Why Coca-cola’s new CEO needs to think bigger for the company to succeed

“A ham sandwich could run Coca-Cola” — Warren Buffett to Bill Gates.

Berkshire Hathaway CEO Warren Buffett may be as famous for his aphorisms as he is for his love of Coca-Cola. CHRIS SALAMONE

He jokes that he’s “one quarter Coca-Cola,” referring to his anatomy, not his holdings, as he drinks at least five cans of Coke or Cherry Coke a day.

A man drinks a Coca-Cola at a store in Phnom Penh, Cambodia, December 5, 2016. REUTERS/Samrang Pring

A man drinks a Coca-Cola at a store in Phnom Penh, Cambodia, December 5, 2016. REUTERS/Samrang Pring

Buffett is big backer of the stock as well, as Berkshire owns more 9% of the company and counts Coke as its second-biggest holding after Wells Fargo. Buffett’s son, Howard, even sat on its board before announcing his retirement recently. In many ways, Coca-Cola is a classic Buffett stock. The company has a huge brand that, along with its distribution network, gives it an economic moat, and its business is focused on recurring small purchases that happen in an up or down economy.

Though Coke made many early investors rich — it was one of the best-performing stocks of the 20th century — the stock’s reputation his taken a hit in recent years. As the chart below shows, it has significantly underperformed the S&P 500 and Berkshire Hathaway over the last five years.

Buffett’s quote above looks especially relevant today. Coke is set the hand the reins to a new CEO as COO James Quincey replaces Muhtar Kent at the helm on May 1, 2017.

Quincey’s anointment is no surprise, as Coke had signaled that he would replace Kent when Kent retired. Quincey has led the company in various regions, including Europe and Mexico, and became COO last year, but his job running Coke’s iconic portfolio of brands may be more difficult than that of his predecessors. Coca-Cola today faces several challenges that won’t be easy to overcome.

Declining soda consumption

It’s no secret that Americans are drinking less soda. Volume sales of the fizzy beverages have fallen every year since 2004, dropping 1.2% last year as per capita consumption reached a 30-year low. As health concerns have mounted, Americans have flocked away from excess sugar in drinks like Coca-Cola, and sales of diet soda have fallen even faster — trends towards organic and natural foods seem to be worse for artificial sweeteners and drinks like Diet Coke, which are perceived to be loaded with chemicals.

The Coca-Cola logo appears above the post where it trades on the floor of the New York Stock Exchange, Friday, Dec. 9, 2016. AP Photo/Richard Drew

The Coca-Cola logo appears above the post where it trades on the floor of the New York Stock Exchange, Friday, Dec. 9, 2016. AP Photo/Richard Drew

Coke brags that it has gained market share for 26 straight quarters in North America in the Non Alcoholic Ready To Drink market, but that figure ignores the fact that many consumers have moved on to coffee drinks available at Starbucks and other chains. Starbucks has seen U.S. comparable sales growth of 4% or better for more than 20 quarters in a row.

To counter sluggish growth, Coca-Cola has adopted a few key strategies. It’s begun selling smaller-volume drinks at a higher price-per-ounce, borrowing a page from tobacco companies, which have also raised prices to counter falling consumption. That strategy has helped pad the bottom line and given consumers lower-calorie options, but its potential is limited.

The company has also gone on a shopping spree in the hopes of diversifying away from its core soda brands. In recent years it’s purchased alternative beverage brands like Zico coconut water, Gold Peak tea, and Suja Life juice. It also took stakes in Keurig Green Mountain, which was bought out, and Monster Beverage. Coke now has more than 500 brands and derives 36% of sales from still beverages. However, the company may have missed an opportunity to diversify into food as its rival Pepsico has done well with brands like Frito-Lay and Quaker. As a result, Pepsico has outperformed Coke in recent years.

A turning tide

Coke’s organic revenue is still growing, up 4% so far this year, but a strengthening dollar has weighed on financial results, as have structural changes. Return on Invested Capital plummeted all the way from 21% in 2008 to 9% last year as the company spent on acquisitions while earnings remained stubbornly slow to grow.

As per-capita consumption has fallen in key markets, the company has also been confronted with an increasing number of soda taxes. Four cities in the U.S., including San Francisco and Boulder, Colo., passed soda surcharges on Election Day, and Philadelphia did so earlier this year. A number of countries, including Mexico and several in Europe, have also moved to tax sugary beverages. It’s an idea that’s gaining currency and is likely to present continued headaches for Coke, as the company has already mounted significant lobbying efforts against such measures. With the lobbying push, big soda, unsurprisingly, has often drawn comparisons to big tobacco.

A Coca-Cola delivery truck drives past an office tower under construction at Manhattan West, Thursday, Nov. 3, 2016 in New York. AP Photo/Mark Lennihan

A Coca-Cola delivery truck drives past an office tower under construction at Manhattan West, Thursday, Nov. 3, 2016 in New York. AP Photo/Mark Lennihan

Can Quincey cut the mustard?

