ENRON CASE STUDY
Published Feb. 25, 2020, 10:36 a.m. by Moderator
Enron a case study of how the application of both goal setting and expectancy theory principles helped to enhance employee performance in a negative way?
Process theories are described as systems of incentives that influence how an individual makes decisions. Content theories, on the other hand, are concerned with the actual personal or individual motivations that drive that individual. Examples of process theories comprise goal-setting, expectancy, and equity theories. I believe that employee performance will improve when goal setting and expectancy theories are executed with proper people management skills. This paper discusses the application of goal setting and expectancy theories in relation to Enron, an energy company that emphasized on loft goals that employees could not achieve (Strategies-for-managing-change.com, 2019).
Goal-setting theory is a system of incentives that advocates for improved employee performance through the setting of goals and it is characterized by the difficulty and specificity of the goals and the final result of the goal. This theory contends that the more difficult a task is, the better it is for improving employee performance. Complex work assignments are more involving than repetitive ones and an employee who has completed a very difficult assignment will feel more motivated to perform even better in the next assignment than an employee who has worked on a monotonous desk assignment (iEduNote.com, 2019).
Goals have to be specific to ensure that they are met. Too many nonspecific goals will demotivate an employee and decrease performance. The specificity of a goal makes it easier for an employee to focus their energies on a single complex task rather than multiple assignments each with its own specific goals. Goal setting has to be accompanied by a feedback mechanism that acknowledges outstanding employees. Personal recognition is a key component of advancing successful goal-setting (Bigony, 2018).
Expectancy theory is also known as ‘Vroom’s Theory’, it’s a concept that focuses on the principle that individuals believe that there is a direct correlation between amounts of effort invested in a task, expected performance and the rewards they derive from the effort and performance. It is premised on four assumptions. The first assumption is that individuals join companies with the belief that all or some of their needs or motivations will be met. The second assumption is that these individuals’ decisions will be guided by these needs or motivations. The third assumption is that individuals have different needs or motivations. For instance, some want job security while others may prefer high salaries and promotions (Lunenburg, 2011).
The final assumption is that individuals will make the choice that offers them the best returns and the least losses. The expectancy theory can be summarised as a concept that argues that individuals are motivated based on the expectation that their efforts will result in a favorable performance and that performance will be recognized and compensated and that the compensation or reward will have a positive outcome in their social wellbeing (Lunenburg, 2011).
Enron’s organizational culture was reinforced by motivation schemes which guaranteed, and provided, massive payments in reimbursement packages to outstanding employees. The net result of that was employees were forced to find creative ways to realize positive financial results. Illegal and unethical bookkeeping policies were measures that Enron introduced to give the company a clean bill of health while the converse was actually true. Employees were also guaranteed no cap bonuses for achieving set targets and employees would regularly engage in unethical practices to get big bonuses (Applied Corporate Governance, 2016).
For instance, Enron used bloated financial figures to increase its market valuation. These ‘cooked’ figures showed that the company had abnormally high profitability while in reality the company was strapped for cash. Enron had maximized all its lending options and it did not want to raise cash through the sale of equity as it would give the impression that it was not financially sound. Kenneth Lay, the chairman and Jeff Skilling, the chief executive officer constantly pushed this philosophy to all employees that the main goal of Enron was to drive the company’s share prices to the zenith and all employees who were not meeting these lofty expectations would be shown the door eventually. The normal business practices of maintaining long-term customers and business relationships were secondary in Enron’s organizational culture (Applied Corporate Governance, 2016).
Upon his appointment as chief executive officer, Jeff Skilling embarked on a recruitment drive that focused on recruiting the best and brightest talent from the top universities. Since these individuals were highly sought after, Enron offered very competitive packages that include limo services, gym memberships, individual awards, and 401K with stock options. Enron was also among the top ten countries to work in and this attracted graduates who believed that the company’s reputation would be a big boost on their resumes (Thomas, 2002).
Employees were not allowed to sell their shares and so they lost all their pensions and savings when the company eventually collapsed. Enron’s top management set lofty goals for its employees and created a corporate culture of extreme competitiveness that eventually led to unethical practices by employees to achieve the set targets whether by hook or crook (Kunen, 2002). Goal setting is a standard motivation tool but the goals have to be realistic. If they are unrealistic like in the case of Enron, to achieve higher performance employees will certainly cheat (Healy and Niven, 2016)
Discuss key Performance Management issues in the Enron case and make recommendations on how you would adapt the Performance Management system to overcome these issues in a similar organization. Make reference to relevant literature.
The top management at Enron massively failed in their jobs. There was a lack of clear leadership because the top management that included chairman, Kenneth Lay, chief executive officer, Jeff Skilling and accounting firm, Arthur Andersen were knee-deep in the financial scandal. The eventual collapse of Enron was fuelled by the management’s greed. The unethical business practices that engaged in were solely driven by the need to increase the share prices so that they could make more money from investors and customers. The management was not transparent to its shareholders, customers and employees to a certain extent. Enron management was ultimately arrested, tried and sentenced for their financial crimes (Johnson 46, 2002).
