Employees Should Have Short-Term Guaranteed Contracts Like Pro Athletes

If you like this article, check out another by Robbie: Every early startup should have an unpaid senior team

Hey, umm, can we step into a conference room real quick?

This is the setup most managers have experienced at some point. An employee wants to take you into an office to drop the bomb that she is giving notice. You get two weeks, but it will take at least two months to replace her, not to mention the onboarding and ramp up time for the replacement.

Sometimes you can see it coming, but often you can’t. As I’ve written before, losing an employee is one of the most damaging things that can happen to a company — and if it’s not, you aren’t hiring well. A certain amount of turnover is healthy, but it’s the unpredictable, opaque nature of it that I don’t like.

Employees have no incentive to give their employers extended notice. Typically, the better, more valuable employees will be accommodating, but it still hurts. It makes resource planning and allocation difficult because you never know when someone is going to leave. On the flip side, companies often stick with employees longer than they should simply because the employee has been “loyal.” There isn’t a clear point for both sides to reassess the relationship (and the dreaded performance review isn’t the answer).

It’s not just a matter of “treat your employees right and they won’t want to leave.” At Automated Insights, we had two straight years where no one left the company and were named a Best Place to Work in the Triangle for four straight years. But eventually, when the company has been around long enough and has enough employees, you’ll start to see people go. It’s healthy for employees to move on eventually, so I’m not advocating that the answer is zero attrition.

It’s the way we set up the company-employee relationship that is fundamentally flawed. In most cases, the company has no incentive to give ample notice to an employee it is going to let go. Likewise, an employee doesn’t want to publicly send signals that she is looking around for fear that the company may let her go first due to her disloyalty.

All of this stems from the unspoken “marriage” that an employee and employer enter when first starting at a company. You don’t join a company with the idea that you will be leaving at some point in the future. This worked fine back in the day of career-long jobs and pensions, but in a world of increasing voluntary turnover and (eventually) increasing job loss due to automation, there is no true loyalty on either side.

And you know what? That’s ok. You don’t need to be part of one company your whole career. But what is wrong is for both parties to enter a relationship under the pretense they are going to be with each other long-term when that rarely happens.

Yes, Another Sports Analogy

I’m in favor of a different model. One that makes the duration of the relationship explicit, with the option to renew if both sides want to continue. It’s an explicit process, instead of an unspoken assumption. It’s similar to how professional athletes are managed with guaranteed contracts in the NBA and MLB.

Reid Hoffman talked about the benefits of applying the sports team model to the corporate world in his book, The Alliance (here is a quick summary), but I don’t think he went far enough.

This is how it would work. Instead of a general employment agreement that has no end-date, an employee signs up for a one-year commitment. Before the end of the 12th month, and it could happen anytime before that — say after the tenth month, the employer sits down with the employee to discuss renewing his “contract.” Do both parties agree to commit to the relationship for another 12 months? If so, extend the term. It also presents a natural point to discuss any compensation adjustments or position changes, which is often an afterthought at many companies.

The kicker is you need to provide employees incentive to stick around until the end of their term — that is the whole point of this exercise in the first place. For athletes, they have a natural incentive with their ability to participate during the season.

I recommend that a significant pre-defined “bonus” be paid out after the term is completed. Imagine an employee wanted a salary of $100,000. In the guaranteed contract model, I’d make the salary $90,000 with a $20,000 end-of-term bonus. That means they make a little less than the $100K they wanted, but if they simply fulfill their end of the agreement, they’ll make 10% more ($110K total) at the end of 12 months. That’s the price of predictability.

If the employee leaves before the agreed upon term, they forgo the bonus. In the previous example, it means the employee would lose out on upwards of 20% of their possible take-home if they don’t make it the full 12 months. Likewise, an early departure would mean any vested stock options would be forfeited. A social penalty could include not agreeing to provide a reference for the employee in the future.

There need to be consequences to the employer if he decides to end the relationship early too. A significant severance can serve that purpose. The point of this is to give some comfort to the employee that the employer will not let her go if she does not leave the company early. Offering a severance equal to 50% of salary should do the trick as well as accelerating some portion of their unvested options (let’s say an extra year). Ouch. It needs to a little painful for both sides to take it seriously.

Just like in the big leagues, you could negotiate multi-year arrangements with your star employees after the first year, but again, the incentives need to be such that it is painful if either side leaves early. You shouldn’t sign up for multiple years unless both parties are comfortable serving the full term.

Job Security is a Myth

A common concern with this approach is whether employees would leave their comfortable, safe job for only a one year commitment.

My response is that anyone that feels they are safe at a big company doesn’t understand how big companies work. Sure, maybe you are in year 15 of your tenure at a particular company, but it just takes one downturn or new manager that decides certain cuts need to be made for that to change. I’ve seen it time and time again. You probably have too.

Would you rather have an unwritten assumption that your job is safe or a well-documented relationship that specifies adverse monetary penalties when either party doesn’t fulfill their commitments?

What About Performance Problems?

One situation I haven’t addressed so far is performance problems — both with the company and employee. The guaranteed contract model requires companies be more conservative when it comes to managing their cash and hiring more employees. If you have to start letting employees go through a layoff, it’s going to be expensive — as it should be. You need to plan on having at least enough monty to pay everyone you are laying off 50% of their salary.

Employee performance issues are a little trickier. Employers still need to reserve the right to let an employee go for not performing well (aka “for cause.”) You could have a policy that anyone let go for cause does not receive any severance or their end-of-term bonus. Or it could be done on a case-by-case basis and prorated according to the duration of their employment.

A common concern I’ve heard is will you have people that want to leave, but go through the motions long enough to complete their term and get the end-of-term bonus before leaving. That kind of thing happens anyway when you have predefined bonus payout periods (e.g., holiday bonus or end-of-year bonus), so it’s not a new issue. It’s also common in big companies for employees to stick around just long enough for their stock to vest — even if they are ready to leave. Keeping the contract period relatively short (1–2 years) can help mitigate this issue, but it certainly won’t prevent it.

From the Start

The guaranteed contract model would be difficult to retrofit in an existing company, so it’s best to do this just as a new company is starting. I intend to put this model into action when I start my next company.

Every approach has pros and cons and I’m sure this one will have challenges that need to be addressed. But I think if we act as rational adults, being more explicit about everyone’s expectations will be a good thing.

Ultimately, I think everyone is better off with the mindset that careers at companies are not multi-decade engagements, but more like 2–10 years. Beyond 10 years at a single company (which I’ve done once) and I question the value both the employee and the company are getting out of the relationship. Let’s start the relationship knowing it will end one day. That’s not a bad thing — it’s the way things should work.

I’m curious what you think about this approach. Leave a comment here or send me a tweet.