This is a perennial difficulty for founders: I want to involve more people in my business, I want to reward them and I want them to stay, but I don't want to give the ranch away...
It helps to differentiate between four things: capital, profit, management and control. Management is about running the business, taking the day to day decisions and running the operation. Involving people in management can be done through org charts, job titles, reporting lines, budgets and most importantly, through creating a culture in which everyone feels able to have a say in how things are run. Management responsibility can be given to people without making them directors. Control is what is exercised when management either fails, or when it is not enough, and someone needs to make a decision. So most boards run on the basis of shared management, with each person having an area of the business which they manage, but with the chief executive exercising overall control. Profit can be shared without awarding equity, by using a clear and well constructed bonus system tied to metrics relating to individual and corporate performance. This gives people a stake in the near-term while rewarding them in the present. Capital is valuable only in the long term, and should be reserved for people making a long term commitment or contribution to the business. Options can be viewed as capital-lite, and should be aimed at people who have the capacity to make a material and sustained difference to the business. It is possible to have four completely separate groups of people enjoying each of those elements which is common in listed companies. In an investment bank, for instance, the owners of capital could be pension funds and other institutions, control will be exercised by the board, management will be exercised by many department heads, and profit will be shared in the form of bonuses by hundreds of people such as traders who have no other involvement but are key to revenue generation. In smaller businesses, there will undoubtedly be more overlap, but it is still useful to view these four elements as distinct layers of involvement and reward which should be configured person by person, and regularly reviewed. It is a very bad idea to hire someone you think will be a rock star, throw cash, equity, responsibility and a fancy job title at them on Day 1. I spend a fair amount of my time clearing up these mistakes.
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AuthorAnindita Doig ArchivesCategories |