George P. Baker

Senior Lecturer of Business Administration (Leave of Absence)

Unit: Negotiation, Organizations & Markets

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(617) 495-6119

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George P. Baker is a Senior Lecturer at Harvard Business School. Until 2010, he was the Herman C. Krannert Professor of Business Administration. He has published works on management incentives, leveraged buyouts, organizational economics, and the relationship between a firm's ownership structure and its management. Baker's work focuses on the problem of managerial performance measurement, and its role in the design of incentive systems and on the structure and performance of organizations. He is also the author of a book on the firm of Kohlberg, Kravis, Roberts & Co. published by Cambridge University Press. Baker is currently working in the clean tech industry, and teaches a course on renewable energy.

Publications

Journal Articles

  1. Strategic Alliances: Bridges Between 'Islands of Conscious Power'

    George P. Baker, Robert Gibbons and Kevin J. Murphy

    Strategic alliances range from unstructured collaborations, through consortia and joint ventures that superimpose new governance structures on existing firms, to transactions that restructure firm boundaries and asset ownership. In this paper, we draw on detailed discussions with practitioners to describe and analyze a rich collection of feasible governance structures. Our model focuses on two issues emphasized by practitioners: spillover effects (as opposed to hold-ups motivated by specific investments) and contracting problems ex post (as opposed to only ex ante). By considering the allocation of assets, decision rights, and payoffs, we generate a large number of potential governance structures, including strategic divestitures, total divestitures, licensing agreements, and royalty agreements. For the broad range of parameter values and payoff functions we consider, we show that each of these possible strategic alliances could be optimal. We expect that, given institutional knowledge about a particular setting, our broad theoretical framework can be specialized to deliver testable predictions for that setting (as has occurred in some analogous work on vertical integration, for example).

    Keywords: Governance; Contracts; Agreements and Arrangements; Alliances; Strategy; Theory;

    Citation:

    Baker, George P., Robert Gibbons, and Kevin J. Murphy. "Strategic Alliances: Bridges Between 'Islands of Conscious Power'." Journal of the Japanese and International Economies 22, no. 2 (June 2008): 146–163. View Details
  2. Contractibility and Asset Ownership: On-Board Computers and Governance in US Trucking

    George P. Baker and Thomas Hubbard

    Keywords: Assets; Ownership; Technology; Governance; Contracts; Transportation Industry; United States;

    Citation:

    Baker, George P., and Thomas Hubbard. "Contractibility and Asset Ownership: On-Board Computers and Governance in US Trucking." Quarterly Journal of Economics 119, no. 4 (November 2004). View Details
  3. Incentives and Cooperation: The Joint Effects of Task and Reward Interdependence on Group Performance

    George P. Baker and Ruth Wageman

    Keywords: Motivation and Incentives; Cooperation; Groups and Teams; Performance;

    Citation:

    Baker, George P., and Ruth Wageman. "Incentives and Cooperation: The Joint Effects of Task and Reward Interdependence on Group Performance." Journal of Organizational Behavior 18, no. 2 (March 1997). View Details
  4. Organizational Changes and Value Creation in Leveraged Buyouts: The Case of O.M. Scott & Sons Company

    George P. Baker and Karen Wruck

    Keywords: Change; Value; Borrowing and Debt; Financial Instruments; Leveraged Buyouts;

    Citation:

    Baker, George P., and Karen Wruck. "Organizational Changes and Value Creation in Leveraged Buyouts: The Case of O.M. Scott & Sons Company." Journal of Financial Economics 25 (December 1989). View Details
  5. Compensation and Incentives: Practice vs. Theory

    George P. Baker, Michael C. Jensen and Kevin J. Murphy

    Keywords: Compensation and Benefits; Motivation and Incentives; Practice; Theory;

    Citation:

    Baker, George P., Michael C. Jensen, and Kevin J. Murphy. "Compensation and Incentives: Practice vs. Theory." Journal of Finance 43, no. 3 (July 1988): 593–616. (Reprinted in Michael C. Jensen, Foundations of Organizational Strategy, Harvard University Press, 1998.) View Details
  6. Discussion of 'An Analysis of the Use of Accounting and Market Measures of Performance in Executive Compensation Contracts'

