Bosses matter to everyone they oversee, but they matter most to those just beneath them in the pecking order: the people they guide at close range, who constantly tangle with the boss’s virtues, foibles, and quirks. Whether you are the CEO of a Fortune 500 company or the head chef at a restaurant, your success depends on staying in tune with the people you interact with most frequently and intensely.

All bosses matter, but those at the top matter most. Whether or not they know it, their followers monitor, magnify, and often mimic their moves. I worked with a large company where the CEO did almost all of the talking in meetings, interrupted everyone, and silenced dissenting underlings. His executive vice presidents complained about him behind his back, but when he left the room, the most powerful EVP started acting the very same way. When that EVP left, the next-highest-ranking boss began imitating him in turn.

The ripple effects of this CEO’s style are consistent with findings from peer-reviewed studies showing that senior executives’ actions can reverberate throughout organizations, ultimately undermining or bolstering their cultures and performance levels. When CEOs have far more pay and power than their direct reports do, for instance, performance can suffer if their subordinates feel they can’t stop them from making and implementing lousy decisions. A few years ago, I did a workshop with a management team struggling with “group dynamics” problems. Team members felt that their boss, a senior vice president, listened poorly and “ran over” others; he called his people “thin-skinned wimps.” I asked the team—the senior vice president and five direct reports—to do an exercise. The six of them spent 20 minutes brainstorming potential products and then narrowed their choices to the most feasible, the wildest, and the most likely to fail.

As they brainstormed, I counted the number of comments made by each team member and the number of times each interrupted someone else and was interrupted in turn. The senior vice president contributed about 65 percent of the comments, interrupted others at least 20 times, and was never interrupted. When I had him leave the room, I asked his subordinates to estimate the results, and they did so accurately. Then the senior vice president returned. He recalled making about 25 percent of the comments, interrupting others perhaps 3 times, and being interrupted 3 or 4 times. When I showed him the results and explained that his direct reports had estimated them far more accurately, he was flabbergasted and annoyed.

Being a boss, as this exercise shows, often resembles the role of a high-status primate: your subordinates watch you constantly, so they know more about you than you know about them. Likewise, anthropologists who study chimpanzees, gorillas, and baboons report that followers devote far more attention to their leader than he devotes to them. (Studies of baboon troops show that typical members glance at the dominant male every 20 or 30 seconds.) As Princeton University psychologist Susan Fiske observes, primates—including ourselves—“pay attention to those who control their outcomes.”

Linda Hudson, CEO of BAE Systems, got this message after becoming the first female president of General Dynamics. After her first day on the job, a dozen women in her office imitated how she tied her scarf. Hudson realized, “It really was now about me and the context of setting the tone for the organization. That was a lesson I have never forgotten—that as a leader, people are looking at you in a way that you could not have imagined in other roles.” Hudson added that such scrutiny and the consequent responsibility is “something that I think about virtually every day.”

The best bosses work doggedly to stay in tune with this relentless attention and use it to their advantage. They are self-absorbed, but not for selfish reasons. On the contrary, they know that the success of their people and organizations depends on maintaining an accurate view of how others construe their moods and moves—and responding with rapid, effective adjustments.

That view is invaluable for bosses as they try to carry out their first and most important task: convincing others that they are in charge. Bosses who fail to do this will find their jobs impossible, their lives hell, and their tenures short. Of course, taking charge effectively isn’t enough. The best bosses also boost performance by watching their people’s backs: making it safe for them to learn, act, and take intelligent risks; shielding them from unnecessary distractions and external idiocy of every stripe; and doing hundreds more little things that help them achieve one small win after another—and feel pride and dignity along the way.

Taking control

James Meindl’s research on “the romance of leadership” shows that leaders get far more credit—and blame—than they deserve, largely because, cognitively, it is easier and more emotionally satisfying to treat leadership as the primary cause of performance than to consider the convoluted and often subtle mishmash of factors that actually determine performance differences. It is especially difficult to resist demonizing the bosses of failing organizations, however irrational that may be. This bias toward glorifying and vilifying individual leaders (and downplaying the role of systems, collective action, and external factors outside management’s influence) is especially strong in the United States and many European nations.

