6 ms·

That's what Enron did and General Electric under Jack Welch. Up or out strategy. If you put the incentive under delivering something of value too much, you end

That's what Enron did and General Electric under Jack Welch. Up or out strategy. If you put the incentive under delivering something of value too much, you end up with people lying. Sometimes it's not just about star individuals, but star teams.

mikeyouse 12y ago
To provide a counterpoint: Enron collapsed under massive fraud and GE would have been bankrupt if they had to mark-to-market their debt during the financial crisis.
- sopooneo 12y ago
  What does it mean that they would have been bankrupt? I thought (wrongly perhaps) that you were only bankrupt if you couldn't pay your bills. So no matter their true debt back then, doesn't GE's current existence prove they weren't bankrupt?
  - lotsofpulp 12y ago
    I think what mickeyouse means is that if the taxpayers didn't step in to subsidize all the financial institutions, then GE would have bee bankrupt (just like most other financial institutions).
  - mikeyouse 12y ago
    If your assets are worth less than your liabilities, you're technically insolvent. If you can still pay your bills from cashflows, you don't need to claim bankruptcy, but on a long enough timeline without a significant change, you will go bankrupt. There was a long stretch of time post-GFC where this was the case with GE. Banks have to 'mark-to-market' their debt periodically, but since GE wasn't a bank, they didn't abide by the same regulations. Say there were two identical houses on a street with $500k mortgages, but the market crashed, the houses are worth less, and only 1/2 of the mortgages will be repaid. If Bank of America owned the first house, the mortgage asset (it's an asset to the bank) would be marked-to-market and what was formerly a $500k asset would now be worth $250k, and the bank would show a loss of $250k. GE doesn't have to do this and could carry assets at their previous value (and didn't have to mark down bad debt either). To simplify the story, during the GFC, GE had that one mortgage "worth" $500k and debts worth $400k. If they were a bank, they would have had to admit that the mortgage was really worth $250k, and they would've gone into receivership. If not for that accounting quirk and the massive amount of bailout cash they took from the Federal Reserve / FDIC, they would have actually had to declare bankruptcy. Ironically enough, the FDIC program and Federal Reserve are to shore up banks and GE was explicitly not a bank per the above few paragraphs. So make sense of how they got access to bailout money solely authorized to bail out banks.. [1] - $45B in losses buried on GE's balance sheet: http://www.businessinsider.com/henry-blodget-living-on-planet-ge-2009-4 http://www.businessinsider.com/henry-blodget-living-on-plane... [2] - GE borrowed $16B from Federal Reserve: http://www.propublica.org/article/general-electric-tapped-fed-to-borrow-16-billion http://www.propublica.org/article/general-electric-tapped-fe... [3] - FDIC to back $139B in GE Capital Debt: http://dealbook.nytimes.com/2008/11/12/fdic-to-back-139-billion-in-ge-capital-debt/?_php=true&_type=blogs&_r=0 http://dealbook.nytimes.com/2008/11/12/fdic-to-back-139-bill... [4] - GE Borrows $59.3B from FDIC program: http://www.bloomberg.com/news/2010-12-01/ge-borrowed-16-billion-in-commercial-paper-plan-fed-data-show.html http://www.bloomberg.com/news/2010-12-01/ge-borrowed-16-bill...
    - r00fus 12y ago
