Wednesday, 7.53pm
Sheffield, U.K.
The employer generally gets the employees he deserves. – J. Paul Getty
In my last post I wondered what a business model should look like these days. I suggested we should replace capital and labour with the concepts of leadership and knowledge.
Now, let’s look at compensation. What do you need to provide to build a company – a group of people who work well together and create value for customers?
It’s easy to start by thinking that it’s all about money – that you have to pay more than anyone else. But a better way to think of the compensation package you provide is as a screen, a filter that gets you the people you want and filters out the people who aren’t a good fit for you.
For example, a lot of job adverts don’t provide salary information. Why is that? Is it because they think that some can lure away their staff by charging more? Or because it’s a negotiable thing that you might be able to drive down?
Now, if you’re the kind of person who pays different people different amounts for doing the same thing, then one might wonder whether you’re the kind of person that others would like working for.
But let’s leave that to one side – perhaps we should start by asking what employees are looking for in the first place.
In a paper titled Employee compensation and new venture performance: does benefit type matter? Christopher J. Boudreaux looks at how benefits to employees relate to firm performance. The conclusions of the paper are interesting because you can see how thinking about the question in terms of basic human motivation can help you create effective compensation packages.
If someone wants to work in a company as an employee the chances are that they are motivated by a need for stability, which is essentially the same as safety. This is the second level of Maslow’s hierarchy of needs, usually expressed as a pyramid, which ranges from physiological needs through to self-actualisation needs. They want, in Robert Kiyosaki’s words, a safe, secure job with benefits.
But benefits come in many shapes and sizes. Some benefits are associated with safety – like retirement plans and healthcare. Other benefits have to do with flexibility, the ability to work differently or receive performance related pay, like commission on sales. Some of these benefits are less to do with safety and more to do with love and belonging – one level up on the pyramid.
Boudreax’s research suggests that firms that provide stability based benefits to employees fail less often and have a better chance of making a profit. Firms that provide flexibility have a better chance of making a profit but do not seem to reduce their chances of failure. Stock options turn out to be a bad thing, depressing profits.
Now, this seems to make sense when you look at what motivates people – and for most of us it isn’t money. Money, it turns out, satisfies you only for a short while. When you get some you feel good. But you need more each time to get the same hit. If your compensation package is based entirely around money then you’ll get the kind of people who believe that money makes you feel good rather than people who believe that serving others makes you feel good.
What this suggests as a compensation policy is that you should keep it simple – a competitive salary and with good benefits that promote stability and security. This will attract employees to you that value stability. You might lose the ones that need high levels of variable compensation – like commission based salespeople, but you’ll also reduce your chances of failing which can happen quickly if commission hungry people decide that their need for money is greater than your need to maintain a reputation.
What I think this paper misses is that it is based on the idea that you have to pay to get the best people out there. I think you can also do well if you grow your own team – invest in teaching and training the team you work with, and invest in the way in which you teach and train. A well-trained team is a formidable force in the market.
A strategy to develop your company should therefore be founded around providing people with a good salary, benefits that promote stability and a good training experience. It’s so easy to say that and so hard to do in practice. Maybe that’s why so many people hope that they can just create an incentive package based around a share of winnings and let people loose.
Building a team is, hard and demanding work. But it’s worth doing if you want to build a company that has a good chance of going the distance.
Cheers,
Karthik Suresh
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