June 18, 2012
By David K. Williams, Contributor on Forbes
How can you prepare your company to scale? An excellent product and the right initial talent is key. But when those are in place, here’s a novel idea—how about designing a compensation strategy that empowers and motivates everybody in your business to help the company grow?
The structure I’m about to describe has been instrumental in helping my own company, Fishbowl, achieve rapid growth of 70% per year since 2007 with less than a 10% per year addition of staff, even through difficult economic times.
Here’s how it works: every member of the company (and I do mean everyone—from development to marketing; from finance to customer support; from administration to sales) receives compensation that is configured as a base plus commission. And the commission is paid every month.
Consider the advantages of this compensation plan:
- Every employee is inherently motivated to help the company focus on creating revenue.
- Job security increases, as the company’s greatest cost—payroll—rises and falls automatically along with the incoming cash.
- In a company that can’t offer stock options, this is a structure that acts like a stock dividend, motivating teams to pull together and to pull harder as they think of the company’s good. The commission is paid every month, and it can continue to be paid even after you have a stock program in place.
- It closes the inherent gaps between departments by ensuring everyone is focused on revenue, profit and savings, versus individual department agendas.
The commission structure encourages transparency and team participation, as well. Everyone knows what the budget for the monthly operational “nut” needs to be. Each day, everyone receives a report on how the company has progressed towards our monthly “nut.” Beyond that sum, two-thirds of additional revenue goes to the commission pools for each department to share among members. One-third goes to the company.
In a structure like this, the team is highly engaged; with compensation decisions acting like the invisible “belt” that holds every decision in check. Every team decides together how to distribute their portion of each month’s profits. Do we need another programmer to meet a critical goal? As the developers look at the discretionary fund they’ll divide, they are able to decide if the time is right for an additional programmer to help them drive new features for more profit, or if they are able to “crunch it up” a little to keep those funds for themselves and accomplish the work on their own.
Towards the end of every month, we see individuals from every department offering extra resources and help. A developer or member of a support team may go to the sales department, for example, to say, “I have an extra half hour. Is there anything I can do to help you make a sale?”
Are there any disadvantages to this structure? Yes, perhaps just a few:
- The commission plan is different for every role and for every department. For example, there are seven levels of commission that apply to the support and training department. We’re perpetually improving our ability to adjust and adapt.
- Is payroll difficult? In theory, it could be—but in practice, as long as we ensure the commission amounts are accurate, each department can submit the list of amounts to the payroll software and our automated payroll system takes care of the rest.
- Are there legal technicalities? Yes. It does require support from HR to build a program to ensure it is compliant with overtime pay requirements under the FLSA.
- The structure of commission is so foreign to many employees that we’ve actually missed some prospective hires because of it. There are some individuals who are simply unable to adapt to the prospect of compensation that may potentially vary by as much as 50% every month.
In hindsight, however, the potential hires we lost were hires I now realize we wouldn’t have wanted to have. The individuals we’ve gained are entrepreneurial in their focus and are highly motivated to influence the additional upside they’ll receive. After a short while on this program, we find our employees would be highly resistant to going away from this plan.
Interestingly, our structure has made it easier for potential stars to determine and to control their rising wages. We seldom need to change or raise a base salary. Individuals who are ready for an increase are ready to build, sell, train and support on more and better products and services. The rise in income is something our team members can largely influence and control on their own.
In our case, our initial investor was a single individual, making it much easier for us to innovate this format than if we’d been controlled by a traditional board or by the structure of a VC fund (yet another criteria to consider along with the points Forbes Contributor Eric Jackson listed in his top ten reasons VC-based companies fail).
We were unable to offer stock options prior to our company buyback in December 2011. We were so motivated to uncollateralize the stock that the entire company rallied and we paid back the loan seven years early.
It is valuable to note that imprudent use of company stock in startup companies is one of a young company’s biggest risks, as Forbes Contributor Alan E. Hall notes in one of his recent Grow America blog posts.
Even as my company enacts our stock option plan over the coming months, our base-plus-commission plan will remain. As we consider the ways we can continue to achieve 70%-plus annual revenue growth for just a 10-20% increase in staff (or less), we wouldn’t have it any other way. I strongly believe this structure could be beneficial for any company that is looking for an effective compensation strategy that allows them to scale.
Additional reporting for this article was provided by Mary Michelle Scott, Fishbowl President