      Also to note: our megabanks would also likely be forced into restructuring (it's probably a bad idea for a bank to go bankrupt) if they also had to "mark to market" with the same strictness as before. Instead of restructuring, the Fed and FASB decided to blow more bubbles in 2009: http://www.marketwatch.com/story/fasb-approves-more-mark-market-flexibility http://www.marketwatch.com/story/fasb-approves-more-mark-mar...
    - clarky07 12y ago
      > If your assets are worth less than your liabilities, you're technically insolvent. No you aren't. It just means you have a negative net worth. insolvent - unable to pay debts owed. Think of people instead of companies. I suspect a majority of people in America have a negative net worth. That doesn't make them insolvent. It just means they have lots of college loans and they are working to pay them back.
      - barrkel 12y ago
        http://www.investopedia.com/terms/a/accounting_insolvency.asp http://www.investopedia.com/terms/a/accounting_insolvency.as... A situation where the value of a company's liabilities exceeds its assets. Accounting insolvency looks only at the firm's balance sheet, deeming a company "insolvent on the books" when its net worth appears negative.
        clarky07 12y ago
        you added an adjective to the term :-) Yes you can call them insolvent if you want to, but it doesn't mean anything if they can still pay their debts. If the number keeps going down it is certainly a problem, but if it heading back up it is fine. The housing crisis is a perfect example of this. It only became a problem for people who bought more house than they could afford with hopes of selling at a moments notice. My house was as much as 50k underwater (going based on foreclosure sales of identical townhouses) during the crisis. Fortunately, I didn't buy more house than I could afford. I could easily continue to pay my mortgage each month and was never anywhere near bankrupt. I sold the house recently for closer to 10k loss. Was I insolvent when the house was down 50k? No. [1]Cash flow insolvency involves a lack of liquidity to pay debts as they fall due. Balance sheet insolvency involves having negative net assets—where liabilities exceed assets. Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency. [1] http://en.wikipedia.org/wiki/Insolvency http://en.wikipedia.org/wiki/Insolvency
pyre 12y ago
> Up or out strategy I think that 'up or out' is slightly different than 'deliver something of tangible value.' It's possible to keep delivering value without wanting to be promoted into (e.g.) management.
- Fizzer 12y ago
  I think the companies with the "up or out" policy also offer career paths that doesn't lead to management. It's viewed as acceptable to keep getting promoted within an individual-contributor role. They've tried to remove any reason to not be promoted.
clarkm 12y ago
It seems to be working out well for McKinsey.
randomfool 12y ago
The DevDiv org at Microsoft definitely had an up or out strategy, I believe there either was not an upper-limit or it was level 65. My understanding is that Google has an up or out as well, which tops out at level 5 (lower than Microsofts). The issue with the up-or-out at Microsoft was that it was incredibly hard to hire better devs than the ones being forced out (counter-argument- you are supposed to be hiring on future potential). This was seriously compounded by the amount of legacy code- new hires either wanted nothing to do with it, or wanted to replace it en-masse without understanding the requirements. The up or out became yet another puzzle piece during the review cycle- if you did not give someone a promo then you would be pressured to cut them loose.

