Employee Compensation and The Alliance

file000166859946

By Reid Hoffman, Ben Casnocha, and Chris Yeh.

Mutual benefit is the fundamental characteristic of an alliance in the workplace. Ideally, by working together, the employee transforms his career and the company transforms its business.

When an employee evaluates what he or she stands to gain in this alliance, the cash and equity compensation the company offers should be one of the benefits. But it should not be the dominant benefit.

Cash compensation and equity is part of the employee’s financial capital. In contrast, our book The Alliance focuses on how the company will help increase the employee’s human capital by making him more valuable and employable through acquiring important skills, experiences, and connections.

These “soft assets” (as we referred to them in The Start-up of You) accrue as the employee pursues and accomplishes his mission, and enable career growth in a way that simply making more money cannot. The smart long-term strategy for an employee is to optimize on building up human capital instead of optimizing for maximum short-term cash: unique skills, powerful experiences, or a deep professional network. These assets have a longer-term pay-off if leveraged well.

The company also wins when employees develop soft assets, of course. Employees who have up to date skills and networks do better work on the job.

One of the ways a company and employee organize the soft asset plan is by committing to a “tour of duty” that has a meaningful mission objective. An example mission objective could be a product launch or scaling some initiative to a certain level over a finite time period. There’s mutual benefit here, too. For the company, employees who commit to a tour of duty because of a meaningful mission will outperform those who are simply seeking cash-for-time. For the employees, they will be most happy and fulfilled if they’re involved in meaningful, high-impact work. Various research on employee engagement and employee happiness support these claims. In Silicon Valley, we call it having “missionary” rather than “mercenary” employees, and our innovation culture depends on it.

All this said, to ignore cash compensation in the context of the alliance is foolish. Regardless of how much they love their jobs or how meaningful the mission, most people would quit instantly if they were told that from now on, they wouldn’t be paid. Soft assets are critical for long-term value, but you can’t use them to pay the mortgage.

In a separate but related conversation to the tour of duty conversation, the manager and employee discuss the compensation package, which generally includes a salary or hourly rate, and might also include things like healthcare, 401k matching, and incentive compensation. The most common incentives include stock option or RSU grants, which vest over time, and bonus plans, which are calculated annually. Salespeople also often receive a commission based on how much they sell. In larger organizations, the broad structure of employee compensation tends to be set, for scalability reasons; personalization and negotiation between manager and employee happens within that structure.

All of these compensation systems serve the goal of alignment. Just as an alliance should align the interests of employee and company by providing the opportunity for soft asset growth and a meaningful mission, the compensation system should align the cash compensation with the value created by the employee accomplishing the mission. Ideally, monetary compensation gets adjusted up or down based on performance over the duration of a tour. Typically, monetary compensation (salary, bonus or long-term incentives like stock options or RSUs) is reviewed annually to allow for some adjustment and alignment. With more meaningful and honest 1:1 conversations between managers and employees, which we espouse in The Alliance, employees can better understand what they make and how they make it.

In the end, no compensation system is perfect. How many of you think that you are paid exactly the right amount? The alliance doesn’t change that fact. What it does do is to help a manager build a stronger relationship with your employees by contextualizing compensation details in an intelligent, more general career conversation.

Below are some additional frequent questions we’ve received about the Alliance and compensation.

Q: I’m an individual manager. I don’t fully control compensation for my employees. How should I deal with compensation when I lead a career conversation with one of my team members?

A: Individual managers can face constraints when negotiating compensation with employees. Oftentimes, HR sets and enforces a company-wide compensation policy or management enacts budget constraints that curtail compensation increases across the board. Still, managers have the ability to tout their employees’ accomplishments and almost always exercise some level of discretion. Furthermore, managers should focus on the elements of compensation that they do completely control. For example, you can still help your people grow their soft assets. As a manager you can define a mission that aligns well with the employee’s aspirations and values and which helps advance his career. On an ongoing basis, you can help the employee acquire useful knowledge and skills, build his personal network, and burnish his personal brand with speaking and thought leadership. This is true even if your organization doesn’t adopt the alliance framework!

Q: Should the company pay a “loss of optionality” bonus for the employee if he’s taking himself off the job market during his tour of duty?

A: The alliance framework does not imply there should be a special “loss of optionality” bonus for an employee who signs up for a tour of duty. But it does imply that there should be a vigorous, honest discussion between manager and star employee about the nature of their commitment to each other.

