Sweat Equity Compensation: The Great Talent Acquisition Equalizer
Great talent makes the difference
If you can remember back to your old grade school days, employee talent today is often described with the term A, B, or C player. With a B level employee being a basic “Steady Eddie” and quite capable, the zenith of employee types is the A player. These are the individuals who are already coming up with solutions before most have even identified that there is a problem. They are the “holy grail” of employee types and everyone covets them. But why you may ask, and how does one quantify the value that an A employee brings to the table compared to a B or C? McKinsey (of their War for Talent fame) actually created an employee value index based on a set of criteria they use to separate the best from the rest. What they found is that companies who had more A players were historically able to deliver a 22% higher return to shareholders compared to companies with lesser type employees. The bottom line is that better employees increase your bottom line.
A simple example to illustrate what impact A players have
Let’s assume that in a sales organization, an average good employee, or B player was producing at 100% of quota (let’s say $500K per year). Using that as a baseline, that would mean that an A salesperson might be producing at 125% (or $625K), while a C salesperson might produce at 75% (or $375K). Given that the sales goal a company has is $3 million dollars, the question then becomes how many of each type employee would you need to hit your sales goal? The answer would be
4 A’s or $3,000,000 / $750,000 sales per employee
6 B’s or $3,000,000/ $500,000 sales per employee
8 C’s 0r $3,000,000/ $375,000 sales per employee
Leaving commissions aside, if you just considered that a base salary might amount to $80,000, that would mean it would cost you $160,000 more to achieve the same sales result with all B players and $320,000 more if your entire sales team consisted of all C players. Of course nobody purposely sets out to hire an underperforming employee. The fact is every organization tends to be a mixture of all employee types. The point here is that those organizations that are good at figuring out what the characteristics of their A players consist of are the ones who can move faster and become profitable quicker.
Talent and early stage companies
In large companies with maybe hundreds of sales people (or engineers or computer programmers), the productivity lapses of one or two underperformers tend to be masked by the stand out employees who make up the difference. In fact, some would say these companies even have the luxury of seeing if their underperformers might just be late bloomers and worthy of a longer look. Early stage company founders are generally not afforded those luxuries. In fact, if the addition of each new employee isn’t producing additive results quickly, the cash burn to keep these individuals around and see if they blossom is generally a luxury owners just can’t afford. When you are talking the difference between break even or profitability, each new hire by an early stage company owner could be a make it or break it proposition.
So how can the little guy compete for the A players they need?
Many of us have been there. It’s the old David and Goliath story, right? As the “little guy”, I need the best of the best of talent to jump start my company. I need the person GE is looking at or that Merck is making an offer to. The problem is that person’s market compensation value is way out of my price range. If I bring them on board, I just might be blowing through a cash burn rate that’s unsustainable. Many early stage company owners are faced with this daily dilemma of hiring what they need versus what they can afford. Is there anyway that you can clear this hurdle?
Let Ben Franklin be your guide
I might be dating myself here, but guys of my generation when faced with some tough choices routinely went to the creation of their Ben Franklin lists. The Ben Franklin is nothing more than lists you create looking at all the positive and negative impacts of your choice. By filling both sides out and reviewing them, it helps to crystallize what your decision should be. So with the question “what can I offer new employees who might be comparing my company to more traditional employment options?”, you might want to craft your Ben Franklin list. I’ll make the assumption that as the owner, you are passionate about your company. I’ll assume you don’t see many negatives to joining your team. That’s good because if you aren’t excited about what you have to offer, it will come through loud and clear in your communication with prospective employees. So let’s talk about a list of positives that might reveal why your employment offer is attractive to top talent.
- Your company is a fun and exciting place to work – If any of you have worked for big companies, you know that some days it seems like you go from meeting to meeting talking about what you want to do, but somehow never accomplishing your objective due to “big company roadblocks.” I read somewhere that once a company gets above 100 employees, it generates enough communication and paperwork between each other to consume most people’s work days. The problem is nothing is being done to take care of a customer or minor things like that. The reality is employees are looking for work environments where their work makes a difference and they can be part of something great. If you have one at your company, let them know it.
- Speaking of the office – If you read the headlines, you might have noticed we have a bit of a yo-yo fuel crisis in this country. It seems many are working just so they can afford to commute back and forth from work to home. And why commute to the office? Well, because that’s where “Big Brother” says you need to be so they can determine if you are effective or not. Imagine if you will an employer who doesn’t care where you do your job from or what time of day you do it. Maybe it only requires three days a week in the office versus five. Or maybe there was no office and everyone actually worked virtually from all points of the globe. Just like the marketing of products and services is becoming more customized to the individual, so is employment. If you have an employment brand that says we trust our employees to get their jobs done no matter where that is, you have a very attractive option to be considered
- Small is not a bad thing – In many employment circles, small conveys instability, or high risk. It’s a setting that scares many potential employees away. Trust me, as a start up owner; these aren’t the people you want anyway. Those type people might spend a 30 year career at a company finally getting to make a decision in year 30 that you need them to make on day one of employment with you. There are lots of employees out there who want to make decisions now because they know it’s how they will learn a business. You just need to communicate that decision making and taking ownership of your role is welcomed and encouraged.
- Don’t forget the boomers – People tend to generalize about new start up ventures and think it’s a young person’s game. You know; high energy required and lots of moving pieces. Guess what? If you were to follow the labor force demographics like me, you would realize that the fastest growing segment of the workforce between now and 2016 will be employees over the age of 55. In fact while that group is projected to grow by about 70%, those under the age of 55 will only grow by 2.4% and workers under the age of 24 will decrease 6.9%. Boomers not only represent a labor supply with some of the best intellectual capital on the market, but are leaving the traditional workplace with big portfolios looking to invest in start up companies as well as work for them.
- It’s not always about the money – I’ve been at the talent acquisition game for a long, long time. I’ve never seen a survey of workers in 30 years that ranked compensation as the number one reason why employees were attracted to or remained with an employer. It generally comes down to opportunity and someone who values what they do. As an early stage company owner, you have a powerful weapon at your disposal in the war for talent. It’s more powerful than the best salary someone can be offered. What is this magic weapon? Equity in your young company. More to the point sweat equity.
Think about it. Knowing what we all know now, who wouldn’t have accepted an offer from a geeky, college drop out like Bill Gates and joined up at Microsoft? We all would, but back then if you sat across the table from him not knowing what the future held, you would have your doubts. During my staffing industry days, I actually had Microsoft as an account and made many trips out to Redmond, WA. I had the opportunity to meet many “Microsoft Millionaires.” And who were these people? Well people just like you and me who sat across from Bill Gates, listened to his vision and accepted the only thing he could offer which was a piece of his company in exchange for their sweat equity. The rest is history and the American dream. So the next time you think you can’t compete for the best talent, think again. Who wouldn’t pass up on an extra $25,000 in base salary compared to an equity interest in Microsoft, or for that matter, your company? It’s all in your presentation of the opportunity and the chance at wealth creation. The tendency may be to not want to part with equity, but its rare when one individual can do it all by themselves. By inviting others to the party, you should surround yourself with people who compliment those things which you cannot do but desperately need.
Early Stage start ups fuel the U.S. Economy
It’s a little know fact that early stage start ups have accounted for 65% of all net new job growth in the U.S. over the last 17 years. In fact if you look around the world, some 250 million people were involved in entrepreneurial activity in roughly 80 different economies. If you are a start up owner, you are not alone. You belong to a very large community of people who launch ideas and help create not only the products and services used by the world’s consumers, but equity for many of their people who choose this path of employment over all others.