Yet the best evidence shows that bosses rarely account for more than 15 percent of the gap between good and bad organizational performance—although they often get more than 50 percent of the credit and blame. If you are a boss, this is your lot in life; make the best of it. If you claim that you don’t have much influence over what happens to the team or company you lead, your people will lose confidence in you and your superiors will send you packing. Here are four suggestions for magnifying the illusion of control (for more ideas, see the sidebar, “Tricks for taking charge”):

1. Express confidence even if you don’t feel it

In 2002, I heard Andy Grove, Intel’s legendary CEO (1987–98), interviewed by Harvard University’s Clay Christensen, who asked Andy how leaders can act and feel confident despite their doubts. He answered, “Investment decisions or personnel decisions and prioritization don’t wait for that picture to be clarified. You have to make them when you have to make them.” That’s why executives need to use what I call the faking-it-until-you-make-it strategy, which he also touched on: “Part of it is self-discipline, and part of it is deception. And the deception becomes reality. It is deception in the sense that you pump yourself up and put a better face on things than you start off feeling. But after a while, if you act confident, you become more confident.”

Research showing that “belief follows behavior” supports his argument. And confidence is especially crucial for inspiring your followers, because like all emotions, it’s contagious—especially when displayed by closely scrutinized bosses.

2. Don’t dither

Indecision, delay, and waffling are the hallmarks of a crummy boss; the best ones know that crisp and seemingly quick decisions bolster the illusion (and reality) that they are in charge. As late stage director Frank Hauser said, “You have three weapons: ‘Yes,’ ‘No,’ and ‘I don’t know.’ Use them. Don’t dither; you can always change your mind later. Nobody minds that. What they do mind is the two minutes of agonizing when all the actor has asked is, ‘Do I get up now?’”

3. Get and give credit

A great thing about being the boss is that when your people do good work, you usually get too much of the credit. Smart bosses often use this to their advantage, knowing that people want to work for and do business with winners.

As a boss, you may already use subtle tactics to get credit, such as collaborating with people who are likely to praise you (so that you don’t have to brag) and, when you do mention your accomplishments, giving copious credit to others. David Kelley, the modest chairman and founder of design firm IDEO, is a master of the art of giving his people credit. I believe that one reason IDEO became a renowned innovation firm under David’s leadership is that he relentlessly thanks others for making him look good, gives them credit when the company does something great, and downplays his contribution—something I have observed him do hundreds of times over the past 15 years.

Indeed, the best bosses routinely give their followers more credit than they probably deserve. And when bosses do this, everyone wins. As the boss, you will get the lion’s share of credit because of the romance of leadership. Your immediate team will regard you as truthful. And your modesty and generosity will be admired—especially by outsiders, who will see you as both competent and generous.

4. Blame yourself

In August 2008, I listened on the radio as Maple Leaf Foods CEO Michael McCain made a statement about the deaths and illnesses traced to tainted meats produced by one of his company’s plants. McCain’s voice quivered as he announced its closure, apologized to the victims, and said that the people at Maple Leaf—including himself—were responsible and that it was his job to restore faith in the company.

Bosses who ignore and stomp on their subordinates’ humanity sometimes generate quick gains. But in the long run, such shortsightedness undermines creativity, efficiency, and commitment.

His response is striking because it is so rare yet so consistent with research on how to fuel the illusion (and reality) that the boss is in charge. Unlike many people in such a predicament, McCain accepted the fact that he would be held responsible for what his people did, no matter what. When something important happens, the boss is expected to know. Rather than blaming others, McCain understood it was wiser to accept the blame and learn from it. Leaders who denounce outside forces for their troubles come across as disingenuous and powerless. By refusing to take responsibility, they implicitly raise a damning question: “If you didn’t have the power to break it, how can you have the power to fix it?” The public also sees a boss’s refusal to accept responsibility as a sign that nothing has been learned from the errors.

If you as a boss want to enhance the perception that you are in charge—and fuel performance at the same time—taking at least some of the blame is usually necessary. Experiments by University of Michigan professor Fiona Lee and her colleagues show that managers who take responsibility for problems like pay freezes and failed projects are seen as more powerful, competent, and likeable than those who deny responsibility. In another study, Lee’s group examined stock price fluctuations in 14 companies over 21 years. They found that when top executives accepted responsibility for problems, stock prices were consistently higher afterward than when CEOs denied responsibility.