James Quincey is stepping into a morass of regulatory battles, changing tastes, and slumping returns. There may be no one more qualified for the job, but the status quo will not be enough to revive Coca-Cola’s stock. In recent years, the company has acted incrementally — cutting, costs, making acquisitions, launching new marketing campaigns — but it hasn’t been enough to reinvigorate its core brands.

Coke may need to think bigger. For instance, scientists are working to make a calorie-free soda that tastes like the real thing, using sugar substitutes like stevia. Such a beverage could capture consumers who have been ditching sodas because of calories or artificial flavors. Pulling off such a feat won’t be easy, but an innovative push like that is more likely to generate long-term growth than Coca-Cola’s current strategy.

Investing in food is another such option. Though management has resisted it in the past, the company recently considered taking a stake in yogurt-maker Chobani before backing out.

It’s clear what Warren Buffett meant by his “ham sandwich” comment — Coke’s brands are so powerful and its business is so simple that the company is essentially a profit machine.

But that logic only applies to a market when soda sales have organic long-term growth ahead, not one in which public sentiment is turning against beverage-makers.  As Buffett may already know, today’s consumers don’t want any old ham sandwich. They want organic, grass-fed porchetta on a fresh-baked ciabatta with garlic aioli and house-made pepperoncini.

Today’s Coca-Cola requires a strategy beyond the stewardship of a perpetual profit machine. If Quincey is going to deliver for investors, he needs to aim for a higher standard than an ordinary ham sandwich.

CHRIS SALAMONE

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A 75-year history of how Americans spend their money

Consumers are the foundation of the U.S. economy, and how they choose to spend their money is a telling indicator of the overall American economic story.

CHRIS SALAMONE

The above chart from HowMuch.net, a cost information site, plots data from the Bureau of Labor Statistics (BLS) for 12 different consumer categories over a period of nearly 75 years to show the changing way in which Americans spend their money.

The data reflects median spending, and is adjusted for inflation.

1

BACK IN THE DAY…

One of the most interesting things about this chart is the data from 1941. What did Americans spend their money on before entering WWII, and how does that contrast with today?

Interestingly, in 1941, more money was spent on food than anything else. That year, the cost of putting food on the table averaged $8,311, coinciding with a time when nearly 15% of the workforce was working in agriculture. Today, farming is obviously much more technologically advanced, and food is also grown cheaply in other countries for consumption in America.

Food is now only the third-most important spending category for Americans at $6,759 per year, and only 1.6% of Americans now work agriculture, according to the World Bank.

Housing has also changed dramatically over time. While it has always been a key component of spending, shelter was actually cheaper ($7,537 per year) than putting food on the table in 1941. Since then, rents and house prices have risen substantially, and Americans now spend $17,798 per year on housing. This makes it by far the largest expenditure, on average, for each person.

TRENDING UP, TRENDING DOWN

Over the years, cost reductions can be seen the most in both clothing and food categories, which have benefited from new technologies and cheap labor in other countries.

Meanwhile, significant increases in spending can be found in healthcare, education, and transportation categories.

Healthcare spending in the U.S. is a global outlier (and not in a good way), and we previously noted that textbook and tuition costs have increased 207% and 197% respectively since 1996.

Lastly, the trend for money spent on transportation appears to reflect the cost of oil, which hit its highest points in the early 1980s and late 2000s. The most recent year of data from 2014 shows a notable decrease in transportation costs, which likely reflects the collapse in oil prices that occurred in mid-2014.

Chris Salaome

 

Read the original article on Visual Capitalist.

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Wall Street hasn’t seen the Santa Claus rally just yet

Ever year while stock traders recover from their Thanksgiving hangovers, they look for what has become the clichéd Santa Claus rally into year end.  But since Donald Trump’s election, stocks have already rallied strongly well beyond the statistical average.  This has begged many to ask: Has Christmas come and gone early this year?

Runners dressed in Santa Claus costumes take part in the Santa Claus Run in Budapest, Hungary December 6, 2015. REUTERS/Bernadett Szabo

Runners dressed in Santa Claus costumes take part in the Santa Claus Run in Budapest, Hungary December 6, 2015. REUTERS/Bernadett Szabo

The answer lies partly in the foundation for the year end rally. By understanding its causes we are in a better position to determine whether they still apply and the rally will continue.

Chris Salamone

 

Does Santa Exist?

The original Santa was certainly real. The ‘Santa Rally’ was first referred to in 1972 by Yale Hirsch in his Stock Trader’s Almanac. It used to refer to a rise in stock prices in the week between the Christmas holiday and the end of the year, a period which is only four or five days.

According to the 2016 Stock Trader’s Almanac “since 1969 the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons — the last five trading days of the year and the first two trading days after New Year’s. The average cumulative return over these days is 1.4%, and returns are positive in each of the seven days of the rally, on average. Nevertheless, each year there is at least one day of declines. Alternative research over a longer period confirms the persistence of these trends: According to historical data going back to 1896, the Dow Jones Industrial Average has gained an average of 1.7% during this seven day trading period, rising 77% of the time.”

