Is it about the reward system and org structure? How about behavioral economics? Or maybe incentive alignment. Within the defi space, it’s known as tokenomics. There are a number of new startups and thought leaders focusing on how organizations and employees within them are rewarded and relate to each other. Though it seems a concise name to encompass the theme has yet to reach consensus.
A shift in the corporate zeitgeist has come out of necessity. To survive relentless waves of competition, those left standing have fleshed out most other methods of improvement: They say, “Get into
digital advertising. Outsource & automate. Have a great workplace culture. Have a social media presence. Use data science to take the optimal course of action…” These low hanging fruit for competitive advantage are well-known, however. To gain a true leap ahead of rivals, businesses need to look at untapped tools and ideas.
Overrated Culture
Of these common improvements, only workplace culture has switched the strategy to inward reflection. It’s proven helpful, but inadequate at catalysing the change needed. Especially in large firms. Founders are all too familiar with the challenges that come with their startups “growing bigger than themselves“. Can they manage to strike the right balance between oversight and autonomy, so their employees are disciplined yet free to innovate? When the time comes, can they bring in the right seasoned executives without alienating the team accustomed to an informal and flat organization?
Founding team members are largely responsible for these decisions, and for maintaining the company culture. Sadly, company mission statements don’t magically sweep through the office halls like a spell. Just as executives can show great examples of leadership…which soon fades from memory. That is, if they can avoid being forced out à la Steve Jobs. In many such cases, the company culture collapses shortly after key members leave.
This is why—among other challenges you’ll see below—business leaders are looking for a more rigorous formula with lasting effect on their company trajectory. Beyond workplace culture. A framework that helps “bake in” favourable outcomes, long after the people who arranged them are gone. Burgeoning enterprises are now having to think deeply about their incentive structures from the ground up. From first principles, they will need to take a hard look at how employees are compensated, grouped and communicate with each-other. This new way of thinking says that once the right incentives are in place, a healthy workplace culture will emerge all on its own.
Cases in Point
As organizations get older and larger, meritocracy tends to succumb to politics. Safi Bahcall, author and ex-biotech entrepreneur outlines this phenomena well in his new book, Loonshots:
There are two competing forces—forms of incentives termed loosely as stake in outcome and perks of rank.
As structure changes, one grows stronger and the other grows weaker. When
groups are small, for example, everyone’s stake in the outcome of the
group project is high. At a small biotech company, if the drug works
everyone will be a hero and a millionaire. If it fails, everyone will be
looking for a job. The perks of rank—job titles or the increase in
salary from being promoted—are small compared to those high stakes.
Sandy Munro, car manufacturing expert, echos similar sentiment. He notes that risk tolerance also suffers in aging firms. This is likely a result of this same erosion of meritocracy Safi talks about. Why take risks that could get you fired if it’s not rewarded? Thoughtful risk-taking in business must involve a great payoff, although many large corporations actively discourage it. In a recent interview, Sandy laid out a lucid example of incentive alignment failure and lack of innovation in the auto industry.
When you’re a legacy company, you’re held back by your past success. Legacy companies have
something called “carryover parts” and there’s a huge impetus by the
finance people to keep using those parts. They don’t lend themselves to
electric cars. That’s just one example but you could call it a force within the company that says don’t change. In change, there are winners and losers within the company itself. When
something is good for the business, but bad for your particular job or department, it doesn’t always win-out.
So how will the solutions of behavioral economics and incentive alignment be implemented to solve these problems? I break them up into three general categories: New forms of compensation, new tools and new jobs.
New Compensation
Although equity ownership can do a lot to improve behavior, it doesn’t help much when the company grows to a large size. Some employees will naturally take advantage of the situation in by being a free rider: Doing just enough work to not get fired and enjoy the fruits of their coworkers labor. If the firm is large enough, one person’s lack of contribution wont impact the stock price very much. The slacker gets the same stock appreciation as the superstar performer.