    George P. Baker

    Keywords: Measurement and Metrics; Contracts; Markets; Executive Compensation; Accounting; Performance;

Book Chapters

  1. The Behavioral Economics of the Labor Market:Central Findings and Their Policy Implications by Ernst Fehr, Lorenz Goette, and Christian Zehnder

    George P. Baker

    Keywords: Economics; Behavior; Labor; Policy; Government and Politics;

    Citation:

    Baker, George P. Comment on "The Behavioral Economics of the Labor Market:Central Findings and Their Policy Implications by Ernst Fehr, Lorenz Goette, and Christian Zehnder." Policymaking Insights from Behavioral Economics, edited by Christopher L. Foote, Lorenz Goette, and Stephan Meier, 241–244. Boston, MA: Federal Reserve Bank of Boston, 2009. View Details
  2. Leveraged Management Buyouts at KKR: Historical Perspectives on Patient Equity, Debt, Discipline, and LBO Governance.

    George P. Baker and George Smith

    Keywords: Governance; History; Leveraged Buyouts; Executive Compensation; Borrowing and Debt;

    Citation:

    Baker, George P., and George Smith. "Leveraged Management Buyouts at KKR: Historical Perspectives on Patient Equity, Debt, Discipline, and LBO Governance." In Private Equity and Venture Capital, edited by Rick Lake and Ronald Lake. London: Euromoney Books, 2000. View Details
  3. Organizations and Markets at Harvard Business School, 1984-1996

    George P. Baker, Michael C. Jensen, Carliss Y. Baldwin and Karen H. Wruck

    Keywords: Higher Education; Markets; Organizations;

    Citation:

    Baker, George P., Michael C. Jensen, Carliss Y. Baldwin, and Karen H. Wruck. "Organizations and Markets at Harvard Business School, 1984-1996." In The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School, 1980-1995, edited by T. K. McCraw and J. L. Cruikshank. Boston: Harvard Business School Press, 1999. View Details
  4. Lessons from a Middle-Market LBO: The Case of O.M. Scott

    George P. Baker and Karen H. Wruck

    Keywords: Leveraged Buyouts;

    Citation:

    Baker, George P., and Karen H. Wruck. "Lessons from a Middle-Market LBO: The Case of O.M. Scott." In Studies in International Corporate Finance and Governance Systems: A Comparison of the U.S., Japan, and Europe, edited by Donald Chew. Oxford University Press, 1997. View Details
  5. Lessons from a Middle-Market LBO: The Case of O.M. Scott

    George P. Baker and Karen H. Wruck

    Keywords: Leveraged Buyouts;

    Citation:

    Baker, George P., and Karen H. Wruck. "Lessons from a Middle-Market LBO: The Case of O.M. Scott." In The Challenge of Organizational Change: How Companies Experience It and Leaders Guide It, by R. M. Kanter, B. Stein, and T. D. Jick. New York: Free Press, 1992. View Details
  6. Organizational Changes and Value Creation in Leveraged Buyouts: The Case of O.M. Scott & Sons Company

    George P. Baker and Karen H. Wruck

    Keywords: Leveraged Buyouts; Organizational Change and Adaptation; Value Creation;

    Citation:

    Baker, George P., and Karen H. Wruck. "Organizational Changes and Value Creation in Leveraged Buyouts: The Case of O.M. Scott & Sons Company." In Performance Measurement, Evaluation and Incentives, edited by William J. Bruns. Boston, MA: Harvard Business School Press, 1992. View Details