The key, though, is not just to accept blame and apologize. You must also take immediate control in whatever way you can, show that you and your people have learned from failure, announce new plans, and, when they are implemented, make sure everyone understands that things are improving because of them—just as Michael McCain did. Although no one can predict his company’s ultimate fate, the Canadian press praised McCain for his clarity, compassion, and control. A nationwide survey in December 2008 showed that among Canadians, confidence in the Maple Leaf brand had risen to 91 percent, from 60 percent, since August of that year. Although the company reported losses in 2008, it returned to profitability in 2009. As McCain said in February 2010, “The packaged-meats business continues to recover. Our brands and our reputation are intact”—an assessment most analysts and customers echoed.

Bolstering performance

Bosses who ignore and stomp on their subordinates’ humanity sometimes generate quick gains. But in the long run, such short-sightedness usually undermines their followers’ creativity, efficiency, and commitment. The best bosses focus on boosting the performance of their people through stratagems such as the three that follow:

1. Provide psychological safety

Good bosses spark imagination and encourage learning by creating a safety zone where people can talk about half-baked ideas, test them, and even make big mistakes without fear of ridicule, punishment, or ostracism. I witnessed the power of psychological safety at a large media company where a new CEO was determined to drive out fear. A vice president had launched a magazine that ended up being an expensive, well-publicized flop. She would have been demoted and fired—and probably publicly humiliated—under past regimes. Instead, the CEO spoke at a gathering and congratulated her for her courage and skill. He emphasized that the decision to start the magazine wasn’t just hers; senior management had backed it. After his speech, every executive I spoke with portrayed the CEO’s comments as a watershed event.

An absence of psychological safety, in concert with fear of the boss, can be dangerous or downright deadly. Studies by Harvard Business School professor Amy Edmondson and her colleagues show that when nurses fear their supervisors will punish and humiliate them for making mistakes, they hesitate to report their drug-treatment errors. The hazards of fearing authority also emerge from research with commercial pilots in flight simulators. One study showed that when pilots faked mild incapacitation toward the end of a rough and rainy simulated flight, their copilots failed to take the controls 25 percent of the time—resulting in simulated crashes. The copilots knew the pilots were incapacitated yet failed to question their authority. Dysfunctional deference can kill real flight crews and passengers too. In 1979, a commuter plane crashed, in part, because the second officer failed to take control when the captain, a vice president known for gruffness, became partly incapacitated.

2. Shield people

The best bosses invent, borrow, and implement ways to reduce the mental and emotional load heaped on their followers—and protect them from the incompetence, cluelessness, and premature judgments of fellow bosses or others who can undermine their followers’ work and well being. Followers who enjoy such protection (and who may be bosses themselves) have the freedom to take risks and try new things.

Annette Kyle, for example, managed some 60 employees at a Texas terminal where they loaded chemicals from railcars onto ships and trucks. In the mid-1990s, Annette led a “revolution” that dramatically raised her unit’s performance through a host of changes, including better planning, greater responsibility at the lowest levels, improved and more transparent metrics, and numerous cultural changes. She personally sewed “no whining” patches on workers’ uniforms, for example, to discourage the local penchant for complaining and auctioned off her desk to workers for $60 because, as she explained it, “I shouldn’t be sitting behind a big desk. I should be contributing to team goals however possible.”

This transformation virtually eliminated the penalties that were levied when ships arrived at the terminal’s dock but (despite considerable advance warning) workers weren’t ready to load them. These “demurrage charges,” which cost the company $2.5 million the year before the revolution, were down to $10,000 the year after. Previously, it had taken more than three hours to load an average truck. Afterward, more than 90 percent were loaded within an hour of arrival. Surveys and interviews by University of Southern California researchers showed that employees became more satisfied with their jobs and felt proud of their accomplishments. I asked Annette how she could make such radical changes in her giant company. She answered that her boss shielded her from top-ranking managers—he found the resources and experts she needed but never discussed these moves with senior management until they succeeded.

Good bosses are especially adept at protecting their people’s time—for example, by eliminating needless meetings. Take a cue from Will Wright, designer of computer games such as The Sims:rather than automatically scheduling meetings, ask yourself if they are really needed. Wright employed a clever trick. Every time someone called a meeting, he charged that person a dollar. Although he collected a lot of dollars, this requirement made people “think twice, even though it was only a dollar.” He also used an employee-centered method to keep meetings short—inviting the creative but impatient artist Ocean Quigley, “the canary in the coal mine.” When Quigley raised his hand to be excused, “we knew that the meeting had hit diminishing returns.”

