Imagine your parents celebrating an F on your report card. From elementary school on, we are taught, “Don’t fail.”

Research institutions in higher education verbalize the importance of learning. They also subscribe to a “publish or perish” culture. This win/don’t lose approach can compromise the espoused values. For example, The Boston Globe (2023) reported that Stanford University President Marc Tessler-Lavigne abruptly resigned in the wake of an investigation into data manipulation in his laboratory (Wosen, 2023). Days later, a Harvard Business School professor was placed on administrative leave for the same reason (Koller,2023).

On the other side of the win/don’t lose continuum, economist Uri Gneezy (2023) relates this story:

During the 1973 Yom Kippur War, the Israeli Air Force (IAF) sent out two formations of F-4 fighters with one mission: Destroy the Syrian military headquarters in Damascus. There was a layer of clouds covering the area., creating a dilemma: IAF planes could fly safely above the clouds but could not see the target or they could fly below the clouds and be easily spotted by Syrian defense forces.

One squadron leader decided to abort the mission. A second leader continued to fly above the clouds. A hole in the clouds appeared above the Syrian headquarters and the IAF was able to destroy the target.

During the post-attack debriefing, the IAF commander commended both squadron leaders for their sound decisions.

Signals that Boards Send to Their CEOs

Gneezy holds the Epstein/Atkinson Endowed Chair in Behavioral Economics at the University of San Diego’s Rady School of Management. He argues that corporate reward systems send powerful signals. And these signals may run counter to leaders’ verbal statements.

For example, many companies verbalize commitment to diversity, equity, and inclusion (DEI). One of the writers of this blog wanted to see whether CEO compensation systems had an impact. He created pairs of public companies of similar size and similar industry sectors and then counted the number of female names listed as vice president or higher.

Consistent with Gneezy’s prediction, companies with the highest number of female VPs had DEI goals as one of the components of the CEO’s bonus program. The board was sending a strong signal to CEOs: Moving forward on DEI will have a positive impact on your personal wealth.

The second important lesson from the research was that the percentage of bonus associated with DEI was less important than the fact that it was in the bonus structure. It didn’t matter whether the percentage was 2% or 5%. Assigning 0 in the bonus calculation sent the strongest signal.

Win/Don’t Fail Culture

A Don’t Fail culture may be counterproductive. Consider Thomas Edison’s search for a filament for the light bulb. After trying two thousand different materials, his assistant complained, “All our work is in vain.” Edison disagreed: “We now know that there are two thousand elements that we cannot use to make a good light bulb.” It took 6,000 failures to find the most suitable filament material.

A positive emotional reaction to failure is required of leaders in certain industries. Venture capital typically experiences a 90% failure rate on investments. The failure rate for pharmaceutical R&D is 90%. The failure rate for software development ranges from 50% to 80%. The failure rate in M&As is 70% to 90%.

In 2005, Steve Jobs, in his Stanford University commencement address, discussed three major failures in his life.

What Are Your Company’s Failure Signals?

If the verbalization is “Fail fast” but bonuses are given only for success, then there is a gap between the signal and the verbalization. This is equivalent to the company espousing the values of DEI but providing zero incentive in its compensation system.

Below is a potential way of transforming the binary concept of Succeed/Don’t Fail into an ordinal framework.

% of Bonus for Item. Description

0 Failed slowly and did not learn from failure.

1 Failed fast and did not learn from failure.

5 Failed fast and learned from the experience.

40 Succeeded and got positive results.

100 Succeeded and met or exceeded expectations.

Beware of Leaders Who Follow ‘Industry Best Practices’

A Win/Don’t lose corporate culture often translates into the following verbalization: “We follow best practices.” This is a good strategy to minimize failure. It will do little for a company’s ability to be successful.

Over time, a “following best practices” corporate culture leads to hiring people who are relatively closed-minded about experimentation. Another problem is the speed of change in your industry. By the time your copycat company manages to institutionalize “best practices,” the real leaders have already moved on.

Are there reward systems in place for heads of functions to try new approaches, fail fast, and learn from failure? Rewards can be financial or public acknowledgments.

Summary and Conclusions:

Win/Don't lose is drummed into us from elementary school on. In business, on the other hand, learning from failure can be positive.

Companies may say they value learning from failure. What is said is less important than the compensation signals sent. Signals may be monetary rewards or verbal compliments. Silence or zero reward sends the loudest signals about your company’s real values.