But, as with many of these sought after market aphorisms, they develop loosely over time. Any sizeable rally now in December invokes the Santa comparison often due to wishful thinking that the rally will continue until year end but also it sells more media copy to say you ‘believe in Santa’. The term ‘Santa Rally’ now is perhaps wrongly applied to a significant upswing within the extended phase from Thanksgiving to New Year.

If one compares December to other months of the year it is by no means the worst but, since the DJIA started in the late 1890s, the average December return has been a disappointing -0.04%. July fares much better. But the pattern over the last 87 years is clear.

Ed Matts

Ed Matts

The causes are less clear.

‘Christmas Comes But Once A Year’

Each year my wife wants to do Christmas differently. And each year we do the same. Why? Because me and my five children like it that way. Markets also have a habit of repeating themselves.

As Jesse Livermore, the famed stock trader of the first half of the 20 th century, said:

“Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.”

If traders and investors and confronted by similar conditions, they are likely to act in a similar way as their decisions are driven by similar conditions including greed, fear, complacency and even short-sightedness.  This process is further entrenched by algorithmic trading as firstly the data on which those algos are often created is itself sentiment driven data and secondly by the necessarily repeating nature of algos. They will, not might, repeat themselves if confronted by the same conditions.

But can those conditions be similar? Once you strip out the detail and the noise, there are not as many different types of variables as people imagine and their effect on markets are even fewer. Markets are like a ball rolling down {or up?) a hill. The ball will always roll the same way unless the wind blows it in a different direction. And It is remarkable how few different market reactions there are. Of all the markets we cover at Matrixtrade.com the complex US stock market has the fewest different types of patterns.

So what are the specific conditions in December?

Santa’s 7 Elves

There are seven possible reasons that help cause the Santa rally and could still apply even now.

1. Tax. The US tax year ends on December 31 st . In order to crystallise capital gains tax losses to use against other gains, both 401K investors and hedge funds typically sell losing stocks in December, to rebuy them in January. But if the losses had already happened earlier in the year (as is often the case), the net effect is, paradoxically, to drive the market up. The losing stocks do not decline further, but as there is little interest in selling a winning stock, the market stabilises or rallies. Furthermore as more people use tax-sheltered retirement plans they have no reason to sell at the end of the year for a tax loss. In both cases, it serves not to depress but often drive the price up more. Still Applies.

2. Window Dressing .  US Hedge funds and other corporations that trade stocks also report portfolio holdings as well as earnings as of December 31 ST This encourages the sales of losing stocks and the retention of the, often still rising, winning stocks. Still Applies.

3. Cash Charges.   A further hedge fund issue is cash holdings. Investors are charged an AUM [Asset Under Management] fee, typically 2%, and since 2008, cash at bank, or AAA bonds have yielded much less than this, leaving people distinctly unimpressed to see cash on the balance sheet. Another incentive to convert cash into stocks by buying those that are trending higher into year end. Still Applies.

4. Feel Good Factor.   The general feel good factor of the holiday season. At this time of year, we are surrounded by positive messages. Not just goodwill and hope, but a frantic increase in retail commercial activity which is visible to all. There is no mandate to report Black Friday results, so all one hears are the good ones. Still Applies.

5. Illiquidity. Less liquid markets tend to accentuate trend moves. One minor theory is that professional short sellers are on vacation. ‘Bear raider’ firms tend to operate during the summer, when, due to ‘Sell in May’ theory, their likely returns are greatest. Come winter time they may take a long vacation. There may have been a grain of truth in this once but in a world with a much shorter time horizon this argument becomes almost apocryphal. More importantly as many close or wind down their trading for the year, volumes and liquidity does decline. This tends to exaggerate moves and allow those, with reason still to trade, to dominate.  Still Applies.

6. Christmas Cash Flow. Another alleged cause is ‘the Christmas bonus’ in pay packets. This rush of investor money into equities is not substantiated. However, as again Jesse Livermore hinted,  a bent on making more money to pay for Christmas may encourage traders to over-pursue a prevailing trend. “There isn’t a [trader] on Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motorboat or a painting. Of all the hoodoos in Wall Street, the resolve to induce the stock market to act as a fairy godmother is the busiest and most persistent.” Similarly. In a more modern context , in a year where hedge funds have underperformed they will be tempted to chase the year end rally in order in a bid catch up to their benchmark, i.e. buying high betas stocks or leveraging low beta stocks so their beta of their portfolio is higher than their benchmarkStill Applies.

7. Self-fulfilling Prophecy.   The more people expect a Santa rally the more likely they are to buy stocks in the December period. Some attribute the more recent Santa rally phenomenon as front running what was traditionally known as the January Effect where (small cap rather than mid to large cap) stocks would rally at the start of the year.    Still Applies.

The number of internet searches for ‘Santa rally’ reflects the extent to which people are aware of the phenomenon even if they do not intend to buy into it.  Interestingly the apparent interest in the Santa has been subdued compared to previous years probably due to the prevalence of the Trump effect. Only now does it appear to be gaining some traction.

Matrix trade

Matrix trade

Even though December is normally and increasingly dominated by the Christmas spirit from start to finish, what we are seeking is to isolate a sizeable rally of more than 4-5 days. We have already seen one will we see another?

