Wednesday, March 30, 2016

Why many tech startups are cheering a broken Liberal campaign promise

On March 22, Prime Minister Trudeau’s Liberal government unveiled its first federal budget since capturing a parliamentary majority in the 2015 election. Among the components of the budget that have attracted attention in the press are the fiscal stimulus measures, infrastructure investments, and a deficit projection of close to $30 billion. But the budget is also notable because of something it does not contain: changes to the taxation of stock options.

In general, Canadians who are likelier to receive compensation in the form of stock options tend to be at the high end of the earnings scale. Large firms often reward their executives with stock options in lieu of salary, partly because stock option gains benefit from preferential tax treatment, and partly because ownership of claims on their own company’s stock provides a material incentive for corporate executives to optimize that stock’s performance.

The Liberals’ original proposal was to place a cap of $100,000 per year on gains from exercised stock options that can qualify for a tax deduction. (Under the current rules, only half of gains from cashing in stock options are subject to taxation, and there is no cap.)

Why didn’t the government follow through on its pledge? And what are some of the implications of this non-change?

Startup compensation a concern

“As I was out on pre-budget consultations I heard from many small firms and innovators that they use stock options as a legitimate form of compensation for their employees, so we decided not to put that in the budget,” said Finance Minister Bill Morneau. Indeed, startups typically do not enjoy the kind of cash flow that large, profitable, established firms generate. Thus, it is common for startups, particularly in the tech sector, to try to lure talent away from major players by offering stock options as compensation. This practice has allowed some startups to attract highly skilled personnel who might otherwise have accepted a more immediately lucrative position at a reputable, old-guard company.

The Liberals were not the only federal political party to float a proposal for altering the preferential tax treatment accorded stock options in the run-up to last year’s election. Thomas Mulcair’s New Democrats actually went a step further, advocating wholesale elimination of the special deduction. But tech entrepreneurs pushed back; Hootsuite Media founder Ryan Holmes even predicted that the NDP plan would “kill the Canadian startup ecosystem.”

At a time when Canada’s economy is experiencing lacklustre growth and job creation, many leading politicians understandably don’t want to be seen as undermining one of the country’s most vibrant growth industries. Moreover, the Liberals have marketed themselves as a party that plans to green the economy through technology and innovation; a policy change to the detriment of the tech startup sector would seem out of step with that brand image.

The downside: loss of federal revenue

Of course, incumbents in many industries would be delighted to receive special subsidies, protections, and preferential tax treatment, and can mount convincing arguments in their own favour. Every policy yields costs and benefits, and it’s the task of policymakers to weigh these in order to identify the most socially beneficial option.

Preferential treatment for stock options imposes a cost on Canadian taxpayers by undercutting the amount of revenue that makes its way into federal coffers. In turn, this compromises the government’s ability to offer public services and invest in infrastructural upgrades and innovation—all of which can lower the cost of doing business and boost productivity—without increasing the deficit. Even relatively conservative tax specialists, like Jack Mintz of the University of Calgary, have argued that the status quo around stock option taxation is inefficient, and unfairly favours employees who receive stock options as compensation.

Trudeau and Morneau broke their promise because they have calculated that the status quo delivers more benefits for startups than costs for Canadians who don’t hold stock options. For now at least, a lot of tech startups will breathe a sigh of relief.

Wednesday, March 23, 2016

When Is The Price Right?

Much of conventional economic theory revolves around the assumption that an economy comprises rational actors seeking to maximize utility. One implication of this hypothesis is that, all else being equal, people will tend to favour a lower-priced product over a higher-priced alternative.

However, research by behavioural economists and psychologists—among them Daniel Kahneman of Princeton University—has cast significant doubt upon the thesis of Homo economicus. Contrary to the assertion that human beings tend to make rational decisions, scholars have consistently found that decision-making is influenced by cognitive biases, the perception of risk and reward, social pressures, oversimplified snap judgements or prejudices, and various other subjective factors that have very little to do with rationality.

This partly explains why many individuals choose higher-priced products, even when all else is apparently equal—the authentic Prada handbag versus a more affordable alternative; the glamorous Porsche, BMW, or Ferrari versus a high-quality, reliable vehicle for half the price; a painting by a famous artist for no reason other than its uniqueness and the renown of its creator.

