Motivation Over Compensation
TL;DR: Compensation and motivation affect job satisfaction in distinct ways. When creating a compensation structure for your company, remember that compensation is intrinsically about fairness, not absolute amount.
Mapping job architecture to compensation
In my prior post, Job Architecture is Your Friend, I discussed the importance of giving employees job expectation clarity. I also noted that job architectures are necessary if you want to compensate your employees fairly. Our Talent Partner, Ashley Nowicki, will cover the nuances of mapping compensation to job architecture in a future post. In this piece, I want to go over the key lesson I learned about compensation.
Seven years ago, I led a painful leveling process across a software start-up. This is a normal growing pain. For three years we had been growing quickly and hiring aggressively in the Bay Area. Because each additional member of the team was relatively ad-hoc, there was no job architecture or compensation plan. We used industry comp tables and negotiated on an individual basis.
The first step in the project was correctly leveling all employees. This was relatively simple. We were still small enough that the leadership team understood everyone’s relative strengths and performance. The surprise came when we turned our attention to compensation — especially since we had recently conducted a 360 review.
There were numerous examples of our top performers earning significantly less than their peers, both on salary and equity. There were also several cases of our lower performers earning above higher-performing peers. When we started digging into the specific cases, a pattern quickly emerged: People who were inherently motivated by their jobs had not aggressively negotiated initial offers, promotions or retention packages. Because we did not have discrete compensation ranges for clearly defined job levels, we had created a ‘moral hazard’ within compensation.
We leveled up the employees who had been unfairly compensated. It was trickier to reduce compensation, so we left that alone. However, once we stopped negotiating with folks who were not inherently motivated by the job, they ended up leaving or being let go.
A few months after the leveling project, I was reading How Will You Measure Your Life? by Clayton M. Christensen, and found a fantastic way of understanding job satisfaction and what had happened at my startup.
You will never get compensation right if you don’t deeply understand motivation.
Unpacking Satisfaction
The key insight from Christensen’s book was that job satisfaction was not a continuous spectrum.
When discussing job satisfaction, we usually think of the range from “unsatisfied” to “satisfied” as illustrated above. Reality is more complex. What Christensen proposes is that there are actually two spectrums within job satisfaction, a “Satisfaction Spectrum’’ AND an “Unsatisfaction Spectrum.” The Satisfaction Spectrum relates to Motivation. The “Unsatisfaction Spectrum” relates to Compensation.
Let’s begin with the compensation spectrum. You will never be happy with the absolute value of your compensation. There will never be a moment when your boss wants to give you a raise and you say “no thanks, I’m satisfied.” You would always want more compensation if the company could afford it. On the other hand, you can be deeply unsatisfied with your compensation.
Have you ever discovered that someone at the company at your level gets paid more than you? Have you ever found out that your friend at another company with the same experience level as you got a much better package? The general feeling is rage. The notion of compensation “fairness” is hard-wired. One of my favorite TED talks explains what happens when two monkeys are not compensated fairly.
Compensation can only make someone “not unsatisfied.” It will never make someone “satisfied.” As long as your employees think they are being compensated fairly (internally and externally) and there is clarity in why and how they are compensated, their compensation will not be a determining factor of their overall job satisfaction. In summary, a company’s compensation strategy should be simple: don’t piss people off.
Even if you create a fair compensation structure, this does not mean that employees will be satisfied. The true Satisfaction Spectrum relates to Motivation.
Motivation is much harder to gauge and change.
Compensation is about fairness
Let’s drill down into compensation. How do you refrain from pissing people off? From my experience, the best way to create compensation fairness is by making it entirely formulaic AND by making the compensation scheme understood by your employees.
INTERNAL
I always assume everyone will find out each other’s compensation. Whenever I had to make a compensation decision, I imagined a situation where everyone’s comp was made public and I had to go to an all-hands to defend the numbers. I would not be able to make everyone happy, but I could at least aspire to hold my ground and defend the decisions. That’s why I prefer very structured, formulaic compensation schemes. There should be an internal logic to why and how your team is compensated.
Within your company, employees with similar roles should be similarly compensated. There will be differences based on role (e.g. engineering versus operations), level (Senior Manager versus VP), tenure (particularly in regards to equity) and performance (tied to an articulated review process), but all these differences should be transparent and formulaic.