The charge sheet included; borrowing loans from the company’s subsidiaries with no intention of making repayments, tax avoidance, manipulation of electricity prices in California, bribery of foreign government officials to secure lucrative contracts abroad, accounts fraud to portray profitability, wire fraud by transferring sums of money from one account to another to boost their earnings reports, manipulating federal energy laws and conspiring with financial analysts to give the company a clean bill of health (Johnson 46, 2002).
The management styles of chairman Kenneth Lay and chief executive officer Jeff Skilling were termed as ‘ruthless’ and ‘authoritarian’. The two captains had massive egos and did not tolerate any form of dissent. The vice chairman’s position was a revolving door of one candidate after another as Kenneth Lay did away with vice chairmen’s who posed a threat to his position. Jeff Skilling was not different either. He fired employees with such regularity and he eliminated all his company rivals. He also bullied employees who were so fearful to not get in his line of fire (Johnson 47, 2002).
There was a lack of supervision and chronic mismanagement. Managers did not always know what the employees were up to and most did not understand how the business operated. The company’s board did not provide proper oversight. They did not interrogate business policies and financial reports. The board was also composed of Kenneth Lay’s business partners and associates that were only loyal to the chairman.
During congressional hearings, members of the board including Kenneth Lay himself claimed that they did not know the unethical practices that were going on in the company. The congressional meeting later declared that the board had full knowledge of the unethical business practices. The board either chose to ignore the unethical business practices or chose to benefit from them. Board members waived conflict of interest in Enron’s code of conduct that would have prevented some of the unethical business practices that Enron was engaged in. (Johnson 47, 2002).
Kenneth Lay did not set a good example for the employees. His lavish spending habits ultimately led employees to adopt them. Kenneth Lay once remarked that he had given his wife Linda Lay a spending budget of $2 million that she eventually gobbled up. The Lay’s borrowed $75 million from the company which they repaid using their shares which were rendered useless when the company collapsed. Kenneth Lay is known to have spent huge amounts on lavish gifts for friends and employees alike. Employees chose to follow his practices and they decided to engage in unethical business practices that would make them the most money (Johnson 47, 2002).
Kenneth Lay was the highest donor in George Bush’s election campaign. He spent a lot of money in both the Democratic Party and Republican Party campaigns (Oppell Jr and Van Natta Jr, 2002). The donations were used to influence government officials to be ‘friendly’ to Enron. The company was able to lobby both parties to appoint ‘friendly’ appointees in both the SecurityExchange Commission (SEC) and the Federal Energy Regulatory Commission(FERC) which allowed their operations to continue unabated without government scrutiny. Government officials endorsed Enron’s activities and were very instrumental in Enron securing energy and water deals around the world. The management was very sensitive to negative market reactions. Kenneth Lay pulled out of a deal with Merrill Lynch to pressure them to fire a financial analyst who had reduced the value of Enron shares (Johnson 48, 2002).
Enron’s top management treated its employees abhorrently while cushioning themselves from the eventual collapse. Enron employees were forced to hold their pension funds in the form of Enron stock. Half of their 401k was also held as Enron stock. Just before the eventual collapse of the company, Enron’s top management sold their shares while forbidding employees from doing so. The employees eventually lost their savings. Those who had retired had to look for jobs to survive and those who had not started their lives from scratch. The top management received bonuses totaling $55 million while employees who had been laid off did not get their severance packages (Johnson 48, 2002).
The top management betrayed the trust of the employees, shareholders, and customers. The top management knew in advance that the company was slowly edging towards bankruptcy and so they sold most of their shares reaping big profits while they left shareholders and customers to lose all their life’s savings. Enron employees felt betrayed by the boss they had ‘worshipped’ and when it was convenient they were discarded without a moment’s thought (Johnson 48, 2002).
The top management led by Chairman Kenneth Lay and chief executive officer Jeff Skilling believed they were ‘invisible’. They referred to themselves as ‘the smartest guys in the room” and the refused to listen to anybody else’s opinion. Kenneth Lay and Jeff Skilling refused to heed to warnings that their business model was unsustainable but they laughed off such suggestions. Vice President Sherry Watkins raised her concerns to Kenneth Lay in a letter and she also held discussions with accounting Arthur Andersen but her concerns were ignored (Johnson 48, 2002).
The main motivation for top management and employees of Enron was greed. It was a culture of impunity where the end justified the means. As long as stock prices were rising management did not care how it happened. As long as the stock prices were high employees and managers got high salaries and astronomical bonuses so the end justified the means. The board members were largely ceremonial and as long as they got bonuses and corporate perks they assumed that the company was doing okay. Enron was a get rich quick scam and it was hatched to make a small group of individuals extremely rich at the expense of thousands. Enron is an excellent case study on how to not manage people. Greed and lack of government oversight ultimately lead to unethical business practices. Transparency, accountability and leadership were clearly lacking in Enron’s organizational culture.
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