Been all of an engineer, a manager, and a founder/CEO, and I enjoy analyzing organizational dysfunction.
The difference between an engineer and a manager's perspective usually comes down to their job description. An engineer is hired to get the engineering right; the reason the company pays them is for their ability to marry reality to organizational goals. The reason the company hires a manager is to set those organizational goals and ensure that everybody is marching toward them. This split is explicit for a reason: it ensures that when disagreements arise, they are explicitly negotiated. Most people are bad at making complex tradeoffs, and when they have to do so, their execution velocity suffers. Indeed, the job description for someone who is hired to make complex tradeoffs is called "executive", and they purposefully have to do no real work so that their decision-making functions only in terms of cost estimates that management bubbles up, not the personal pain that will result from those decisions.
Dysfunction arises from a few major sources:
1. There's a power imbalance between management and engineering. An engineer usually only has one project; if it fails, it often means their job, even if the outcome reality dictates is that it should fail. That gives them a strong incentive to send good news up the chain even if the project is going to fail. Good management gets around this by never penalizing bad news or good-faith project failure, but good management is actually really counterintuitive, because your natural reaction is to react to negative news with negative emotions.
2. Information is lost with every explicit communication up the chain. The information an engineer provides to management is a summary of the actual state of reality; if they passed along everything, it'd require that management become an engineer. Likewise recursively along the management chain. It's not always possible to predict which information is critical to an executive's decision, and so sometimes this gets lost as the management chain plays telephone.
3. Executives and policy-makers, by definition, are the least reality-informed people in the system, but they have the final say on all the decisions. They naturally tend to overweight the things that they are informed on, like "Will we lose the contract?" or "Will we miss earnings this quarter?"
All that said, the fact that most companies have a corporate hierarchy and they largely outcompete employee-owned or founder-owned cooperatives in the marketplace tends to suggest that even with the pitfalls, this is a more efficient system. The velocity penalty from having to both make the complex decisions and execute on them outweighs all the information loss. I experienced this with my startup: the failure mode was that I'd emotionally second-guess my executive decisions, which meant that I executed slowly on them, which meant that I didn't get enough iterations or enough feedback from the market to find product/market fit. This is also why startups that do succeed tend to be ones where the idea is obvious (to the founder at least, but not necessarily to the general public). They don't need to spend much time on complex positioning decisions, and can spend that time executing, and then eventually grow the company within the niche they know well.
> All that said, the fact that most companies have a corporate hierarchy and they largely outcompete employee-owned or founder-owned cooperatives in the marketplace tends to suggest that even with the pitfalls, this is a more efficient system.
This conclusion seems nonsensical. The assumption that what's popular in thearket is popular because it's effective has only limited basis in reality. Heirarchical structures appear because power is naturally consolidating and most people have an extreme unwillingness to release power even when presented with evidence that it would improve their quality of life. It is true that employee owned companies are less effective at extracting wealth from the economy, but in my experience working for both traditional and employee owned companies, the reason is employees care more deeply about the cause. They tend to be much more efficient at providing value to the customer and paying employees better. The only people who lose out are the executives themselves which is why employee owned companies only exist when run by leaders with passion for creating value over collecting money. And that's just a rare breed.
You've touched on the reason why hierarchical corporations outcompete employee-owned-cooperatives:
> Hierarchical structures appear because power is naturally consolidating and most people have an extreme unwillingness to release power even when presented with evidence that it would improve their quality of life.
Yes, and that is a fact of human nature. Moreover, many people are happy to work in a power structure if it means that they get more money to have more power over their own life than they otherwise would. The employees are all consenting actors here too: they have the option of quitting and going to an employee-owned cooperative, but most do not, because they make a lot more money in the corporate giant. (If they did all go to the employee-owned cooperative, it would drive down wages even further, since there is a finite amount of dollars coming into their market but that would be split across more employees.)