In conclusion, trying to compete on price is not always an advisable strategy. But when can you reasonably expect that raising the price of an item will deliver higher revenue? When is it best to stay put or even go lower?

Subjective perceptions of price

I often pass by a restaurant that attracts long line-ups on the weekends, starting just before noon and continuing well into the evening. This establishment offers tasty Mediterranean-style comfort food, at a price that enables it to undercut its nearest competitors. Understandably, it is tremendously popular.

Yet even in this case, we can see less-than-rational economic behaviour at work. On rainy and chilly days, lengthy queues still form outside this restaurant—which suggests that in the name of a modest saving, customers gathered outside are willing to forgo both their physical comfort and their precious time. (Is it really worth it?) Adding to the complexity of the dilemma is the perception of sunk cost—the queuers may think to themselves “I’ve been standing here for half an hour already; I might as well stick it out to the end.”

On the other hand, in my neighbourhood there is a restaurant offering somewhat higher-quality Mediterranean fare for a higher price. This business has also enjoyed commercial success and recently expanded—but I have yet to encounter a line-up stretching out the door and halfway around the block.

Some customers may perceive products with higher prices to be superior, even if this is not necessarily the case. Do you want your enterprise to be perceived as a low-cost provider, a high-quality outfit that people will be willing to pay a little extra for, or somewhere in the middle? What value do you offer that others don’t? Answering those questions will help you not only formulate a pricing strategy, but more clearly define your brand identity too.

Merits of cost-plus and value-based pricing

As the name suggests, cost-plus pricing is based on tallying the fixed and variable costs that you incur to provide a good or service to your customers, and then adding a mark-up that enables you to turn a profit. On the other hand, value-based pricing is a reflection of what you believe customers are willing to pay for the product or service you offer.

Generally, cost-plus pricing is more apt for industries in which the items on offer are generic or easily substitutable, and there are many competitors. If your business is a convenience store, or sells items that are readily available elsewhere, you will probably need to maintain a cost-plus strategy and keep a watchful eye on local competitors’ prices.

Value-based pricing is better suited to industries in which the items on offer have some subjective quality—such as association with a particular brand or celebrity, atmosphere and ambience (as in a restaurant), or an inimitable experience or flavour. Businesses that deal in goods and services of this kind enjoy more pricing flexibility, and can often get away with raising prices gradually as their profile and reputation grow. On the negative side, this strategy can invite more competition, and complicates the task of establishing an appropriate price in the first place.

Determining the right price for your products is a challenge that doesn’t necessarily lend itself to a straigthtforward answer. Particularly in the early stages of a business, some trial and error may be necessary. Nonetheless, a coherent pricing strategy begins with defining the type of brand identity you want your business to embody.

Thursday, March 17, 2016

Mental Health in The Workplace

Given the frequently serious consequences of mental health problems for individuals and their loved ones, there is a strong moral case for businesses to prioritize mental health in the workplace. Moreover, a growing body of studies and polling data suggests there’s an equally strong economic case for taking mental health seriously.

A Gallup poll from 2013 found that absenteeism due to depression alone costs U.S. employers approximately $23 billion per year in lost productivity. Add to this missed work days because of stress-related illnesses, addiction, and other common mental health disorders that afflict millions of people in our society, and the expenses can mount quickly.

Aside from reducing productivity losses and employee turnover, an effective approach to mental health in the workplace can raise workforce morale, and improve relations among employees and managers.

A work environment conducive to good mental health

A manager’s first priority should be to foster a salubrious work environment, and encourage sound habits and practices in general.

  Keep stock of the essentials, like workplace safety, clean air, good hygiene and organization, proper equipment and training for all employees. Ensure that everyone knows and understands h/er own role and assigned tasks.

  Promote mental health literacy in the workplace. Consider supplementing your organization’s current training regimen with expert seminars that address warning signs of mental health problems, stigma and unwarranted feelings of shame or embarrassment around mental illness, popular misconceptions about the mentally ill, and common but inaccurate descriptions of mental illness.

  Involve staff members in decision-making. Ideally, they should feel that their point of view and individual agency are respected, as opposed to feeling like cogs in a machine who robotically follow orders.

