Thursday, June 20, 2013

Stars or Performers? A Lesson from Basketball

The basketball team Miami Heat doesn't have a dilemma. They have the star player LeBron James with multiple Most Valuable Player awards and a big press presence, which is important for earning television and other revenues in a sport where keeping a team competitive is much, much more expensive than what one can earn by selling tickets. He was also ranked as the most efficient player in the NBA league by the end of the 2012-1023 regular season. Although finals opponent San Antonio Spurs were able to extend the series to seven games, it is not a big shock that Miami won the championship.

What if you own or manage an NBA team, and you can't get LeBron James to play for your team? He is expensive, and besides, there is only one of him, currently playing for Miami. Well, from then on it gets complicated. There are less efficient player, and players with lower status, to choose from. Put enough of them on a team with an inspired coach, and you can still be competitive because basketball is played with 5 players on the court and a bench of substitutes. But the real dilemma is that the relation between stardom and efficiency is actually murkier than the LeBron James example suggests. Some players will give you one but not (much of) the other. Which do you choose?

The problem is related to how leaders make staffing decisions. Some people are strong contributors, and make a team perform better. Or even an entire organization. Others only have star status, but that is also useful because stardom can bring in more resources, for example by making others more likely to collaborate with the team. In a recent article in the Academy of Management Journal, Gokhan Ertug and Fabrizio Castellucci look at how NBA teams made these decisions. Their results are very interesting. Teams hire in ways that suggest they are well aware of the tradeoffs: they go for stardom when their revenues are down, and they go for efficiency when they don’t play well enough. Moreover, they put money behind these hiring patterns. A player earns more when he goes to a team that has less of what he provides. So if a gifted but underappreciated player wants to win a championship, he should go to a strong team – but he will have to take a pay cut. If he wants to cash in on his skills, he should go to a weak team.

So they are doing the right thing, and this is a problem that managers generally solve correctly, right? Wrong. Basketball players are among the most closely analyzed human beings on earth. Regular fans have a good understanding of efficiency. They also have a feeling for stardom, and they know that they love some players who aren’t that efficient (sports fans understand the heart versus brain tradeoff). Coaches know performance even better, and any biases they might have are kept in check by the use of statistics.

Whenever performance is not so well understood, it is all too easy to assume that the star is also the high performer. Leaders making that assumption will be prone to picking based on past success, and will be overlooking individuals who might make their teams even better. And they will certainly miss the option of picking stardom or performance depending on the needs.