This is an Influencer post By Tomasz Tunguz
In his book describing Google’s People Operations called Work Rules!, Laszlo Bock presents this chart to describe the difference between the way many companies think about talent today, as a normal or Gaussian distribution, and how Google thinks about it, as a power law. It’s the most provocative idea about employee compensation I’ve found.
As Daniel Kahneman showed in Thinking Fast and Slow, humans think in normal distributions. Most people will near the mean and a few outliers exist at the best and worst end of the spectrum. But, that’s not the case at work. Quoting Bock:
“Human performance in organizations follows a power law distribution for most jobs. Herman Auginis and Ernest O’Boyle of Indiana University and the University of Iowa explained that quote instead of a massive group of average performers dominating… Through sheer numbers, a small group of elite performers [dominate] through massive performance.” Most organizations undervalue and under reward their best people, without even knowing they are doing it.”
Today, it’s common for startups and companies of all sizes to refer to compensation surveys that span the 10th percentile to the 90th percentile in compensation for roles, and use these benchmarks provide offers to new hires, inform promotion salary increases and new option grants, and underpin retention packages. And for most of the company, this strategy works very well.”
But, this compensation strategy must be complemented with a plan to reward the exceptions, the 10xers. Initially, Google used the Founder’s Award, a multimillion dollar stock grant awarded to an extraordinary project team. Founder’s Awards were presented annually to a handful of different teams.
However, Founders’ Awards engendered their own set of issues. Employees were less happy after Founders’ Awards were granted. These grant raised questions like: Who should be included in the project team? How should the stock grant be allocated amongst the team? How can I achieve a Founder’s Award if my team can’t impact the company on the same scale as others (so is my work less meaningful)? These questions impinged morale. Founders’ Awards celebrated the financial success of the team, not company achievements. I remember a few ceremonies, and that’s exactly how I felt.
So, Google experimented and determined that publicly shared experiential awards are far more satisfying cash. These include trips to Hawaii, elegant dinners, new gadgets among other things. Employees felt a stronger emotional connection to the company, regarded the business as more thoughtful, and overall employee satisfaction increased. In addition to these public experiential rewards, Google still rewards top performers privately with financial rewards that follow a power law distribution.
I’ve seen these types of rewards work well at startups, too. At one fast-growing startup, the founder rewarded the remarkable contributions of a young engineer with a beautiful motorcycle. The motorbike is a sincere gesture of thanks and recognition.
When developing your startup’s compensation philosophy, consider whether you’d prefer to compensate your team based on a normal distribution or power law distribution.
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