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I am so very tired of MBO-based bonuses in startups. I knew the concept of MBOs pre-dated my time in business school, but I couldn’t remember where they came from. Wikipedia reminded me – it’s another Peter Drucker creation from The Practice of Management.
I’ve only worked in what could be considered a “big” company for 18 months (1993 – 1995) and that was the company (AmeriData) that bought my first company (Feld Technologies). When they acquired us, they weren’t big (probably 200 people) and when I left they still weren’t really big (2,000 people) but were “big enough.” So the joy, and experience, of working in a 50,000 or even 100,000 person company eludes me.
As we enter Q4, I’m starting to see discussions about annual performance – often in the context of gearing up for 2014 plans. This often comes in the form of long emails or tedious board discussions about compensation and bonus programs. And inevitably, discussions of MBOs and qualitative performance bonuses quickly enter the discussion.
Now, I’m not a huge fan of programatic bonuses. I spend way to much time reviewing comp plans and trying to help CEOs get a decent alignment between an elusive and inaccurate “plan” (which – especially in a rapidly growing company is never anywhere close to correct), bonuses driven off of company performance, and then bonuses driven off of individual performance. It’s just really hard to get right and feels like an enormous misallocation of time for a young company.
The ostensible goal is to motivate certain behavior and reward certain outcomes. The quantitative, performance-based bonuses are about rewarding outcomes. The qualitative MBO based bonuses are often included to motivate behavior.
Therein is the conflict for me. I have a deeply held belief that a manager cannot “motivate behavior.” She can only create a context in which a person is motivated. It’s up to the individual to motivate himself. Theoretically MBOs help create this context, but it’s often an artificial construct linked to arbitrary behaviors that have nothing to do with motivational structure. Toss money in, and you put focus on the behavior, not on the motivation.
This is totally messed up in a startup. Things are changing daily. Annual performance plans are often irrelevant by February. Quantitative metrics are either too easy to hit, or completely impossible. So the MBOs becomes the achievable bonus, and behavior shifts to achieving them, even when they are even more irrelevant because of the needs of the business.
At Feld Technologies, we had a very simple bonus program. Each quarter, we paid out 10% of pre-tax profits as a bonus. We did this on an accrual basis. My partner Dave and I took the number, made a list of all employees, and figured out how much we were going to give each of them. We then printed out checks and gave them to each person. When we had our act together, which was several quarters each year, we delivered feedback – good and bad – with the checks. If I had realized how powerful this was, I would have done a better job of figuring out and delivering the feedback, in the goal of creating a context for motivation for each person, and realigning goals each quarter.
I’m considering encouraging all the CEOs I work with to get rid of MBOs in 2014. If you insist of having a bonus plan, use a financial bonus for the entire company based on top down performance. This will be a calculation across the entire company and built into the budget at an EBITDA level (e.g. it has to be funded by the performance of the company, which could include a negative EBITDA number, but the bonus pool is linked to that.) Then, the CEO and the leadership get to allocate the bonus to each person on a direct performance basis at the end of the year.
Even better, consider using equity compensation as the bonus. Figure out an equation for converting the bonus amount (in current cash terms) to stock option awards. Then let’s set aside that pool, at the beginning of the year, to award at the end of the year based on the bonus achieved. Be transparent with everyone in the company about the size and determined value of the pool, how their behavior will increase the value, and then work like hell to achieve it.
I’m looking for feedback on this approach. A programatic bonus amount driven by company performance. Individual bonuses based on the discretion of the leadership team that add up across the company to the company bonus pool. No MBOs.
As Amy and I get to the end of Season 2 of Battlestar Galactica, I’m noticing more and more management and leadership lessons. Oh – and it’s awesome SciFi.
In my experience, it’s a challenge for CEOs and management teams to get focused on a small set of numbers that drive behavior. I talked about this in my post Three Magic Numbers. I regularly suggest that you should only have three numbers that you focus on daily – that reflect “what is going on right now in the business.”
You should be able to discern what is going on from the daily trend of these numbers. Sure – you’ll look at plenty of other numbers, but these are the three you focus on every day. You don’t need fancy tech for this – just a white board.
