Earned Lessons

Twitter Summary: To grow a business, you have to give pieces of it to others who also will benefit from its growth.

In my continuing research on alternate equity plans, I spoke with the founding member of a real estate company that originally started with 6 partners, and has grown to an 80 partner firm. The founding of the company was that each partner bought 1/6th of the company and any future distributions would be divided equally among the members.   At the inception of the company, there wasn’t enough revenue to actually have any distributions, but everyone was providing sweat equity and the real estate sales model comes with a well defined commission structure.

The biggest hurdles for the company was when the 6 original partners had to make a decision of whether to keep the company small or to broaden the ownership to include more of the associates and employees.  The two times the company had to make the transition it almost destroyed the company as you had to deal with partners who didn’t want to grow the company bigger or dilute the equity they have created within the company.  The majority of the partners argued that by broadening the equity participants you could get even larger returns.  The company ended up choosing to broaden the number of participants in the equity plan, which fortunately also coincided with a growth of the business which brought greater returns for everyone. In retrospect, the founder thought that Bill Gates, Jeff Bezos and many of the internet startups got it right from the start by starting off with an options and equity plan so that the incentive to help everyone participate in the growth of the company was broadly distributed throughout the organization.

The hardest part about building a business is that if you want growth you end up having to give your business away. You have to give ideas, equity, incentives, and successes to people you have enlisted to help you grow the business. By broadening the base of the number of people working to make your organization to grow and flourish you increase the probability that you will be successful. The transition from growing “my idea” to “an organization of ideas” is likely to be the biggest issue in managing the growth of an entrepreneur started organization.

Twitter Summary:  Open compensation systems seem ultimately fair, so why do closed compensation systems still dominate?

Compensating engineers and managers in most organizations is a haphazard affair. Most organizations have “pay ranges” where they are provided a window of salary that each employee should be for stock, cash, bonuses, and even the amount of office space allocated for each employee level. If compensation ever felt “unfair”, it was more often caused by the secrecy surrounding the compensation process then any actual structural unfairness in the system. Most software engineers were in a few thousand dollars of each other, and by the time we are talking about 6 figure salaries,  “fair” was really just worrying about pride or status. However, it is hard to make people feel they have gotten a fair offer if the whole system is clothed in secrecy and they don’t feel that their compensation reflects the projects they have completed.

One solution is to have a transparent compensation process that can be inspected by the team and they can help contribute to its ultimate success. It is possible to run the largest of organizations with an open/transparent compensation system as the military and the U.S. government have published all their pay levels and expected benefits. Why don’t more companies open up their compensation for their employees to help contribute?  In my search for open and team based compensation systems my favorite example has been Joel Spolsky’s Fog Creek Software Compensation System. I was lead to his plan by the compelling article “Why I never let employees negotiate a raise”.  The summary is that if there is an issue that requires a raise for one employee, the company should consider if every employee at that pay level should get a raise. Frequently, the issue of a raise is simply the engineer is having some issues with some other aspect of their job. By having an open compensation system, the engineer can understand what it would take to increase their compensation individually, or by making the company more successful such that the profit sharing mechanism benefits them and all their colleagues.

Closed compenstation systems have difficulty getting it right for team based development methodologies such as Agile development. Agile software development practices require a different way to think about how to align team goals with the incentive to launch goals. Mary Poppendieck’s article on Managing People and Projects(PDF) is a great example of what a manager can do if they are trying to help create an appropriate reward structure for a team within a closed compensation system organization. The compelling part, is that if you follow her guidelines it will eventually lead you to a transparent/open compensation system as advocated by Joel Spolsky.

There are ultimately some holes in these compensation systems as they don’t take into account organizations that have roles that have been traditionally incentive based. An example of this is a sales force, that is provided a bonus if they sell a certain amount of the company’s product, however as a whole these seem like a great way to think about creating a company’s compensation plan.

Twitter Summary:  Information aggregators have the best chance at getting the right advertisement to the right person at the right time.

Prior to advertising on the web, advertisers were primarily paying for repeated impressions over broadcast technologies, such as radio, billboard and TV advertising. The amount they paid was based on the number of people that saw the shows, heard the radio, or passed by the billboard while the advertisement was displayed.  The metrics that the marketers use to target their customers are viewer age, sex, and zip code in the attempts to influence the viewer when they made their next purchase.

The web changed the nature of advertising by being much more precise then any of the previous methods. My first “favorite” search engine was Altavista. It returned results quickly and it was relatively complete for its time. It made money by selling banner advertising to whomever would pay for the space above the search results.  Advertisers were still paying primarily for impressions following the same strategy as for broadcast technologies, but this time they could get complete information about how many times their advertisements were actually seen by customers.

Google also began with marketing deals to display sponsored results at the top of a search results page based on their customer’s keyword searches.  Their innovation was to eventually only charge if the customer clicked on the advertisement to go to the resulting page, instead of just viewing the advertisement. This new scheme, branded as Google AdWords,  improved advertising results by scoring advertisements and only presenting the ones that were good enough to earn their customer’s clicks. Cost per click (CPC) advertising ensured the quality of the ads were high, and they created a multi-billion dollar business that replaced the impression based advertisements that appeared in the Google search results.

The challenge for marketers in this environment is getting the right advertisement to the right person at the right time.  With customer’s jumping from website to website, and searching for disjoint topics, its difficult to know who the customer is, which advertisements they have seen already, and whether they are spending the money effectively to reach everyone they can.

My prediction is “information aggregation” utilities such as Google Wave, Gist, or the customer’s web browser with integrated email client will be the next best source for complete marketing information. These aggregators could solicit customers for biographical data both explicitly (customer surveys) and implicitly  (observing the customer as they search and click on web links), and selectively share the biographical data with advertisers. This complete biographical view of  the customer will allow advertisers to more effectievely target fewer and better ads to everyone.

The challenge will be convincing the customers that the advertising they get is to their benefit as well as the advertiser’s benefit. There are concerns that this may be considered too invasive to the privacy of the customer as they navigate the web. Fortunately, the trends on the web indicate that younger audiences are more willing to share information via Youtube, Twitter, and Facebook. This would imply they are more likely to share their information with marketers provided they are included in the value proposition and actually get a benefit from the advertisements they see.  The success of Hulu bears this out since they are explicit about the tradeoff of getting on-demand video viewing while being required to sit through commercial breaks.  As people get used to the idea of providing more information to marketers, they will have the ability to get more focused marketing information that could help them make informed decisions in the future.