Working Papers

  1. CEO Incentives and Firm Size

    Brian Hall and George P. Baker

    What determines CEO incentives? A confusion exists among both academics and practitioners about how to measure the strength of CEO incentives, and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms. We show that while one measure of CEO incentives (the dollar change in CEO wealth per dollar change in firm value) falls by a factor of ten between firms in the smallest and largest deciles in our sample, another measure of CEO incentives (the value of CEO equity stakes) increases by roughly the same magnitude. We resolve the confusion about which of these measures better reflects CEO incentives by developing and solving a model that allows CEO productivity to differ for firms of different sizes. The crucial parameter is shown to be the elasticity of CEO productivity with respect to firm size. Our empirical results suggest that CEO marginal products rise significantly, and overall CEO incentives are roughly constant or decline slightly with firm size. We also show that the appropriate measure of incentives depends on the type of CEO activity being considered. For activities whose dollar impact is the same for large and small firms (such as the purchase of a corporate jet), the dollars-on-dollars measure is appropriate, and large firms suffer significant agency problems due to their weak incentives. For activities whose percentage impact is similar across firms of different sizes (such as a corporate reorganization) the equity stake measure is better, and the incentive problem faced by large firms is not as severe. Finally, using a multi-task model, we discuss the implication of our findings for the design of control systems.

    Keywords: Business Ventures; Motivation and Incentives; Executive Compensation; Size; Management Systems;

    Citation:

    Hall, Brian, and George P. Baker. "CEO Incentives and Firm Size." NBER Working Paper Series, No. 6868, December 1998. View Details

Cases and Teaching Materials

  1. O.M. Scott & Sons Co. Leveraged Buyout

    George P. Baker III and Karen Wruck

    Documents the organizational changes that took place at O.M. Scott & Sons Co. in response to their leveraged buyout. Provides the opportunity for students to discuss the effects of high leverage on management decision making, and the differences between operating as a small subsidiary of a large conglomerate and as a free-standing company. Focuses on the role of the LBO sponsor in the management of the company, the role of restrictive debt covenants, and the effect of changes in the compensation system at the company.

    Keywords: Leveraged Buyouts; Capital Structure; Borrowing and Debt; Organizational Structure; Organizational Change and Adaptation; Management; Business Conglomerates; Cost of Capital; Financial Services Industry;

    Citation:

    Baker, George P., III, and Karen Wruck. "O.M. Scott & Sons Co. Leveraged Buyout." Harvard Business School Case 190-148, March 1990. (Revised November 2004.) View Details
  2. K-III: A Leveraged Build-Up

    George P. Baker III, Nicola Bamford and Nicolas Greenspan

    Explores the strategy, financing, and governance of a new type of organizational form, dubbed the Leveraged Build-Up by its inventor, Kohlberg, Kravis, Roberts & Co. The company makes leveraged acquisitions of small publishing companies, managing them in a very decentralized way. It has grown dramatically between 1989 and 1993. K-III's organization and governance structure combines many of the characteristics of leveraged buyouts with those of venture-backed companies. Each individual operating company is highly leveraged, achieving the discipline of debt and avoidance of free cash flow problems that otherwise plague pubishing companies. At the same time, the top management mandate is to acquire companies, requiring continual infusions of cash. Explores the tension between the debt repayment obligations and the demand for additional financing.

    Keywords: Debt Securities; Financial Management; Leveraged Buyouts; Cash Flow; Organizational Structure; Mergers and Acquisitions; Corporate Governance; Financial Strategy; Corporate Finance; Publishing Industry;

    Citation:

    Baker, George P., III, Nicola Bamford, and Nicolas Greenspan. "K-III: A Leveraged Build-Up." Harvard Business School Case 295-067, November 1994. (Revised May 2002.) View Details
  3. Value Creation: Abridged

    George P. Baker III, Michael C. Jensen, Karen Wruck and Perry Fagan

    Asks students to value a strategic plan while considering the capital investment required to complete the plan. Cummins Engine is used as an example.

    Keywords: Investment; Strategic Planning; Valuation; Value Creation;

    Citation:

    Baker, George P., III, Michael C. Jensen, Karen Wruck, and Perry Fagan. "Value Creation: Abridged." Harvard Business School Case 898-185, March 1998. View Details
  4. Cambridge Technology Partners (A)

    Teresa M. Amabile, George P. Baker III and Michael Beer

    Cambridge Technology Partners uses a highly innovative product strategy, supported by a human resources strategy, that has been very successful. However, high growth rates jeopardize product quality while tension about relative compensation levels between sales and operations threatens the firm's culture.