Remember the yardstick here. Capitalism optimizes for quantity of dollars transacted. The only quality that counts is the baseline quality needed to make the transaction happen. It's probably true that people who care about the cause deliver better service - but most customers don't care enough about the service or the cause for this to translate into more dollars.
As an employee and customer, you're also free to set your own value system. And most people are happier in work that is mission- & values-aligned; my wife has certainly made that tradeoff, and at various times in my life, I have too. But there's a financial penalty for it, because lots of people want to work in places that are mission-aligned but there's only a limited amount of dollars flowing into that work, so competition for those positions drives down wages.
> most customers don't care enough about the service or the cause for this to translate into more dollars.
This is an important point as it reinforces the hierarchical structure. In an economy composed of these hierarchies, a customer is often themselves buying in service of another hierarchy and will not themselves be the end user. This reduces the demand for mission-focused work in the economy, instead reinforcing the predominance of profit-focused hierarchies.
There is a Chinese saying you can conquer a kingdom on horseback but you cannot rule it on horseback. What that means is, yes, entrepreneurial velocity and time to market predominate in startups. But if they don’t implement governance and due process, they will eventually lose what market share they gained. Left uncontrolled, internal factions and self serving behavior destroys all organisations from within.
This is a wonderful summary, very informative. Thank you. Is there a book or other source you’d recommend on the subject of organizational roles and/or dysfunction?…ideally one written with similar clarity.
One thing stood out to me:
You note that executives are the least reality-informed and are insulated from having their decisions affect personal pain. While somewhat obvious, it also seems counterintuitive in light of the usual pay structure of these hierarchies and the usual rationale for that structure. That is, they are nearly always the highest paid actors and usually have the most to gain from company success; the reasoning often being that the pay compensates for the stress of, criticality of, or experience required for their roles. Judgments aside and ignoring the role of power (which is not at all insignificant, as already mentioned by a sibling commenter), how would you account for this?
Most of these organizational theories I've developed myself from observing how actual corporate hierarchies function and trying to put myself (and sometimes actually doing it!) in each of the different roles and think about how I would act with those incentives. I did have a good grounding of Drucker and other business books early in my career, and two blog series' that have influenced my thinking are a16z's "Ones and Twos" [1] and Ribbonfarm's "Gervais principle" [2].
For executive pay, the most crucial factor is the desire to align interests between shareholders and top executive management. The whole point of having someone else manage your company is so that you don't have to think about it; this only works when the CEO, on their own initiative, will take actions that benefit you. The natural inclination of most people (and certainly most people with enough EQ to lead others) is to be loyal to the people you work with; these are the folks you see day in and day out, and your power base besides. So boards need to pay enough to make the CEO loyal to their stock package rather than the people they work with, so that when it comes time to make tough decisions like layoffs or reorgs or exec departures, they prioritize the shareholders over the people they work with.
This is also why exec packages are weighted so heavily toward stock. Most CEOs don't actually make a huge salary; median cash compensation for a CEO is about $250K [3], less than a line manager at a FANG. Median total comp is $2M (and it goes up rapidly for bigger companies), so CEOs make ~90%+ of their comp in stock, again to align incentives with shareholders.
And it's why exec searches are so difficult, and why not just anyone can fill the role (which again serves to keep compensation high). The board is looking for someone whose natural personality, values, and worldview exemplifies what the company needs right now, so that they just naturally do what the board (and shareholders) want. After all, the whole point is that the board does not want to manage the CEO; that is why you have a CEO.
There are some secondary considerations as well, like:
1.) It's good for executives to be financially independent, because you don't want fear of being unable to put food on the table to cloud their judgment. Same reason that founder cash-outs exist. If the right move for a CEO is to eliminate their position and put themselves out of a job, they should do it - but they usually control information flow to the board, so it's not always clear that a board will be able to fire them if that's the case. This is not as important for a line worker since if the right move is to eliminate their position and put themselves out of a job, there's an executive somewhere to lay them off.