This problem can be remedied by giving employees synthetic equity that tracks a KPI(Key Performance Index) in a specific branch or division. This way, individuals have better reason to work hard. Under this localized synthetic equity system, employees will also be more critical to someone who isn’t doing their fair share, because it closely reflects on themselves. Of course, creating unbiased metrics to do this is difficult, especially in different departments and industries with their own nuances. However, with the dawn of big data and machine learning, we’re poised to quantify excellence more than ever.
Another unique tool to add to the modern compensation toolbox is delayed bonus compensation. This is to be used in situations where projects have a long time horizon before success or failure can be measured in full. Or, in situations where an employee is due to leave the firm, such as retiring or contract workers.
An example would be a contract developer hired to build an app for a company: Long after his contract is completed, managers discover the code wasn’t properly optimized, causing poor user experience and running up the server bill. Another example is a salesperson who aggressively on-boards clients that he knows won’t be a good fit long-term. However, when a portion of compensation is tied to a future metric, it helps employees think long-term, preventing the “not my problem” attitude.
In summary, new forms of equity need to be localized and fit to the correct time horizon to keep employees properly motivated.
New Tools
Below are some tools that are changing how companies of the future will operate, using concepts like incentive alignment and behavioral economics.
Firmament
Created by German software developer Stefan Lange-Hegermann, Firmament is a tool that allows employees to reward each other in chat apps such as Slack and HipChat. Built on the OST platform, it leverages the use of “branded tokens” which are pegged in an interoperable network. Employees can tip each other with real money that’s air-dropped to them by the company.
This system breaks from the traditional top-down structure of
compensation. Firms that opt-in will then have a hybrid, which can
benefit the company in many ways. Managers don’t see everything that
goes on in a company, and so can’t compensate their employees
accurately. This is especially true of dynamic jobs where priorities
change quickly or are difficult to quantify. In offices across America,
coworkers are exchanging in an informal, favor-based economy. The
firmament reward token aims to help bring this hidden economy to light.
15Five
15 five is a productivity software suite that helps employees bring more honest and effective performance reviews. It leverages psychology and a unique structure to help employees feel more appreciated and tease out candid feedback which isn’t always easy to do in face-to-face reviews.
Employers have been amazed at what this simple tool can do to make meetings and reviews more honest, structured and productive.
Balloonr
Balloonr was launched by Ivy League founders Amanda Greenberg and Noah Bornstein in 2015. Since then, it has on-boarded industry titans like Capital One and Microsoft, helping them gain valuable insight. The software leverages similar ideas as 15five but applies it to idea generation and planning. They leverage the best science and research to address how humans actually share information and make decisions. They accelerate time to wisdom, de-bias decision-making, and establish an idea meritocracy.
As Steve Jobs put it, “The best ideas must win”
Focusmate
Focusmate was created when Taylor Jacobson, an executive coach failed to get satisfying results with countless “productivity hacks”. So he came up with a new model.
How it works is simple—just open your laptop and turn on the webcam, as your match does the same. You greet your partner, declare a goal then work together. It’s the power of human accountability.
Focusmate integrates 5 behavioral triggers to achieve a flow state:
- Pre-commitment
- Implementation intentions
- Social pressure
- Accountability
- Specificity in task definition
Studies have found that harnessing these simple principles can boost productivity by 200-300%. As the remote workforce grows, solutions such as this will become vital.
New Jobs
Recent waves of innovation have pushed many out of employment, most recently, writers in the wake of citizen journalism and social media. In similar fashion, many back and front-office workers are being chipped away in favor of automation.
Despite this, at least some of these lost jobs will be replaced by new roles. One which will become commonplace is the “Chief Incentive Officer”. An executive that thinks deeply about Goodhart’s Law, the free rider problem, the moral hazard problem and other perverse incentives. This new department may be flanked by a small team of data scientists and MBAs. They will “watch the watchers” to some extent and be the deep thinkers in the organization.
Conclusion
We are on the precipice of a new type of company. One that has only recently become possible due to new technology and an automated workforce, now free to think different.
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