By signing up for a tour of duty, both company and employee gain short-term and medium-term predictability. This is what lets both sides invest in each other with confidence over the course of the tour. As such, even though this isn’t a legal agreement, breaking the tour of duty commitment represents an ethical violation.

Of course, talented employees will always be sought after by other companies, and sometimes employees will come upon a truly transformational career opportunity at a different company that would justify them ending their tour with you early.

As a manager, you should aspire to get to a place where your employee will talk to you first before seriously exploring alternative career offers in the middle of a tour. After all, if an employee is so unsatisfied or uninspired on his current tour that he feels compelled to be interviewing elsewhere, better for you to know about it as early as possible so you can potentially redefine the tour of duty, redefine the relationship into a short term, month-to-month transitional one until a new tour can be defined, or help the employee amicably transition out of the company altogether. You earn this “right of first conversation” by showing the employee that you’re truly committed to his career transformation and not simply motivated to keep him at your company as long as possible.

As a manager, be specific with your employee on how your alliance deals with certain tactical scenarios, such as interviewing elsewhere during a tour. For example, is it acceptable for the employee on a tour of duty to answer the phone when a headhunter calls? Is it acceptable to take a day off to interview at another company if the employee is already on a long-term commitment with his current employer? The manager and employee need to arrive at a mutually agreeable decision on this and other potentially sticky situations. While managers may be tempted to consider any contact with another company as a violation of the ethical pact, keep in mind that one way an employee can better understand his market value and the quality of his current career opportunity is by talking to other companies, so to explicitly bar that activity would not be in the spirit of the alliance. Different managers may have different standards, but all managers should be clear about expectations.

Q: If a tour of duty’s mission lasts multiple years, should compensation be set for multiple years? Why set compensation annually?

A: Today’s compensation systems, with stock option and RSU vesting, 401k match vesting, and so on already reward employees for staying over the long term. These kinds of systemic, standardized incentives are good because it does make sense to think about compensation in the context of long-term missions.

That being said, even if a tour of duty is expected to last more than a year, we suggest regular check-ins and tweaks as necessary. The goal of the tour of duty framework is to provide greater adaptability; locking in compensation could lead to a misalignment of compensation and responsibilities. In this sense, re-visiting compensation on an annual basis is not necessarily at-odds with a long-term tour of duty.

Q: In a classic compensation negotiation, there’s information asymmetry between employer and employee. The company has access to all the company’s compensation records in addition to market data from commercial providers. The employee meanwhile doesn’t even know what his co-workers make, let alone broader market trends. Doesn’t this information asymmetry erode the trust that’s necessary for the alliance framework?

A: Indeed, transparency and honesty are necessary for a true alliance.

Companies should be transparent about how they determine compensation (while preserving the confidentiality of other employees). Managers should share the data they’re relying on to determine compensation benchmarks. If candidates and employees expect companies to be open with them, then they should be ready to reciprocate by being open about their compensation history, competitive offers, and the information they’ve gathered through their networks and readily available reported data.

As we put it once in an interview, the ideal scenario is for both parties in a compensation negotiation to show all of their cards to each other, thus cooperatively determining the fair market rate as effectively as possible.

By framing this negotiation as a puzzle to be solved, rather than a battle to be won, both parties can work together, rather than at cross-purposes. Of course, at the end of the day, you do have to set a final number. The goal is simply to find a number that reflects the mutuality of a transformative alliance.

Q: How do I handle compensation when introducing the alliance to current employees who are already on an undocumented tour of duty?

A: For existing employees who are not on a defined tour, we recommend that you introduce the tour of duty process by defining the non-compensation benefits to the employee—the human capital gains around skills, experiences, and connections that can lead to career transformation—and leave the current monetary compensation system in place. This reduces uncertainty for both company and employee.

When it is time to define an employee’s next tour of duty, you’ll have the opportunity to work compensation into the discussion. In most cases, milestone- or achievement-based incentives will best align the interests of the employee and the company around accomplishing a specific mission. Transform the company, and be rewarded–that’s the kind of compensation that helps attract entrepreneurial employees.

This post was co-authored with Ben Casnocha, and Chris Yeh. To continue the discussion with us on this topic, please join our LinkedIn Group.

Photo: morgueFile

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s