Naughty or Nice

Over the last 16 years the S&P has developed a dominant pattern.

Matrix trade

Matrix trade

For whatever reason, SPX appears to have a propensity to rally in the first half of December. This could generally be caused by anticipation of the Santa rally but consequently is often subject to a mid month sell off to take out any weak premature buyers.  A fake Santa then reminiscent of the naughty French Pere Fouettard who handed out coal and floggings to children as he accompanied St Nicholas on December 6 th .  In this case the rally has clearly been inspired by the election President Trump who promises fiscal expansion instead.  But will it still be subject to a nasty mid month sell off?

The market has been thrown by the election of the potentially radical Donald Trump rather than the ‘more of the same’ candidate Hillary Clinton. An aggressive 5% sell off on the night of his election (in line with the pre-election orthodoxy of Sell Trump Buy Clinton) followed by a sustained break to new all time highs. The market may now be compensating in the shorter term with a similar 5% rally from the immediate pre-election night high.

But there are 3 dominant factors that suggest we are yet to see the Santa rally.

1. Markets tend to trend until the reason for the trend is confirmed or denied (buy the rumor sell the fact). We will only start to know if the Trump Presidency will be inflationary from January at the earliest.

2. Stock markets are acting very similar to the 1929/1987 style blowouts we have touted for the last 3 years.

3. Any one or combination of the specific reasons for the Santa rally are yet to apply.

We have a very clear view what this will entail in the shorter and medium term not just for American stocks. Those receiving our free weekly newsletter https://www.matrixtrade.com/register/ can see how it translates to the German DAX and UK FTSE stock markets and subscribers to MatrixTrade.com can see our projected levels and trading strategies.

This year Donald Trump’s Christmas turkey may not be stuffed or half-baked but will probably be celebrated.

Read the original article on Matrix Trade. Register now at matrixtrade.com for more articles like this, and to see our range of premium subscription services. Copyright 2016.

CHRIS SALAMONE

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Here’s how Mark Zuckerberg made $5.9 billion in 2016

If Mark Zuckerberg wasn’t planning to give away 99% of his family’s Facebook shares before he dies, I bet he’d be a trillionaire at some point in his life. For now, though, he’ll have to settle for a net worth of $51.7 billion, according to Bloomberg’s Billionaire Index. That’s up $5.9 billion year to date as of this writing.

Getty Images

Getty Images

His wealth increase was driven by his 14% stake in Facebook. The stock price increased a solid 13.5% so far this year, although it was up more than double that amount at one point this year. Those gains were offset by the sale of some of Zuckerberg’s stock to fund the Chan Zuckerberg Initiative, the vehicle through which Zuck plans to donate 99% of his stock.

Chris Salamone

Facebook’s revenue and earnings growth didn’t slow down

Throughout 2016, Facebook consistently posted earnings results that beat analysts’ expectations. Over the last four quarters, Facebook grew its revenue 55% to $24.7 billion. What’s more, its net income grew a whopping 165% to $7.5 billion.

Those strong results were fueled largely by continued user growth, increases in engagement, and more advertising in Facebook’s News Feed and Instagram.

Monthly active users (MAUs) increased from 1.55 billion at the end of the third quarter last year to 1.79 billion today. Daily active users (DAUs) increased from 1.01 billion to 1.18 billion. Engagement also increased as evidenced by the DAU-to-MAU ratio improving to 66% this year.

Facebook also provided an update on average user time spent per day across Facebook, Instagram, and Messenger. Users now spend an average of 50 minutes per day as of the company’s first-quarter earnings report. That’s up from the 40 minutes per day the company reported in the second quarter of 2014.

Additionally, Facebook has managed to display more advertisements in user’s News Feeds and Instagram feeds. Total ad impressions increased 50% in the third quarter, in line with the first and second quarter. What’s more, Facebook has managed modest average ad price increases while increasing its revenue so significantly.

Just a little bit of bad news

But a few pieces of bad news kept Facebook stock from flying too high this year. In February, India’s telecom regulator banned Facebook’s Free Basics app in the country, saying it violates net neutrality principles. Free Basics allowed users to access select apps (including Facebook) without the data counting against their data caps. The ban was seen as a major blow to Facebook’s ambitions in the huge emerging market.

Additionally, despite reporting strong results for the third quarter, investors were scared by comments from CFO Dave Wehner saying ad load would have less of a meaningful impact on revenue growth. “With a much smaller contribution from this important factor going forward, we expect to see ad revenue growth rates come down meaningfully,” Wehner said on the third-quarter earnings call.

The comments sent Facebook shares tumbling from an all-time high of $133.50 before Facebook reported its third-quarter earnings.

The Chan Zuckerberg Initiative launches

Zuckerberg has already started to make good on his plan to donate 99% of his wealth to nonprofits over his lifetime. Shareholders approved a complex 3-for-1 stock split in June, which established a new class of shares (class C) that hold no voting power. The new class of shares should enable Zuckerberg to make good on his promise without losing control of his company.