  Promote work-life balance by enabling staff to share the workload, and providing adequate vacation, sick leave, and family-related leave.

  Insist on respectful behaviour and inclusiveness at every level of your organization.

  Provide opportunities for skills acquisition and advancement.

  Recognize and express gratitude for good work at all levels, and acknowledge individual employees’ contributions to the overall success of the enterprise.

  Provide employee feedback mechanisms, and have an appropriate conflict resolution strategy.

  Encourage openness, honesty, and respectful discourse around mental illness, emphasizing the notion that mental health challenges are nothing to be ashamed of. (This is especially important, since concealed mental health problems can undermine an employee’s performance and overall health.)

  Remember that people with mental health challenges may be taking psychoactive medication as part of a treatment program, and/or attending regular therapy sessions. These obligations may preclude them from putting in long hours at work, or limit their flexibility in terms of shift-scheduling.

Aspects of the physical environment can also help to promote good mental health. For example, studies indicate that the presence of green plants in an office environment can help reduce negative emotions like stress, anger, and fatigue, while promoting focus, productivity, and job satisfaction. Nowadays, a growing number of office environments offer recreation spaces to help employees regain their focus, and some even have dedicated nap rooms!

Accommodating mental illness

Just as with physical disabilities and chronic conditions, reasonable accommodations can often be made for employees with mental health challenges, helping them perform to their full potential at work. The first and most crucial step is to overcome the stigma that our society has historically attached to mental illness, so that staff members who face mental health difficulties can freely articulate their needs.

Thursday, March 10, 2016

Addressing Diversity and Inclusiveness in The Workplace

It’s no secret that many people are uncomfortable with discussing issues around race, diversity, and inclusiveness in the workplace. However, as we all know, the first step toward solving any problem is to acknowledge it.

In general, it is better to be proactive than reactive in building an inclusive workplace. Organizations that initially overlook questions of diversity, face public criticism as a result, and then make changes in response, may be accused of kowtowing to critics instead of showing a bona fide desire to become more inclusive. Likewise, the general public is unlikely to find a large organization’s claims of “meritocracy” convincing if the lack of diversity among its high-ranking officials is obvious. And in business, as in politics, public opinion matters a great deal.

Consider the Academy of Motion Picture Arts and Sciences—better known as the agency behind the Oscars. In the weeks leading up to this year’s ceremony, the Academy courted heavy criticism over the apparent lack of diversity among its voting members—and the consequences in terms of the films and performers deemed meritorious of Oscar consideration. Some high-profile critics even announced plans to boycott the Awards.

Although the Academy’s president Cheryl Boone Isaacs said her organization would take “dramatic steps” to change the composition of its membership, scrutiny of the Academy’s hiring and nomination practices will continue. The onus of demonstrating progress now falls squarely on the shoulders of Isaacs and her colleagues.

According to the Los Angeles Times, as of February 2016, 91 percent of the Academy’s 6,261 voting members are white, and 76 percent are male.

Becoming an inclusive organization

Dr. Kira Hudson Banks is a psychologist who specializes in racial identity, discrimination, diversity, and their relationship to mental health. Writing in Harvard Business Review, Banks recommends that organizations make a deliberate, long-term investment in inclusiveness. This means engaging with issues of race, inclusivity, and diversity on a regular basis, rather than merely in a one-off seminar.

For this purpose, managers can organize small study groups and/or specialized training sessions devoted to discussions among people of diverse ethnic and cultural backgrounds, life experiences, and gender identities.

Items that participants might engage with include:

  Privilege: What is it, and what role does it play both in society, and within our organization in particular?

  Experiences of discrimination: Have you experienced discrimination or barriers to success based on race, religion, sexual orientation, gender identity, or physical ability? Have you noticed any such barriers here, within this organization? If so, what can we (as managers) do to facilitate your success?

  Employment-related issues involving diversity and inclusiveness: Possible topics include the hiring and employment disparity between people with “ethnic-sounding” names and those with Anglo-Saxon-sounding names; the merits of affirmative action; the persistent compensation gap between men and women; and the presence (or deficiency) of infrastructure to assist people with disabilities.

