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.


Robert Katz said...

what about when those "right people" have to leave your startup so they can stop renting and buy a house, pay for graduate school, save money for their kids' futures, etc?

this may work for a startup, to be sure, but as your startup matures, this mentality could lead to a plague of turnover (i should know - i work at a purpose-driven organization where turnover is about 35% per year, mostly because of low pay)

Anonymous said...

I second that comment. Such a pay strategy will only attract recent grads with no debt, mid-lifers who got lucky in the boom or with a trust fund windfall, and retired execs.

Unfortunately, too, while there are many great purpose driven organizations who do really mean well and want to pay good people as much as possible given the realities of the operation - there are also organizations and companies who deliberately offer less for a "meaningful" job simply because they know they can get away with it.

The sad thing is that some of the best and brightest people are attracted to these jobs - not only because of the impact they will have but also because of the multi-faceted nature of the work. Yet, they end up making substantially less than their counterparts who took more traditional jobs.

Bopreneur said...

Dear Robert and Anon-

Different strokes for different folks. I certainly am not defending all non-profits and their compensation strategies. And I am aware that non-profits are plagued by turnover. Compensation is one of many parts of a business model. And a job is one part of a person's life.

If you have a good job with a good non-profit, and leave because of low pay, my guess is you will not be happy in your new position. But what do I know? Maybe you will be, and then I will be happy for you.

And, Mr/Ms Anon, the job hunters in your first paragraph provide a very good pool of potential employees... what is wrong with any of those people? Do they not pass some type of "non-profit purity standard"?

Anonymous said...

I was reading Guy Kawasaki's "Art of the Start" a few months ago and he brought up this issue in a way that I thought was enlightening. If memory serves me, his premise was that you can't start paying people a "big" salary before your company/organization has done anything. Before then, you've got to be bootstrapping and throwing as much of your resources as you can into proving the model. Folks who are in it for the pay package generally aren't "hungry" enough or aren't inspired enough by your idea to make the sacrifice. In some ways, it is a litmus test. The start-up life is as hard as it is exciting.

That said and as someone who recently helped start a non-profit, "low pay" also cuts out a lot of people who would be great assets to your org. It also may mean that your employee pool is less diverse (age, skills, gender, nationality, experience) than you might want it to be. Hopefully, you can use your board of directors or advisory board to compensate for some of that though.