If you are a BSG fan, you’ll recall the white board behind President Roslin’s desk. It has one number on it. The number of survivors alive at that moment. This number started showing up in the opening credits some time in Season 2, and after a few episodes I noticed it changing each time in the credits, often based on what had happened in the previous episode.
This is BSG’s KPI. The number of humans alive. Right now.
When I reflect on this KPI, I realize it drives all the behavior on BSG. The easy behavior to focus on is keeping the number from decreasing. But as Gauis eloquently states late in Season 2, if the trend line continues, based on a complex regression analysis he’s done, the human species will be extinct in 18 years. Soon after, Admiral Adama reminds Roslin that the number generally just goes down, and that Roslin had said early on that if the human species is to survive, the colony needs to start “making babies.”
This is an obvious set up for a much more complex social issue – that of pro-life vs. pro-choice. But obvious set up aside, Adama is focusing on the KPI and reminding Roslin that the goal is for it go up, as well as not go down. It turns out there is a lot of richness in the number.
In my world, as companies grow, I notice a proliferation of KPIs being tracked. On a periodic basis, I encourage CEOs to keep paying attention to all the numbers, but surface – on a daily basis – the three magic numbers that drive their business.
Do you know your three magic numbers?
At this year’s NVCA meeting, my partner Jason Mendelson (who was the chair of the event) interviewed Dick Costolo, the CEO of Twitter. Dick is an awesome CEO, awesome human, and awesome interviewee. Among other things, he’s hilarious, and PandoDaily wrote a fun summary of the interview in their post What CEOs could learn from comedians.
Dick had many great one liners that fit in 140 characters as you’d expect from someone who is both the CEO of Twitter and was once a standup comedian. But one really stuck in my mind.
It’s not your job to defend your team. It’s your job to improve your team.
Upon reflection, all of the great CEOs and executives that I’ve ever worked with believe this and behave this way.
Every time I make an investment I believe it is going to be an incredible success. I don’t know any VC who invests thinking “eh – this will be mediocre. When you start the relationship you believe it’s going to be massively successful. The same is true of hiring an executive. Dick made the point that the cliche “only hire A players” is completely obvious and banal. CEOs don’t run around saying “hey – let’s hire C players – that’s what we want – C players.” Everyone you hire is someone you think will be an A player, by definition.
But, in the same way that every VC investment doesn’t become a 100x return, every person you hire won’t turn out to be an A player. After a few months, you start to really understand the strengths and weaknesses of the person. And you see how the person interacts with the rest of your team. This is normal – there’s no way you could know any of this during the interview process.
The not so amazing CEO or executive immediately falls into a mode of trying to defend the person, or the team, to the outside world (board, investors, customers) and other members of the team. I’ve heard a remarkable number of different rationalizations over the years about why a person or a team is going to work. And, when I press on this, the underlying response is often simply “give us / me / them more time.”
Instead of defending the team, the amazing CEO will respond with “yup – we need to get better – here’s what we are doing.” And then they’ll add “what else do you think we should do?” and “how can you help us improve?” This type of language – accepting reality and focusing on improving it, rather that defending it, is so much more powerful.
Of course, often the answer is that to improve a team, you have to eliminate a person or move them to a very different role. This is hard, but it’s part of the process, especially in a fast growing company. Someone who was incredible at a job when the company is 50 people might be horrible at the job when the company is 500 people. Nothing is static – including competence.
This is true of CEOs as well. We can all be better at what we do – a lot better. It’s easy to fall into the trap of defending our own behavior when someone offers us feedback or constructive criticism. The walls go up fast when someone attacks us, or we fail. But if you switch immediately from “defend” to “improve”, you can often get extraordinary feedback and help in real time. And sometimes you have to replace yourself, as Jonathan Strauss at Awe.sm did recently and explained in his tremendous post Replacing Oneself as CEO
I loved working with Dick at FeedBurner – I learned an incredible amount from him. I treasure every minute I get with him these days and one of the biggest bummers about not being an investor in Twitter is that I don’t get to work with him on a regular basis. It was joyful to listen to him and realize that there is another wave of people at a rapidly growing and very important company that are learning from him, as he works to improve his team on a continual basis.
Now that we are in March, you should have a pretty good view of how your Q1 is likely to end up. If you are a revenue generating company, you’ve probably got a formally approved 2013 plan by now (if not, why not?) Your board is paying attention to your performance against plan, and you and your management team are executing based on the plan you had approved, which likely includes both a revenue plan and an expense plan.
