved?
Practical Discipline # 3: Put your best people on your biggest opportunities, not your biggest problems.
The good-to-great companies made a habit of putting their best people on their best opportunities, not their best problems. The comparison companies had a penchant for doing just the opposite, failing to grasp the fact that managing your problems can only make you good, whereas building your opportunities is the only way to become great.
There is an important corollary to this discipline: When you decide to sell off your problems, don’t sell off your best people. This is one of those little secrets of change. If you create a place where the best people always have a seat on the bus, they’re more likely to support changes in direction.
We noticed a Level 5 atmosphere at the top executive level of every good-to-great company, especially during the key transition years. Not that every executive on the team became a fully evolved Level 5 leader, but each core member of the team transformed personal ambition into ambition for the company. This suggests that the team members had Level 5 potential – or at least they were capable of operating in a manner consistent with the Level 5 leadership style.
You might be wondering, “What’s the difference between a Level 5 executive team member and just being a good soldier?” A Level 5 executive team member does not blindly acquiesce to authority and is a strong leader in her own right, so driven and talented that she builds her arena into one of the very best in the world. Yet each team
member must also have the ability to meld that strength into doing whatever it takes to make the company great.
Indeed, one of the crucial elements in taking a company from good to great is somewhat paradoxical. You need executives, on the one hand, who argue and debate – sometimes violently – in pursuit of the best answers, yet, on the other hand, who unify fully behind a decision, regardless of parochial interests.
FIRST WHO, GREAT COMPANIES, AND A GREAT LIFE
Whenever I teach the good-to-great findings, someone almost always raises the issue of the personal cost in making a transition from good to great. In other words, is it possible to build a great company and also build a great life? Yes.
The secret to doing so lies right in this chapter.
Members of the good-to-great teams tended to become and remain friends for life. In many cases, they are still in close contact with each other years or decades after working together. It was striking to hear them talk about the transition era, for no matter how dark the days or how big the tasks, these people had fun! They enjoyed each other’s company and actually looked forward to the meetings. A number of the executives characterized their years on the good-to-great teams as the high point of their lives. Their experiences went beyond just mutual respect (which they certainly had), to lasting comradeship.
Adherence to the idea of “first who” might be the closest link between a great company and a great life. For no matter what we achieve, if we don’t spend the vast majority of our time with people we love and respect, we cannot possibly have a great life. But if we spend the vast majority of our time with people we love and respect – people we really enjoy being on the bus with and who will never disappoint us – then we will almost certainly have a great life, no matter where the bus goes. The people we interviewed from the good-to-great companies clearly loved what they did, largely because they loved whom they did it with.
FIRST WHO … THEN WHAT: KEY POINTS
- The good-to-great leaders began the transformation by first getting the right people on the bus (and the wrong people off the bus) and then figured out where to drive it.
- The key point of this chapter is not just the idea of getting the right people on the team. The key point is that “who” questions come before “what” decisions – before vision, before strategy, before organization structure, before tactics. First who, then what – as a rigorous discipline, consistently applied.
- The comparison companies frequently followed the “genius with a thousand helpers” model – a genius leader who sets a vision and then enlists a crew of highly capable “helpers” to make the vision happen. This model fails when the genius departs.
- The good-to-great leaders were rigorous, not ruthless, in people decisions. They did not rely on layoffs and restructuring as a primary strategy for improving performance. The comparison companies used layoffs to a much greater extent.
- We uncovered three practical disciplines for being rigorous in people decisions:
- When in doubt, don’t hire – keep looking (Corollary: A company should limit its growth based on its ability to attract enough of the right people.
- When you know you need to make a people change, act. (Corollary: First be sure you don’t simply have someone in the wrong seat.)
- Put your best people on your biggest opportunities, not your biggest problems. (Corollary: If you sell off your problems, don’t sell off your best people.)
- Good-to-great management teams consist of people who debate vigorously in search of the best answers, yet who unify behind decisions, regardless of parochial interests.
Unexpected Findings
- We found no systematic pattern linking executive compensation to the shift from good to great. The purpose of compensation is not to “motivate” the right behaviors from the wrong people, but to get and keep the right people in the first place.
- The old adage “People are your most important asset” is wrong. People are not your most important asset. The right people are.
- Whether someone is the “right person” has more to do with character traits and innate capabilities that with specific knowledge, background, or skills.
