Fairness and Incentives

Note:
Although this article focuses on incentive stock in startups, the principles
apply to any type of compensation.

Popular
wisdom says that 90% of the work is done by 10% of the people; therefore, the
trick would be to hire nothing but 10%ers. Since that is impossible, you want
to motivate your people to act like 10%ers by encouraging them to find ethical,
creative ways to meet the company’s goals while continually improving their own
performance.

Stock
has long been a top incentive for startups and private companies to motivate
their employees. Whether the stock is in the form of options, restricted, or
phantom shares, a strong, well-thought out stock program remains essential to
attract, acquire, motivate and retain people.

To
entice today’s workers an allocation system must

  • be authentic and
    transparent;
  • support the company’s
    stated values and culture; and
  • create an environment
    perceived as truly fair and therefore worth supporting.

It
must please investors by

  • making the best use of
    equity;
  • focusing
    employee efforts squarely on the goals of the company;
  • accurately
    predicting future dilution; and
  • providing an audit trail.

Finally,
it should make the CEO’s job easier by

  • providing one-click
    reports for monthly board meetings, employees, etc.

Changing
the typical (we’ve always done it that way) approach to awarding stock options
to one that recognizes that people’s past efforts and interviewing skills are
no guarantee of their future performance sounds simple, but if it was it would
have been done much sooner. There are three basic reasons:

  • Changing a time-honored,
    standard approach requires serious management effort, since people rarely
    take kindly to change, including management.
  • To adhere to a system
    that assures fairness may mean passing on a demanding candidate in order
    to maintain system integrity.
  • Talking fair is impossible
    without walking public, a notion so radical that most companies are not
    willing to try it, which is why true transparency is often more of a goal
    than an accomplishment.

My
passionate belief in the need for true fairness, especially when awarding
startup stock grants, was the driving force behind the creation of Option
Sanity, a system designed for founders and CEOs who are serious about creating
a truly fair environment based on their publicly stated values and want to
support the ensuing culture in a tangible way.

About the author: Miki
Saxon, fan of What Do You Want From Them, is the founder of RampUp
Solutions
and co-creator of Option Sanity™, an automatic system that ties stock option
allocation tightly to a startup’s values and culture, while creating a laser
focus on the company’s goals. Option Sanity is
transparent and provides a large dose of authenticity for any startup that
claims fairness as a basis for its culture. Miki also rewrites executive
summaries, websites, marketing material, etc., for clarity. Her company’s blog is MAPping Company Success. You can reach Miki at 866.265.7267
or email [email protected]

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