mikeyouse 12y ago

To provide a counterpoint: Enron collapsed under massive fraud and GE would have been bankrupt if they had to mark-to-market their debt during the financial crisis.

sopooneo 12y ago
What does it mean that they would have been bankrupt? I thought (wrongly perhaps) that you were only bankrupt if you couldn't pay your bills. So no matter their true debt back then, doesn't GE's current existence prove they weren't bankrupt?
- lotsofpulp 12y ago
  I think what mickeyouse means is that if the taxpayers didn't step in to subsidize all the financial institutions, then GE would have bee bankrupt (just like most other financial institutions).
- mikeyouse 12y ago
  If your assets are worth less than your liabilities, you're technically insolvent. If you can still pay your bills from cashflows, you don't need to claim bankruptcy, but on a long enough timeline without a significant change, you will go bankrupt. There was a long stretch of time post-GFC where this was the case with GE. Banks have to 'mark-to-market' their debt periodically, but since GE wasn't a bank, they didn't abide by the same regulations. Say there were two identical houses on a street with $500k mortgages, but the market crashed, the houses are worth less, and only 1/2 of the mortgages will be repaid. If Bank of America owned the first house, the mortgage asset (it's an asset to the bank) would be marked-to-market and what was formerly a $500k asset would now be worth $250k, and the bank would show a loss of $250k. GE doesn't have to do this and could carry assets at their previous value (and didn't have to mark down bad debt either). To simplify the story, during the GFC, GE had that one mortgage "worth" $500k and debts worth $400k. If they were a bank, they would have had to admit that the mortgage was really worth $250k, and they would've gone into receivership. If not for that accounting quirk and the massive amount of bailout cash they took from the Federal Reserve / FDIC, they would have actually had to declare bankruptcy. Ironically enough, the FDIC program and Federal Reserve are to shore up banks and GE was explicitly not a bank per the above few paragraphs. So make sense of how they got access to bailout money solely authorized to bail out banks.. [1] - $45B in losses buried on GE's balance sheet: http://www.businessinsider.com/henry-blodget-living-on-planet-ge-2009-4 http://www.businessinsider.com/henry-blodget-living-on-plane... [2] - GE borrowed $16B from Federal Reserve: http://www.propublica.org/article/general-electric-tapped-fed-to-borrow-16-billion http://www.propublica.org/article/general-electric-tapped-fe... [3] - FDIC to back $139B in GE Capital Debt: http://dealbook.nytimes.com/2008/11/12/fdic-to-back-139-billion-in-ge-capital-debt/?_php=true&_type=blogs&_r=0 http://dealbook.nytimes.com/2008/11/12/fdic-to-back-139-bill... [4] - GE Borrows $59.3B from FDIC program: http://www.bloomberg.com/news/2010-12-01/ge-borrowed-16-billion-in-commercial-paper-plan-fed-data-show.html http://www.bloomberg.com/news/2010-12-01/ge-borrowed-16-bill...
  - r00fus 12y ago
    Also to note: our megabanks would also likely be forced into restructuring (it's probably a bad idea for a bank to go bankrupt) if they also had to "mark to market" with the same strictness as before. Instead of restructuring, the Fed and FASB decided to blow more bubbles in 2009: http://www.marketwatch.com/story/fasb-approves-more-mark-market-flexibility http://www.marketwatch.com/story/fasb-approves-more-mark-mar...
  - clarky07 12y ago
    > If your assets are worth less than your liabilities, you're technically insolvent. No you aren't. It just means you have a negative net worth. insolvent - unable to pay debts owed. Think of people instead of companies. I suspect a majority of people in America have a negative net worth. That doesn't make them insolvent. It just means they have lots of college loans and they are working to pay them back.
    - barrkel 12y ago
      http://www.investopedia.com/terms/a/accounting_insolvency.asp http://www.investopedia.com/terms/a/accounting_insolvency.as... A situation where the value of a company's liabilities exceeds its assets. Accounting insolvency looks only at the firm's balance sheet, deeming a company "insolvent on the books" when its net worth appears negative.
      - clarky07 12y ago
        you added an adjective to the term :-) Yes you can call them insolvent if you want to, but it doesn't mean anything if they can still pay their debts. If the number keeps going down it is certainly a problem, but if it heading back up it is fine. The housing crisis is a perfect example of this. It only became a problem for people who bought more house than they could afford with hopes of selling at a moments notice. My house was as much as 50k underwater (going based on foreclosure sales of identical townhouses) during the crisis. Fortunately, I didn't buy more house than I could afford. I could easily continue to pay my mortgage each month and was never anywhere near bankrupt. I sold the house recently for closer to 10k loss. Was I insolvent when the house was down 50k? No. [1]Cash flow insolvency involves a lack of liquidity to pay debts as they fall due. Balance sheet insolvency involves having negative net assets—where liabilities exceed assets. Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency. [1] http://en.wikipedia.org/wiki/Insolvency http://en.wikipedia.org/wiki/Insolvency

pyre 12y ago

> Up or out strategy I think that 'up or out' is slightly different than 'deliver something of tangible value.' It's possible to keep delivering value without wanting to be promoted into (e.g.) management.

Fizzer 12y ago
I think the companies with the "up or out" policy also offer career paths that doesn't lead to management. It's viewed as acceptable to keep getting promoted within an individual-contributor role. They've tried to remove any reason to not be promoted.

clarkm 12y ago

It seems to be working out well for McKinsey.

randomfool 12y ago

The DevDiv org at Microsoft definitely had an up or out strategy, I believe there either was not an upper-limit or it was level 65. My understanding is that Google has an up or out as well, which tops out at level 5 (lower than Microsofts). The issue with the up-or-out at Microsoft was that it was incredibly hard to hire better devs than the ones being forced out (counter-argument- you are supposed to be hiring on future potential). This was seriously compounded by the amount of legacy code- new hires either wanted nothing to do with it, or wanted to replace it en-masse without understanding the requirements. The up or out became yet another puzzle piece during the review cycle- if you did not give someone a promo then you would be pressured to cut them loose.