Saturday, October 20, 2007

Low Pay: A New Venture's Competitive Advantage

Recently, a former student was talking with me about creating a new venture in the non-profit sector. Pretty soon, we were talking about how to attract "great people." The pay, or percieved low level of pay, loomed large. He was worried that he might not be able to attract anyone to work for him. I suggested that he focus more on the mission and business model, and that actually, "low pay" can be a competitive advantage for start-ups, at least in the early years.

Pay is the first thing most people look at when they consider a job. I don't want to work with those people, or hire them. They are motivationally impaired. Usually (but not always) these people are pretty easy to spot, and you can avoid wasting time on them. Who wants to staff up with people that are in an organization because it pays "well"? Low pay will keep them out of your start up.

By having "low pay" be part of an early venture's core values... i.e., everyone agrees to work for less, but has an upside "out there" for when the business model flips... you can build a very strong team dynamic. But two things matter here... everyone on the team needs to work for less (with greater sacrifice by founders and execs), and this will not last for years. But if you haven't created value in years, you deserve to lose your employees.

At our companies, we try to have generous benefits (at least for a start up) and keep them equal across the board. We do the best we can, consistent with staying in business and having an impact. Part of a business model is deciding how to divide up the value your enterprise captures. Definitely a balancing act. Obviously we would like to reduce prices, pay employees more, and scale up our impact. But you have to prioritize. For now, it is keep the burn rate low, and get the products to market. Pay has to lag performance. So far it has worked pretty well for us. At Envirofit, we get unsolicited job apps, people offering to work for free, etc. I recently saw that New Belgium gets up to 200 applications for entry level positions. You know, I have yet to meet a New Belgium employee that is working there for the money. They work there for the vibe, the people, the beer, the free bike. But not the money.

When you start a non-profit, you miss out on one "lever" by not having equity, but done right, you can lengthen another lever called "purpose." What is equity? It is a right to share in the financial success or failure of the company. What is purpose? It too involves sharing in the success of the company, but here the participation is not separated from the employment relationship. So leaders in non-profits need to be sure to "leverage" the purpose lever so that co-workers feel connected to success. Instead of having "owners" and employees, a non-profit's employees must "own" the mission and its success. It simply can't just be a job, or your organization will be a failure.

I encourage entrepreneurs to work on for-profit business models if possible. Not because of pay, but because of the ability to attract capital to successful, scaleable business models. But in either model, purpose should be the starting point. A strong purpose will attract people more than strong pay. Design your company to attract those that share the passion and motivation for change. Better yet, figure out new types of options/bonuses on the social/environmental returns of a business. Invent a new model. Create more value for the venture.

One last thought. Much of the stuff about pay is in the context of people wanting "more." As you think about who you want to work in your company, think hard about character. Do they have the discipline to save early in their careers? Do they understand how limiting consumption can be? How important it is to avoid overdoing on credit? These are keys to building personal wealth and creating value in an enterprise.

There is no secret to wealth. Most of the time it is hard work over a long period of time. But people get stuck. And then they can't take the cool job they want. And then they are less happy with their job and life. The discontent is like a cancer. They think getting paid more will cure it. Unlikely.

So design your venture around purpose and impact. Build a business model that can fairly reward people for success. But don't get stuck on having to pay a lot in the early days to attract the right people. Trust me, they won't be the right people.

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