In August, Zuckerberg sold $95 million worth of stock — about 0.2% of his net worth at the time — to fund investments made by the Chan Zuckerberg Initiative. The CZI’s first investment led the Series B funding round for Andela, an Africa-based coding bootcamp and four-year fellowship program for software engineering. It also led a $50 million round of investments for Byju, an app-centric education start-up based in India.

In September, the Chan Zuckerberg Initiative announced plans to invest at least $3 billion over the next decade toward preventing, curing, and managing all diseases by the end of the century.

Overall, it was a pretty good year for Mark Zuckerberg. He’s about $6 billion richer than he was last year, and he’s been able to help make the world a better place.

Chris Salamone 

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Secrets to Being Super Successful

The difference between who you are and who you want to be is what you do

Super successful people understand that there are traits, behaviors, and actions they must take in order to succeed.

Their thinking is, “I will do what it takes to get to where I want to go” They know success doesn’t come to them. They have to go out and get it for themselves.

Here are 13 ways super successful people manage to be so successful.

1. Super successful people are always prepared.

Prepare for opportunities by creating a comprehensive strategic plan incorporating your vision, values, and goals. This means a strong understanding of the new knowledge environment. To multiply the options available to you and make the most of them, keep learning and becoming better at what you do every day.

2. Super successful people speak their mind.

Be consistently candid and honest. Make it a point to speak what’s on your mind without fear of judgment. By speaking the truth and being honest, you can support your words with actions that will help you pursue your success. Simply thinking for yourself can make you unforgettable.

3. Super successful people honor their values.

Formulate your own code of conduct based on your most important values, and make sure your conduct is grounded in it. If you value excellence, make everything you do excellent; if it’s teamwork, make everything about doing things together.

4. Super successful people harness their mental toughness.

Everyone faces challenges and obstacles. Whatever yours look like, overcome them with hard work, resilience, and tenacity. Surround yourself with good people who can see things from a different perspective and shed light on the darkest of situations. Finally, walk through your fears to make yourself mentally tough. When you do, you will begin to attract more opportunities and be known as someone who can take the heat.

5. Super successful people embody their self-assurance.

Be confident in yourself without requiring constant input or feedback from others. Instead, develop the ability to get work done independently without any hand-holding as a path to confidence in your own capabilities and competence. Lead with confidence but ask for help when you need it.

6. Super successful people manage their stress.

There will always be something that goes wrong, something that causes stress, something that isn’t working, something that’s upsetting. Learning the stress management techniques that work for you will not only make you successful but help you become a positive example to others.

7. Super successful people are constantly pushing past their status quo.

The difference between someone who’s highly successful and someone who’s simply in a position of authority is easy to spot — the highly successful person will continue to work on improving his or her skills. After a certain amount of success, the temptation to maintain the status quo is great, but a commitment to always keep growing, learning, and evolving will always pay off.

8. Super successful people successfully maintain their discipline.

The key to a disciplined life is identifying the most important things to you and establishing barriers to protect those things. There will always be people, opportunities, ideas, and distractions coming at you all at once, but by being disciplined and purposeful, you can be open and still stay in control. Knowing what to say yes to and what to turn down can be the difference between success and failure.

9. Super successful people are always challenging themselves.

It’s a wonderful thing when you can find a new way to express a concept — to see with fresh eyes and communicate the things most people overlook. Work every day to find new perspectives on challenging ideas and new ways to convey them that bring others on board.

10. Super successful people know how to embrace their discomfort.

Learn to become comfortable with being uncomfortable. Many people start out with great intentions but are unable to move forward because they fear rejection, failure, or a bruised ego. Find ways to identify and process your fear, leave your comfort zone, and embrace the things that challenge you.

11. Super successful people are exemplary conductors of their lives.

Most successful people are adept at planning, coordination, and collaborating — and they got there by building habits of organizing, arranging, systemizing, and scheduling to make things happen. You can start today to do the same, become a conductor, bring together different elements seamlessly and effectively. This will be the hallmark of your success.

12. Super successful people are consistently working on their impact.

Influence is about being able to cajole, encourage, and incentivize people. It’s not about elevating yourself but lifting up others. Other forms of power are limited by what you can command or control, but working on your impact allows your ideas to expand far beyond your personal limits.

13. Super successful people are always holding themselves to a higher standard.

More than anything else, high standards are a prerequisite for success. You will always have opportunities to cut corners, do things halfway, and show up halfheartedly, but if you hold yourself and others to a higher standard, you’ll be surprised at how much they (and you) can stand out and succeed.

Chris Salamone

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What companies get wrong about motivating their people

Duke University professor and author Dan Ariely. (Photo: Center for Advanced Hindsight, Duke University)

Duke University professor and author Dan Ariely. (Photo: Center for Advanced Hindsight, Duke University)

A few years ago, behavioral economist Dan Ariely conducted a study at a semiconductor factory of Intel’s in Israel. Workers were given either a $30 bonus, a pizza voucher or a complimentary text message from the boss at the end of the first workday of the week as an incentive to meet targets. (A separate control group received nothing.) Pizza, interestingly, was the best motivator on the first day, but over the course of a week the compliment had the best overall effect, even better than the cash. “When I get the money, I’m interested, when I’m not getting the money, I’m not so interested,” Ariely said in a recent interview. “Even relatively small bonuses can reframe to people how they think about work.” 