  Key questions: What would inclusiveness look like? How can we (as an organization) achieve it? Individuals within the organization may have different ideas about what inclusiveness and diversity mean. Encourage them to share these notions openly and frankly within their discussion groups, and be prepared to deal with direct criticism. A measure of conflict is okay in this situation, provided the atmosphere remains respectful and all participants have a fair chance to express their point of view.

   This process has three main goals: 1) to enable individuals to identify and confront their own biases and misconceptions; 2) to establish a common understanding and direction for the organization with respect to inclusiveness, and highlight any shortcomings in that area; and ultimately, 3) to foster a work climate in which all current and prospective personnel feel they have a fair opportunity to succeed.

Thursday, March 3, 2016

Apple’s Public Dispute With The FBI, Explained

Apple has recently courted controversy over its resistance to a demand by the U.S. Federal Bureau of Investigation (FBI). Namely, the FBI wants Apple to help its investigators hack into the iPhone of San Bernardino shooter Syed Rizwan Farook, and a federal magistrate has ordered the tech giant to comply. Apple CEO Tim Cook has said the company plans to fight the ruling.

The bureau, with the support of the Department of Justice (DoJ) and the White House, argues that its proposal is analogous to a warrant-authorized search. FBI officials speculate that information stored on Farook’s device may help them ascertain the circumstances that led to the San Bernardino tragedy, identify any accomplices the perpetrators may have had, and possibly prevent future attacks by violent extremists. The bureau’s director James Comey has suggested that he is not trying to set a legal precedent by pursuing the Farook case.

On the other hand, Cook contends that a version of the iOS operating system designed to override security features would constitute a “backdoor to the iPhone” and would indeed set a dangerous precedent for digital privacy around the world.

Technically, a backdoor to the iPhone already exists, in the sense that Apple has the ability to create and upload to its devices software that would override security features. The determining factor is whether the author possesses Apple’s secret digital signing key, since Apple devices won’t run software that doesn’t bear this signature.
The FBI’s proposal, and why Apple is resistant

Farook’s phone and the data stored on it are protected by a pin number that only the shooter knew. The FBI plans to conduct a “brute-force attack”—in other words, connect a device to the phone that can attempt many numerical passcode guesses in quick succession. But Farook has enabled a security feature that causes his iPhone to temporarily lock after 10 incorrect guesses. Depending on the settings, there is a possibility that data stored on the phone could be automatically erased after the tenth attempt.

The government wants Apple to design and upload onto the iPhone a version of iOS that would allow investigators to attempt an infinite number of passcode guesses without getting locked out, and without incurring the risk of data erasure.

But the company has raised several objections.

  Cook fears Apple’s creation of “backdoor” software could have far-reaching implications. And his concern isn’t isolated to the future actions of American individuals and agencies. Apple is a transnational corporation that does business in dozens of countries around the world, including authoritarian regimes. If the U.S. government can demand that Apple help law enforcement hack an iPhone, what is to prevent a dictatorship from enlisting Apple technicians to break into the electronic devices of suspected dissidents?

  The Farook case is not, in fact, unique. Rather, the U.S. Justice Department has requested Apple’s help to extract data from at least 12 other iPhones. Apple brass have expressed concerns that by writing security-override software on behalf of law enforcement, their company could come to be perceived as an appendage of the national security state—and thereby lose customers’ trust.

  Security-overriding software for the iPhone could empower cyber-criminals. Cook has suggested that by creating a new version of iOS for the purpose of overriding security protections, Apple would run the risk that this software might fall into the wrong hands. However, the existence of Apple’s private signing key already poses a similar threat; armed with that signature, a skilled programmer with expertise in iOS could theoretically hack into any iPhone.

Does the government have ulterior motives?

Last fall, the Obama administration’s National Security Council formalized a “decision memo” which tasks state agencies with finding ways to circumvent digital encryption and security protections. Apple’s authorship of “backdoor” software would be a big step in that direction.

Given the significance and implications of the Farook case, don’t be surprised if an appellate court eventually rules in the tech giant’s favour. But U.S. government agencies’ efforts to gain access to digital devices will surely continue. In fact, through a tool called DROPOUTJEEP, the U.S. National Security Agency probably has backdoor access to at least some iPhones already.