    Keywords: Growth Management; Compensation and Benefits; Organizational Culture; Quality; Human Resources; Relationships; Innovation and Invention; Consulting Industry; Massachusetts;

    Citation:

    Amabile, Teresa M., George P. Baker III, and Michael Beer. "Cambridge Technology Partners (A)." Harvard Business School Case 496-005, July 1995. (Revised April 1996.) View Details
  5. San Francisco Bay Consulting

    George P. Baker III and Karin B Monsler

    San Francisco Bay Consulting leads the field of economic consulting and litigation support in the application of powerful computers and cutting edge software to manipulate and analyze large data sets. The transfer pricing system, used to facilitate the purchasing and payment of computer resources, is falling apart as computer prices drop and consultant demands broaden. Researchers, forbidden to go outside for their hardware or software needs, range from frustrated to furious when they can't get the software they want or when transfer prices yield charges to clients that are greater than their computer's current market price. The case presents the company as it evaluates the system and discusses possible changes in pricing and sourcing policies.

    Keywords: Fair Value Accounting; Profit; Marketing; Fluctuation; Consulting Industry; Computer Industry;

    Citation:

    Baker, George P., III, and Karin B Monsler. "San Francisco Bay Consulting." Harvard Business School Case 195-096, July 1994. (Revised April 1995.) View Details
  6. Visionary Design Systems: Are Incentives Enough?

    George P. Baker III and Karin B Monsler

    A compensation case about Visionary Design Systems (VDS), a small, high-tech full service systems integration firm based in Silicon Valley with eleven offices throughout the country. All employees, including engineers, administrators, and receptionists, received a significant portion of their income from commissions and bonuses, and all were shareholders. The company espoused a philosophy of empowerment, under which all employees were given substantial decision-making authority, and were expected to act in the interests of the firm. This case examines one group that, although it had both the authority and the incentives to exploit a new market opportunity, continued to wait for top management's instructions and approval before making decisions or taking action.

    Keywords: Decision Making; Cost vs Benefits; Compensation and Benefits; Employee Stock Ownership Plan; San Francisco;

    Citation:

    Baker, George P., III, and Karin B Monsler. "Visionary Design Systems: Are Incentives Enough?" Harvard Business School Case 495-011, October 1994. (Revised April 1995.) View Details
  7. RKO Warner Video, Inc.: Incentive Compensation Plan

    George P. Baker III

    Details the design and implementation of an incentive bonus plan for video store managers. The problem for top management of the chain is to induce the store managers to "sweat the details," to keep the stores neat and well organized, and to deal courteously and efficiently with customers. The design of the bonus plan is simple: rather than try to measure the neatness of the stores or the quality of customer service directly, give the managers a fraction of the revenue from the store and let them worry about the details themselves. The case ends after a six-month experimental period with the new plan, and leaves the top managers of the chain saying that although revenues have increased, the store management has not improved in terms of managing the details.

    Keywords: Acquisition; Change; Strategic Planning; Performance Improvement; Sales; Management; Employee Relationship Management; Situation or Environment; Success; Motion Pictures and Video Industry; Entertainment and Recreation Industry;

    Citation:

    Baker, George P., III. "RKO Warner Video, Inc.: Incentive Compensation Plan." Harvard Business School Case 190-067, October 1989. (Revised June 1993.) View Details

Presentations

  1. Wage Policies and Incentives to Invest in Firm-Specific Human Capital

    George P. Baker, Nancy D. Beaulieu and Cristian Voicu

    Keywords: Wages; Policy; Motivation and Incentives; Human Capital;

    Citation:

    Baker, George P., Nancy D. Beaulieu, and Cristian Voicu. "Wage Policies and Incentives to Invest in Firm-Specific Human Capital." Paper presented at the HBS Negotiation, Organizations & Markets Seminar, Harvard Business School, November 02, 2005. View Details

Other Publications and Materials

    Research Summary

  1. Relational Contracts

    by George P. Baker

    George Baker is exploring (with Robert Gibbons of MIT and Kevin Murphy of the USC) how relational contracts--contracts secured by reputation and trust, rather than by legal enforcement--affect the performance and boundaries of firms. Such relational contracts are ubiqitous, and constitute some of the most important instruments that managers have to influence both internal and external stakeholders. Their research explores the role of relational contracts in performance measurement and compensation, in delegation, in outsourcing, and in strategic alliances.