Ariely describes this study, and others, in his new book, “Payoff: The Hidden Logic that Shapes our Motivation.” Short and readable, it is part of a series of TED Books that go beyond the talks but aren’t as long as a typical book. Ariely’s latest exploration of why we do what we do looks at intrinsic motivation, the importance of a sense of creation and mastery on the job, and even how our own mortality shapes our motivation. Many of its observations focus on how people are paid in today’s companies — and where companies go wrong.

The Post spoke with Ariely, a Duke University professor of psychology and behavioral economics who has also written popular books about dishonesty and what leads to irrational decisions, about everything from CEO pay and cubicles in the workplace to finding meaning in our careers. The conversation has been edited for length and clarity.

What was your motivation for doing a book about, well, motivation?

Doing research with companies on motivation is unbelievably difficult, time-consuming and rare. The experiment we did with Intel, for me, was so important because as I spend more time with companies, I see that the largest line item is salaries and compensation. It’s a problem that people in companies are not spending enough time on and thinking enough about. And then, as a social scientist I think it is such a general problem to think about: The marvels of human motivation.

One of the things I found most interesting in it was the discussion on meaning and work. Talk about “purpose” has become a big buzzwords in Corporate America today. But meaning at work can be as simple as getting to do work where your projects aren’t killed off or you’re actually creating something and seeing it through. What do corporations get wrong about this?

Often what it means is that the CEO picks a charity that they give money to. That’s often corporate social responsibility. But the reality is that a lot of meaning is about the small struggles in life and managing to overcome them and feeling a sense of progress. It’s not so much about having an overarching goal that is 20 to 30 years ahead. I think in the workplace there’s lots of things that we do that are small steps of making progress. Companies often don’t create this kind of sense of connection and meaning. They destroy it — unintentionally — with rules and regulations.

I wrote a paper earlier this year for the Mayo Clinic Journal. Every year, 400 physicians commit suicide. Of course, this is an extreme example. But take people who are committed to medicine, joined because they want to cure people, and most of their time they have to fill out paperwork. This is not what they signed up for. It’s an extreme example, but an example of how we take people who are committed to their work and we destroy their motivation.

In many companies, in the name of bureaucracy and procedure and streamlining things, we’re basically eliminating people’s ability to use their own judgment. We think about people as cogs. And because of that we eliminate their motivation.

You’re critical of the role cubicles play in demotivating people. What could companies do instead?

Imagine that you wake up next to your significant other every morning, and you look lovingly into their eyes and say “should we do this for another day or stop here?” Imagine that’s the kind of contract you had. How much would you invest in each other? Very little, right?

The same thing is true for employees. There is specific and general human capital. General human capital is when you learn something that could be used everywhere, like Excel. Specific human capital is something you can learn that only works in your company. By getting people to not think about the long term, companies are not getting people to invest in long-term specific human capital.

So what does this have to do with cubicles?

They give people a sense that they’re interchangeable. The cubicle is a mechanism to signal to people that they are replaceable and temporary. If you look at the walls at Zappos, people have cubicles there, but they get to decorate them in such a way that each cubicle has the same amount of decorations as a small house. Yes, it is a cubicle but it feels like it has your whole personality connected to it.

What do you think companies get wrong about monetary incentives, such as bonuses?

There’s lots of reasons to give people bonuses — for accounting purposes, or for tax efficiency, if you give people stock options. But in terms of motivation, again, what we find is what is really important is the connection between the person and the company. Think about the idea of goodwill. In most jobs we’re relying on people’s goodwill and we’re relying on more and more overtime. What gets us goodwill is to feel that we’re a part of a family, a part of an organization that we’re proud of. It’s not thinking about yourself as an individual just trying to maximize your revenue.

You’ve done some research in the past where you actually found that large bonuses can backfire.

People expect that as the bonus increases, people will work harder or perform better. But the reality is that as the bonus increases people choke and they actually don’t work as well. Now, this finding is true for tasks that require creativity, problem solving and cognitive capacity. It doesn’t hold for tasks that require just manual labor. As long as it’s just technical, as long as it’s Charlie Chaplin kind of stuff, then there’s no problem.

With cognitive tasks, we don’t have the same control. If I say think harder, by trying to think harder, part of your brain is occupied by “am I thinking harder?” and you actually think less hard. If you go into surgery, you don’t want your surgeon to think about bonuses, or about statistics. You want your surgeon to be in a state called ‘flow.’ You want her to be completely immersed in her work. Big bonuses distract people.

What’s your take on the accounts scandal at Wells Fargo?

This is just speculation, but what worries me about Wells Fargo is it wasn’t a couple of people who were doing it. It was clearly part of the culture.

I’ll give you an example from a different company that fixes gas leaks. They had a procedure where they asked people to park illegally, as close as possible to the gas leak, and then they had a procedure for how to submit their parking tickets if workers got one. This company also asked employees to wear protective gear when they were fixing the gas leaks, and they were shocked that people were not always wearing the protective gear. But of course they wouldn’t. You just told them speed is more important than the rules with the parking — so why isn’t speed more important than the rules in other things as well? You have to think about they’re told culturally, not just by the CEO.