This is why job architecture is vital to creating a culture of fairness. Without a clear job architecture, a compensation structure will be ad-hoc. Over time these ad-hoc compensation decisions accumulate into a disastrous compensation scheme that will inevitably upset some of your best people!
EXTERNAL
Once you create a logical compensation scheme, you still have to make sure that you do not lose your best people to the competition. Employees should be compensated fairly compared to similar positions at similar stage companies. If they find out their roommate at company X is making 15% more for the same job, you have a problem. In general, I believe internal fairness is more important than external. If someone believes they are not compensated fairly internally, trust is broken and it is hard to rebuild that trust. However, if someone believes the company is not compensating everyone fairly to market, they can present an argument to the company. It is not as much a matter of trust but competence. Still not great, but competence can be addressed more easily.
Like with job architecture, there are tools to help you ensure external fairness like industry surveys, cost of living indexes, etc. Remember, external fairness also relates to company stage, zip code, etc. There is an understandable difference between public companies in Texas and start-ups in Silicon Valley.
Leadership should conduct periodic (annual if possible) reviews of comparables at other companies to recalibrate to market. This keeps the company competitive and proactive instead of reactive as employees get pinged by recruiters (thanks LinkedIn!).
A few years ago I presented a compensation package to an ex-colleague I was bringing to my new company. He tried to negotiate the equity piece. I told him I couldn’t because we had a strict compensation structure; I needed to maintain internal fairness. He then wrote me a two-page email explaining why my equity band was not ‘market.’ He made a compelling argument. I ended up increasing his equity offer and he accepted. However, when he accepted the offer, I went back and proactively gave several employees equity bumps to maintain the integrity of the system. These were small, basis point increases in most cases, but it maintained internal fairness while adjusting to make the entire system externally fair as well.
Motivation is the hard part
The best you can do with compensation is not upset people. If they believe they are being paid fairly compared to their peers and the industry, they probably won’t be ‘Unsatisfied.’ They likely feel neutral. You will not retain your people if this is the only way you measure job satisfaction.
Everyone has a friend who is paid very well for a job they hate.
Employees feel “Satisfied” when they have agency, when they feel empowered by leadership, when they feel they are progressing in their career, and when they believe in the intrinsic value of their work. Employees are satisfied when they are motivated. Motivation has many different facets, but I like to focus on three:
- Vision: People can be strongly motivated by the company’s vision. To motivate people with a vision, it must be clearly articulated, real (meaning that it actually affects the way you make decisions) and part of your recruiting process and onboarding.
- Function: People who can get into flow with their role generally like their job. From a company perspective this means minimizing bureaucracy / politics as well as clearly defining jobs and workflows (again — job architecture can help).
- Manager: Even if the company gets vision and function right, motivation is massively correlated to the company’s leadership and more specifically to your boss. Good managers are a prerequisite for job satisfaction. (See my other post on management).
This is not a comprehensive list and I could write several pieces solely on motivation because it is such a hard topic. The key takeaway is that job satisfaction is not about compensation. Too many people try to motivate based on compensation. We should figure out how to make “motivation packages” instead of “retention packages” and also make sure we give those from the start, not when someone’s foot is out the door.
Only the beginning
This piece only scratches the surface around compensation. Compensation is a relatively technical practice, especially when you include more complex schemes like incentive structures for sales teams. As a founder, get help early in thinking through your compensation structure! It is a relatively solved problem. At Prime Movers Lab, we have dedicated resources that help our portfolio companies not make the same mistakes I made. But remember — that’s the easy part. The challenge for a leader is understanding that getting compensation right only gets you to baseline. You then have to figure out how to inspire.
Finally, as an employee…
If you understand the difference between motivation and compensation, you can start optimizing both. First off, create confidence that you are compensated fairly. Don’t be shy about asking peers at other companies, looking at job boards etc. Find out what the market looks like. Knowing your internal standing is trickier since it is rarely disclosed. But you can ask HR if there is a compensation scheme and how compensation is calculated (definitely do this during a job search and interview process).
Once you dig into compensation you will be one of two things: pissed OR not pissed. After you know where you stand on comp you can turn your attention to the more important question: what motivates you in your current role, and is it enough to keep you satisfied?”
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.
Sign up here if you are not already subscribed to our blog.