2.) There's often a risk-compensation premium in an exec's demands, because you get thrown out of a job oftentimes because of things entirely beyond your control, and it can take a long time to find an equivalent exec position (very few execs get hired, after all), and if you're in a big company your reputation might be shot after a few quarters of poor business performance. Same reason why execs are often offered garden leave to find their next position after being removed from their exec role (among others like preventing theft of trade secrets and avoiding public spats between parties). So if you're smart and aren't already financially independent, you'll negotiate a package to make yourself financially independent once your stocks vest.
3.) Execs very often get their demands met, because of the earlier point about exec searches being very difficult and boards looking for the unicorn who naturally does what the organization needs. Once you find a suitable candidate, you don't want to fail to get them because you didn't offer enough, so boards tend to err on the side of paying too much rather than too little.
Another thing to note is that execs may seem overpaid relative to labor, but they are not overpaid relative to owners. A top-notch hired CEO like Andy Grove got about 1-1.5% of Intel as his compensation; meanwhile, Bob Noyce and Gordon Moore got double-digit percentages, for doing a lot less work. Sundar Pichai gets $226M/year, but relative to Alphabet's market cap, this is only 0.01%. Meanwhile, Larry Page and Sergey Brin each own about 10%. PG&E's CEO makes about $17M/year, but this is only 0.03% of the company's market cap.
There's a whole other essay to write about why owners might prefer to pay a CEO more to cut worker's wages vs. just pay the workers more, but it can basically be summed up as "there's one CEO and tens of thousands of workers, so any money you pay the CEO is dwarfed by any delta in compensation changes to the average worker. Get the CEO to cut wages and he will have saved many multiples his comp package."
The difference between an engineer and a manager's perspective usually comes down to their job description. An engineer is hired to get the engineering right; the reason the company pays them is for their ability to marry reality to organizational goals. The reason the company hires a manager is to set those organizational goals and ensure that everybody is marching toward them. This split is explicit for a reason: it ensures that when disagreements arise, they are explicitly negotiated. Most people are bad at making complex tradeoffs, and when they have to do so, their execution velocity suffers. Indeed, the job description for someone who is hired to make complex tradeoffs is called "executive", and they purposefully have to do no real work so that their decision-making functions only in terms of cost estimates that management bubbles up, not the personal pain that will result from those decisions.
Dysfunction arises from a few major sources:
1. There's a power imbalance between management and engineering. An engineer usually only has one project; if it fails, it often means their job, even if the outcome reality dictates is that it should fail. That gives them a strong incentive to send good news up the chain even if the project is going to fail. Good management gets around this by never penalizing bad news or good-faith project failure, but good management is actually really counterintuitive, because your natural reaction is to react to negative news with negative emotions.
2. Information is lost with every explicit communication up the chain. The information an engineer provides to management is a summary of the actual state of reality; if they passed along everything, it'd require that management become an engineer. Likewise recursively along the management chain. It's not always possible to predict which information is critical to an executive's decision, and so sometimes this gets lost as the management chain plays telephone.
3. Executives and policy-makers, by definition, are the least reality-informed people in the system, but they have the final say on all the decisions. They naturally tend to overweight the things that they are informed on, like "Will we lose the contract?" or "Will we miss earnings this quarter?"
All that said, the fact that most companies have a corporate hierarchy and they largely outcompete employee-owned or founder-owned cooperatives in the marketplace tends to suggest that even with the pitfalls, this is a more efficient system. The velocity penalty from having to both make the complex decisions and execute on them outweighs all the information loss. I experienced this with my startup: the failure mode was that I'd emotionally second-guess my executive decisions, which meant that I executed slowly on them, which meant that I didn't get enough iterations or enough feedback from the market to find product/market fit. This is also why startups that do succeed tend to be ones where the idea is obvious (to the founder at least, but not necessarily to the general public). They don't need to spend much time on complex positioning decisions, and can spend that time executing, and then eventually grow the company within the niche they know well.