Bonus lessons from AIG: crisis management just sets up the next crisis

By Andy Oram
March 24, 2009

The flap over 165 million dollars in bonuses at a company taking federal bail-out money provides an opportunity to rethink how we handle crises. We all can use that once in a while.

When I speak here of "crisis management" I'm talking in of a crude overreaction, where a manager sees an incident that's embarrassing to the organization, calls up underlings, bangs on the table, and says, "Fix this now!" Much of the administrative and legislative branches of the federal government are currently embroiled in this kind of "crisis management," but we've all experienced it at times.

Such management rarely fixes a crisis, but it does set up the next crisis.

To understand why, let's start by assuming that staff are well-educated and competent. (If they aren't, the organization has no hope in any case.) The staff have carefully apportioned their time among projects, setting up checks on things that might go wrong in the future.

With the phone call from the big boss, everybody has to devote some 20% to 80% of their time over several days or weeks to a desperate rescue effort. The more hopeless a recovery is, the more time they must spend on it. And where does that 20% to 80% come from?

Staff has to withdraw that time from projects whose deadlines are far off, and psychologically they're so anxious over the crisis that they can't think about things that might go wrong. The exhaustion brought on by effort and anxiety also weakens their professional effectiveness.

So the manager is sure to be on the phone again in two months saying, "Fix this now!"

Most crisis management of this type is a waste because the horse is already out of the barn and the cat is already out of the bag. By these metaphors, I mean that the crisis has already caused more damage than you can effectively repair, and everybody will continue to think badly of you even after your fumbling efforts to repair it.

I certainly believe in making reparations to injured parties and exploring the roots of a problem to avoid its repetition. But I don't consider those to be crisis management--just solid responsible behavior.

Another problem with crisis management is that it distorts your response and causes you to focus on the wrong things. The AIG bonuses are a perfect example. I don't want to sound cavalier, but in the context of the bailout and the larger economy, 165 million dollars are hardly worth focusing on. The bonuses have nothing to do (except in exposing bad judgment) with the core problem, which is that the true leaders of our country--the financiers--have been investing our assets in the wrong places. Now they're not investing at all. Giving out another 165 million dollars in loans won't make a difference.

Meanwhile, the treasury has released a new plan today to neutralize "toxic" bank holdings by spreading around the pain. It has become a target of criticism right away, for a wide variety of reasons that mainly show how much easier it is to find fault with a plan than to create one. But the plan probably contains sins or omission or commission that, given the current atmosphere of crisis management, will escape public debate. Just as the bonus problem in the bailout bill escaped debate back when such debate might have averted the crisis.

How, then, do you handle a crisis? It helps to think of life as a river. Not only is that a nice calming metaphor, but it reminds you that there is always a fresh batch of water in front of you. And it reminds you that your main job is to be a good steward of this water so you don't poison the people downstream.

Start by trusting your staff to set long-term priorities accurately (partly by conveying to them honestly the long-term priorities of your organization). Tell your staff about problems when you hear about them, and ask the staff to analyze them for root causes and incorporate their lessons into their current planning. Also, ask the people most affected by the problem what they need to fix it.

If leaders throughout government and business could behave that way more often, the lesson would be worth 165 million dollars.

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