3. Make small gestures

The late Robert Townsend, CEO of Avis and author of the masterpiece Up the Organization, called the phrase “thank you” a “really neglected form of compensation.” The broader lesson for bosses is the importance of “the attitude of gratitude,” a line borrowed from Kimberly Wiefling, founder of Wiefling Consulting, who argues that too many projects end without acknowledgement and celebration and that whether a project succeeds or fails, the best managers take time to express appreciation. Conveying this attitude is especially crucial when the stench of failure fills the air—precisely the time when people most need support from the boss and one another. Bosses with the will and the skill to provide that kind of support set the stage for learning from fiascos. Unfortunately, too many bosses have the opposite response and use such occasions to conduct “blamestorms” or “circular fire squads,” where the goal is to point fingers, humiliate the guilty, and throw a few overboard.

Good bosses don’t just get more from their people and do it in more civilized ways; they attract and keep better people. If you think your employees are deadbeats, downers, and jerks, look in the mirror. Why don’t the best people want to work for you? Why do people who appeared to be stars when they joined your team seem to turn rotten?

Of all the skills and aspirations good bosses must have, self-awareness is probably the most important. Cornell University’s David Dunning has shown that poor performers consistently overestimate their intellectual and social skills. In contrast, the best performers accurately judge both their strengths and their flaws. Dunning’s research has crucial implications for leadership. The best and worst bosses alike suffer from overconfidence and insecurity, from weaknesses and blind spots. Such is the human condition. Yet the best bosses are keenly aware of their flaws, work to overcome them and to reverse the resulting damage, and enlist others who can compensate for their weaknesses.

The most effective bosses devote enormous effort to understanding how their moods, quirks, skills, and actions affect their followers’ performance and humanity. They constantly make adjustments to be a bit more helpful and constructive tomorrow than they were yesterday. To be a great boss, you must constantly ask and try to answer many questions. Perhaps the most crucial is, “What does it feel like to work for me?” If your people answered this question honestly, would they say that you know the impact your words and deeds have on them—or that you are living in a fool’s paradise?

About the Author

Too many companies approach the retention of key employees during disruptive periods of organizational change by throwing financial incentives at senior executives, star performers, or other “rainmakers.” The money is rarely well spent. In our experience, many of the recipients would have stayed put anyway; others have concerns that money alone can’t address. Moreover, by focusing exclusively on high fliers, companies often overlook those “normal” performers who are nonetheless critical for the success of any change effort.

Our work with companies in many sectors (among them, energy, financial services, health care, pharmaceuticals, and retailing) suggests there is a better and less costly approach to employee retention—and one that will serve companies well as they merge, restructure, and reorganize to seize strategic opportunities as the economy picks up. It starts with identifying all key players, but targeting only those who are most critical and most at risk of leaving. These people are then offered a mix of financial and nonfinancial incentives tailored to their aspirations and concerns. A European industrial company applied this approach during a recent reorganization and found that it required only 25 percent of the budget that had previously been spent on a broad, cash-based scheme. What follows are three suggestions for companies with similar hopes of keeping their top talent without breaking the bank.

1. Find the “hidden gems”

HR and line managers need to work together during times of major organizational change to identify people whose retention is critical. Yet too often companies simply round up the usual suspects—high-potential employees and senior executives in roles that are critical for business success. Few look in less obvious places for more average performers whose skills or social networks may be critical—both in keeping the lights on during the change effort itself as well as in delivering against its longer-term business objectives.

Once HR and line managers have generated a thoughtful and more inclusive list of key players (usually 30 to 45 percent of all employees), they can begin to prioritize groups and individuals for targeted retention measures—in our experience, 5 to 10 percent of the workforce. The key is to view each employee through two lenses: first, the impact his or her departure would have on the business, given the focus of the change effort and his or her role in it; and second, the probability that the employee in question might leave.

When a European industrial company conducted this exercise, it mapped the outputs on a risk matrix. The results were sobering. The company had been launching a new centralized trading unit—requiring almost all traders and their support staff to relocate, with half of them heading to another country—and was steadily losing people. The risk matrix revealed that another 104 people were likely to leave. Among them were 44 employees who were critical for the success of the trading unit. To be sure, some were traders but most were IT, finance, and administrative staff with unique knowledge of the unit’s systems.