If your sales and revenue are not on or ahead of plan, it’s time to take a hard look at what is going on. Q1 is the easiest quarter to make since you just created the annual plan. If you miss Q1, especially in a recurring revenue, services oriented business, or adtech business, there is almost no way you will make it up over Q2 – Q4. Sure – it’s nice to think something magic, special, and happy will happen, but it almost never does.
Step 1: Put on the brakes right now on discretionary spending, especially headcount. You are probably spending at plan. If sales / revenue / MRR are behind plan, you are just creating a bigger problem for yourself.
Step 2: Do an aggressive root cause analysis of why you missed Q1 so far (January and February). Use the five whys approach and keep digging until you actually understand what is going on. Don’t let your sales organization wave things off. Don’t assume it’s all going to come together on 3/31. Don’t assume the high level metrics you are looking at tell the story. Go deep as a management team. Get everyone on the management team in a room for the day on Saturday 3/9, and figure it out. Yeah, I know some of you are going to SXSW – figure it out. It’s important.
Step 3: Keep playing through on your plan for all of Q1 other than discretionary spending. Be surgical about what is going on. Use this as a wakeup call that you aren’t executing well yet, or at least to the plan you put out there. Do you have confidence you’ll make it up in March? If you do after you think hard about it, then you’ll know in a few weeks. But don’t wait for those weeks to pass to get your mind into the issue.
Step 4: Re-forecast Q1 and the rest of 2013 based on what you expect the actuals for Q1 to be. Again, go deep. You just created an annual plan so the process and the numbers should be fresh. Use it to re-forecast based on the new information you learned in January, February, and Step 2. Get it in shape so that after you know the score for Q1, you can quickly put it in front of the board.
Step 5: Call a board meeting for around April 15. Make this a Q1 review and Q2 – Q4 planning meeting. As part of this, get a new 2013 plan approved that takes into consideration what you learned in Q1.
Don’t panic, but don’t be caught off guard. Assume you won’t make things up and get ahead of them by figuring out what your real trajectory is.
Oh – and if you are beating your Q1 plan, then start thinking about how you can accelerate and grow even faster!
Following is a guest post from Chris Moody. Chris is president and COO of Gnip, one of the silent killers in our portfolio. Once the main stream tech press starts noticing Gnip, they will be blown away at how big they got in such a short period of time by just executing. Chris is a huge part of this – he joined Gnip when they were 10 people and has been instrumental in working with Jud Valeski, Gnip’s founder and CEO, to build a mind blowing team, business, and market leadership position.
Following is a great email Chris sent me Friday night in advance of the Foundry Group “Scaling Your Company Conference” which we are having this week for CEOs of companies we are investors in that are on the path from 50 to 500 people.
Startups that experience success are typically built upon a strong foundation of trust among the early founders/employees. This trust has been solidified through long days/nights in small offices working on hard problems together. The amazing thing is that the founders don’t always realize that their company is even operating under an umbrella of trust or that trust is one of their core values. Instead, they just know that it feels easy to make decisions and to get shit done.
When companies try to scale, one of the biggest mistakes they make is trying to replace trust with process. This is rarely a conscious decision, it just feels necessary to add new rules in order to grow. After all, there are a lot of new people coming into the company and it isn’t clear who of the new people can be trusted yet.
A startup obviously needs to add process in order to scale, but if you replace trust with process, you’ll rip the heart right out of your company. When adding processes, ask yourself the following questions:
- Does this new process help us go faster?
- Does this new process help us be more efficient?
If the answer to these questions is “yes” you are off to a great start.
Now ask yourself “Are we adding this process because we don’t trust people to make decisions?” If the answer to this question even has a hint of “maybe” you need to stop and really consider the cost of that process.
Replacing trust with process is like a cancer that will spread quickly and silently throughout the company. One day you’ll wake up and think “this place doesn’t feel special any more” or ask yourself “why is it so hard for us to get stuff done.”
Trust could be one of your most valuable company assets. As a leader, you need to fight like hell to protect it. If you are successful protecting trust, you’ll actually grow much faster and you’ll still have a place where people love working.
I’ve seen trust work at a 700 person company. Trust can scale.