When it comes to the rank-and-file employees, should we bother paying bonuses?

No. I don’t even think we should pay bonuses to CEOs. There’s lots of reasons to give bonuses. Some are for accounting purposes — a company says ‘Let’s not promise people a fixed amount of money: You’ll get at least x, above that we’ll do revenue sharing.’ I understand that. It depends on how much money we make. But when you have performance-contingent bonuses — and this goes back to the book — to motivate people, what you are assuming can hold people back. Imagine I paid you on a performance-contingent approach. What is my underlying assumption? My underlying assumption is that you know what you need to do but you’re too lazy to do it.

You’re saying they know what to do but they’re not doing it. We first need to ask ourselves whether this is the real issue. Maybe you don’t feel connected to the goal of the company, right? And then the money, yeah, it might push you a bit further, but it’s not solving the problem in a deeper way. Or maybe we would find out that you don’t know how to do things better; that if we invested in your education, we would have gotten [better] performance.

Now, let’s just mention CEOs. How many CEOs are just lazy? Who’d say, if they didn’t have the bonus, that I’m not interested in working? CEOs are deeply involved in their companies. Their egos are tied to it. The second thing they tell you after they say their name, often before they tell you how many kids they have and what hobbies they have is what company they are leading. To think that they’re just working for a bonus is just completely crazy.

So how would you suggest boards redesign pay programs for executives if they wanted to base it on an evidence-based, behavioral economics approach? Should they just pay a fixed salary and no performance-contingent amount?

You want to pay people well, but it’s unclear to me that the bonus is the right way to do it, outside of the accounting thing. I think CEOs should get a good fixed amount — I don’t want the CEO to worry about their own salary. But I don’t want them to be motivated by quarterly or yearly earnings. I think they should think about the long term rather than the short term.

The whole concept of pay-for-performance, I think, is very good for some very very specific jobs and completely irrelevant for most of the jobs that we do. What is it relevant for? Sales is a very tough job. It’s just very depressing. Paying people for every bit of success is one reasonable solution. But how many CEOs do you know who are really saying, ‘you know what? Should I stay home and play with my kids or should I go to work?’ and then the bonus shifts that equation for them. It just doesn’t happen. All the CEOs I know are extremely, extremely motivated by lots of things. The bonuses of course are good for them, but from a shareholders’ perspective, it’s a waste of money.

Chris Salamone

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Bill Gates says the author of this book ‘could not have predicted how resonant’ it would be in 2016

Bill Gates, co-chair of the Bill & Melinda Gates Foundation, speaks during a discussion on innovation. (Joshua Roberts/Reuters)

Bill Gates, co-chair of the Bill & Melinda Gates Foundation, speaks during a discussion on innovation. (Joshua Roberts/Reuters)

The books on Bill Gates’ annual end-of-year book list this year are the usual mix of science, business, personal passions — and, as Gates calls them, “books about mundane stuff that are actually fascinating.” The Microsoft co-founder and Gates Foundation co-chair included “The Gene,” Siddhartha Mukherjee’s history of genomics, along with “String Theory,” a collection of essays by David Foster Wallace about tennis, which Gates loves to play. “The Grid,” a book about America’s aging electrical system, gets an honorable mention. And Gates calls “Shoe Dog,” Nike founder Phil Knight’s memoir, “a refreshingly honest reminder of what the path to business success really looks like: messy, precarious, and riddled with mistakes.”

Yet the fifth book in the quintet of recommendations is particularly relevant this year: “The Myth of the Strong Leader: Political Leadership in the Modern Age.” The author of the 2014 book, Gates wrote in a blog post about his selections, “could not have predicted how resonant his book would become in 2016.” This year’s election prompted Gates to pick up the book, he wrote. The author, Oxford University professor Archie Brown, Gates wrote, “shows that the leaders who make the biggest contributions to history and humanity generally are not the ones we perceive to be ‘strong leaders.’ Instead, they tend to be the ones who collaborate, delegate, and negotiate — and recognize that no one person can or should have all the answers.”

In a longer review of the book, Gates explains Brown’s core argument, a leadership truism many will recognize. “Despite a worldwide fixation on strength as a positive quality, strong leaders — those who concentrate power and decision-making in their own hands — are not necessarily good leaders,” Gates writes.” Instead, Brown’s book posits that those who make the biggest difference “are the ones who collaborate, delegate, and negotiate — the ones who recognize that no one person can or should have all the answers.”

While the book covers the people you’d expect in such a book — Hitler, Stalin, Mao — it’s at its most fascinating, Gates writes, when featuring those who most people with a casual acquaintance with history wouldn’t know, such as Spain’s Adolfo Suárez. “These leaders didn’t insist on their own infallibility or claim exclusive power over policy decisions,” he said. “And yet they pulled off incredible feats of leadership simply by working with others and seeking advice when they needed it.”