2. Mind-sets matter

One-size-fits-all retention packages are usually unsuccessful in persuading a diverse group of key employees to stay. Instead, companies should tailor retention approaches to the mind-sets and motivations of specific employees (as well as to the express nature of the changes involved).

When executives at the European industrial company looked beyond their standard retention package (bonuses plus compensation for the costs of the move) and focused instead on the needs of individual employees, they found a more nuanced situation than they had anticipated. Among the key people at risk were two main groups with two different mind-sets. One consisted of individuals who were worried about relocating because it would uproot their families. The people in the other, more career-driven group didn’t mind living and working abroad but wondered, as they faced change in any event, whether staying or searching for another employer would best further their careers.

In one-on-one conversations with the people in the family-oriented group, managers explored specific concerns and discussed how the company could add to the measures already in place to increase the likelihood of retaining these individuals. On the menu of incentives: an increase in base pay, assistance in finding schools and kindergartens for their children, career counseling for their spouses, language training, and alternative work arrangements so employees could work at home or commute instead of relocating.

Meanwhile, in the conversations with the career-driven people, managers offered them a cash bonus but focused primarily on the organizational chart of the new, centralized unit, which had been designed from scratch. For people who had held senior roles in their local organization, it was essential, for example, to learn about their new responsibilities and how many direct reports they would have; for many of the more junior people a key question was who their bosses would be. Also high on the agenda was a dialogue with each individual about his or her future career and leadership opportunities in the context of the unit’s new strategy.

This targeted approach, which cost just one-quarter as much as the broad financial incentives plan the company had previously applied, succeeded in stabilizing the new unit. One year after its launch, some 80 percent of the staff who received special attention had started to work in the new location—a significantly higher share than for the group that didn’t receive this attention. Since its founding, the unit has increased its sales by more than 30 percent and its earnings before interest and taxes (EBIT) by more than 90 percent.

3. Retention is about more than money

As the European industrial company’s experience suggests, financial incentives play an important role in retention—but money alone won’t do the trick. Praise from one’s manager, attention from leaders, frequent promotions, opportunities to lead projects, and chances to join fast-track management programs are often more effective than cash. Indeed, a 2009 McKinsey Quarterlysurvey found that executives, managers, and employees rate these five nonfinancial incentives among the six most effective motivators when the main objective of the exercise is retaining people.

One financial services firm undertaking a recent cost-cutting initiative elected to use onlynonfinancial measures—including leadership-development programs—to retain the pivotal players it had identified as being at risk of departure. One year later, none of those players had quit.

Leadership opportunities are a powerful incentive in any sector. In a pharmaceuticals merger aimed at building the North American acquirer’s presence in Europe, some 50 middle managers from the acquired company accepted invitations to join trans-Atlantic teams with key roles in integrating the two organizations and developing business strategy. The chance to network with the acquirer’s senior people and develop leadership skills during the two-year program signaled to these high-potential employees—in many cases, people who had been slated for promotion before the merger was announced—that they had a promising future in the new organization. For the acquirer’s senior executives, one benefit was the opportunity to assess first hand a potential next wave of top management talent. The program was one part of a carefully designed communication and engagement plan that made it possible to sustain the energy of the 50,000-person strong workforce during the merger. The company ultimately needed to offer only 750 targeted employees a financial incentive.

When financial incentives are required, it is important to design them appropriately and use them in a targeted way. For example, one-third of the retention bonus during a merger might be paid to pivotal staff even before the deal is closed, with the remaining two-thirds to be paid out a year later—dependent in part on the recipients meeting defined performance criteria such as the successful transfer of systems from the acquired company.

Targeting retention measures at the right people using a tailored mix of financial and nonfinancial incentives is crucial for managing organizational transitions that achieve long-term business success; it’s also likely to save money.

Still, executives mustn’t view employee retention as a one-off exercise where it’s sufficient to get the incentives packages right. Rather, best-practice approaches build on continuous attention and timely communication every step of the way to help employees make sense of the uncertainty inherent in organizational change. Ultimately, what many employees want most of all is clarity about their future with the company. Creating that clarity requires significant hands-on effort from managers, including the ongoing work of tracking progress so that companies can quickly intervene when problems arise.