Let’s Get Paid Upfront: getting over the carrot-stick game

In start-up and VC land is all about technology innovation, isn’t it?… or so we tend to think.

Actually is not, or at least not all, many companies are thriving on simple innovation schemes applied to processes, business models or simple tactics.

Going further, the concept itself of ‘frugal innovation’, a.k.a creative thinking in the face of constraints, a.k.a doing more with less in the face of critical conditions, shows all the many ways problems can be solved even in the absence of proper resources.

This wonderful TED talk by Navi Radjou is an excellent primer on the topic, covers from fridges running with no electricity in India to advertising billboards producing water literally out of thin air in the rain scarce city of Lima in South America.

But today, in this post, we’re going to talk about an even more simplistic yet powerful innovation tactic: incentives.

First, the Theory:

Incentives and reward schemes are used in companies to drive employee and management behaviors, aligning those toward a set of objectives.

Incentives range from simple weekly, monthly or yearly salaries all the way to sophisticated cash bonuses with triggers, accelerators and equity schemes more long term oriented.

For the vast array of different incentive and compensation mechanisms one thing is true, they all are paid AFTER the activity and expected behavior has happened. Simply put, if you behave and meet your targets, you get paid (carrot), if not, you don’t (stick).

…There must be a better way. Considering everybody needs to be paid for his/her work, what if we get paid BEFORE?.

With current company incentives lying ahead, in the future, all rewards are perceived as a future ‘gain’ contingent on employee & management behavior and this is an excellent transaction scheme, no doubt.
But there is a much bigger motivation factor for humans, actually double at least: loss aversion.

Kahneman, D. and Tversky, A. (1984) — ‘Choices, Values and Frames’

Just look at the grey area in the left (loss quadrant) in comparison with the green area on the right (gain), for the same absolute incentive amount X, you get 2Y motivation for a loss.

So, what if we re-wire the incentive schemes in a way we can leverage this much bigger motivating factor?

The Watney rule for Startups

In this letter to their limited partners, First Round venture capital firm set the stage for what is to come this year for start ups.

Back to the ‘old normal’ and adjusted valuations has put all expectations on start-ups to become deeply conscious on their expenditure and make the most efficient use of capital.

Kind of the behavior the astronaut Watney showed while stranded on Mars waiting for rescue in the movie The Martian.

Similarly, and while the next ‘rescue’ round of capital comes, Start-ups CEOs need to use their limited resources imaginatively while securing key milestones and monetization in particular happens. So they started paying bonuses in advance.

Wait… how is that an efficient use of working capital?

It actually is, and, as Irfan Pardesi told me when we met in San Francisco in May, paying in advance his sales execs was a much better motivator for performance, which grew 15% on average and even 50% in some individual cases.

Irfan is a serial entrepreneur, founder of Accentuate Capital Markets, a holding company providing financial FX brokerage services from South Africa. Irfan is also a member of YPO, the Young Presidents Organization, a non-profit organization of leaders under 45.

Paying bonuses and/or the paycheck in advance creates trust and strengthen bonds between the company and its employees/managers, who feel much more confident about the company and react incredibly well to the trust put on them.

On top of that, think how cool it is to get your money upfront every month, so you can do the things you want now rather than waiting to get that elusive bonus at the end of the year. This is a form of instant gratification in a way, and your company is doing that for you in appreciation of your work.

There needs to be a catch of course for this model to work and to secure ‘loss aversion’ dynamics work towards objectives.
Irfan told me, for this model to work two things must be in place:

• Close management and monitoring of the activity so targets are really realistic and achievable, consistently, each month

• A catch, a future deduction of the paycheck/bonuses if targets are not met, something reasonable and agreed with the employees

End result? once the process is tuned in, and, securing you build that trusted relationship with your employees, productivity and performance will be boosted significantly (specially at the end of the month when loss aversion feelings kick in).

The magic of a 2x motivating factor.

Actually there is a whole new industry arising around the concept of instant gratification, the precursor to loss aversion.

ActiveHours, a Palo Alto startup offers the possibility to get your monthly salary paid almost in real time, through an app and in cozy hourly installments.

It’s like everyday is pay-day!

I’m particularly fond of the trusted relationship model, in my own experience, all stelar teams and epic growth stories come from nimble teams with strong bonds of trust both amongst them and with management, add the right incentives at the right timing, and there you go, the sky is the limit.

ed fernandez
@efernandez