Curious to get Brown’s views on the most recent presidential election, The Post reached out to the emeritus professor, who has studied political leadership for more than 50 years. He was hesitant to offer an evaluation of what kind of leader Trump would be, given he has not yet taken office. Yet Brown shared his thoughts about the U.S. presidential campaign — one in which Donald Trump said “I alone can fix it” in a speech at the Republican National Convention, repeatedly criticized Hillary Clinton for her lack of strength or stamina and where his running mate often talked about “broad-shouldered” leadership and called Russian President Vladimir Putin a stronger leader than President Obama.

Below are excerpts of the discussion, which have been edited for space and clarity.

How much have you been talking about your book given that the topic of leadership “strength” was such a theme in this year’s U.S. election?

The only talk I’ve given on the subject of my book was in Doha, Qatar recently. Certainly it came up in discussions there after recent developments in the United States. When I was signing some copies of the book in the main bookshop in Oxford before the American election, an American from Dallas came up to me and looked to see what I was doing. And he said, ‘well, America needs a strong leader and Donald Trump is a strong leader.’ There’s anecdotal evidence and survey evidence that one of the attractions of Donald Trump is that people thought he was a strong leader. I argue that there are lots of other qualities, which are more useful than strength, as defined by someone who’s domineering and maximizes power, and that being a strong leader and being an effective leader are not quite the same thing.

What echoes of your book did you see in this year’s presidential campaign?

I think that certainly the Trump campaign wasn’t characterized by humility. It remains to be seen what kind of team he’ll complete. So far it seems to be a mixture of billionaires and generals — with some exceptions, but they do seem to be somewhat overrepresented. … I think it’s very important there should be diversity of experience within the team. The less the chief executive knows about politics and the outside world, the less political experience that person has, the more the quality and diversity of the experience of the team matters.

Has there ever been a U.S. election where the dichotomy between strong vs. weak leadership was as prominent as it was in this one?  

I don’t think so. I think in Reagan against Carter there was a little of that, but it was all very civilized in comparison with the most recent campaign. Reagan was wanting to make America great again and strong again and implied that Carter had been weak. Though in fact, after the invasion of Afghanistan [in late 1979], the Democratic administration in the United States was already taking quite a hard line against the Soviet Union and building up defenses.

But this campaign — the tone of the campaign — was unlike any in my lifetime. It was so aggressive. It’s one thing to say that you want to defeat your rival. But to say that the rival should be in jail — that was something more reminiscent of a third world country.

You write that “the idea that charisma is a special quality a leader is born with needs to be severely qualified. To a large extent, it is followers who bestow charisma on leaders, when that person seems to embody the qualities they are looking for.” In what ways did you see that play out in our most recent election?

Many people saw Trump as a charismatic leader and then projected their hopes and their existing disappointments. They projected what they wanted to sense onto Trump. It’s rather strange that he was seen as the champion of blue-collar workers when the people he’s appointed [to the Cabinet so far] tend to be people who are very far removed from that milieu. This is a classic example of charisma being bestowed upon somebody.

Charisma really is a value-neutral term. Hitler was charismatic. Mussolini was charismatic. But then on the positive side, Martin Luther King was charismatic. So was Mahatma Gandhi. Everything depends on the values of the person who is deemed to be charismatic. Charisma is not something someone is born with and has all their life. They can lose it. Mussolini at the end was despised by most Italians because he led them into a disastrous war. So charisma can be lost.

Is that easier for people to do — to project those ideas of charisma — onto someone when their policy views are unclear?

I think it is. I think that the more detail on policy someone goes into, the more they may be regarded as technocratic or lacking in charisma. Somebody who paints a bold picture, however remote it may be from reality, is probably more likely to be deemed to have charisma. I think charisma, again, is an overrated virtue.

What would you say is the big takeaway or idea from your book?

That the worship of strength, in the sense of domination and maximization, is the worship of a false god. There are other qualities that are more important in a leader — integrity, intelligence, collegiality, empathy, having a questioning mind — and if we’re very lucky, the person has vision as well. There are many other qualities which are put ahead of strength — and I’m defining strength in the conventional way, as someone who is a maximizer of their power and wants to dominate all and sundry.

There’s a place in your book where you quote Harry Truman talking about Dwight Eisenhower. He suggested that Eisenhower, a general, would be sitting at his desk saying ‘Do this! Do that! And nothing will happen. Poor Ike — it won’t be a bit like the Army.’ Trump is used to being in charge of his business empire. How hard is it for someone accustomed to that kind of hierarchy to make the adjustment?

The military is a very hierarchical organization. So would Trump’s companies be hierarchical — there’s no question about who had the last word there. … That’s one reason why I would hesitate to say what kind of president he’s going to be. When he’s faced with the fact that he can’t simply issue a set of instructions and it’ll automatically happen — because it’s a very complex political system and there are still checks and balances — how he reacts to that will be very important.

Why do you think people are so drawn to this dichotomy between strong versus weak leaders?

It’s hard to say. There’s something rather primitive about it. Going back to a time when there were clans and people looking to the chief, the person who was the ruler was also usually the strongest person or the greatest military person in the group.

CHRIS SALAMONE 

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