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Fourteen years ago, AngelList co-founders Naval Ravikant and Babak Nivi launched Venture Hacks—a blog dedicated to startup advice. A lot has changed in the world of startups and venture since their first blog post, but many of the ideas shared on Venture Hacks remain timeless. We’re resharing some of Naval and Babak's more influential posts in hopes that the lessons and insights can inspire a new generation of founders and investors. These blog posts are being republished in their entirety with minimal edits.
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This article was published on January 9, 2009
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“A raise is only a raise for 30 days; after that, it’s just your salary.”
— David Russo,
VP of Human Resources at SAS Institute
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This is one of my favorite quotes from the book Hidden Value. It explains why money by itself doesn’t motivate high performance. Money by itself can only motivate the quest for more money. A raise is only a raise for 30 days; after that, it’s just your salary.
We are motivated to perform when our work expresses who we are, when the business’ goals are intrinsically meaningful to us, and we feel that we are valued as people, not simply as economic agents.
But, even in startups, financial incentives and HR practices often treat us like economic agents.
From Hidden Value:
“Consider the implicit values conveyed in the modern management practices adopted by many companies. Most firms today emphasize, among other things, the employee’s responsibility for being career resilient, employment at will and no-fault dismissal, pay for performance, downsizing to cut costs, and maximizing shareholder value above all else. What is the message any sentient employee takes from these practices? Pursue what is best for you, not the firm or the customer, adopt a free-agent mentality, and do not invest any more in the firm than it is willing to invest in you. The underlying values are crystal clear, even if they are never expressed in a formal way. In this sense, arguments by managers that value statements are irrelevant or inappropriate miss the point: All organizations have values; the only question is how explicit they are about them."
“And what happens when employees behave in accordance with these values? First, a rational employee is not likely to exert much effort in activities beyond what he or she is explicitly rewarded for. A ‘show me the money’ mood prevails. Second, a smart employee will be constantly alert for new and better job opportunities in other organizations—loyalty is for fools. Third, unless cooperation is explicitly monitored and rewarded, teamwork is viewed as optional… To resolve some of these problems, management’s job is to design ever more sophisticated control and incentive systems to ensure that the necessary teamwork occurs and that the loss of intellectual capital is minimized.”
The problem isn’t that money is a weak motivator. The problem is that money is a terribly strong motivator. By itself, money motivates the wrong people to do the wrong things in the quest for more money.
This is why Zappos pays employees to leave. This is why Tandem Computers didn’t tell employees their salaries until after they started working. In other words: we don’t pay you to work here—we pay you so you can work here.
Organizing Around Values, Not Value
The authors, Charles A. O’Reilly III and Jeffrey Pfeffer, both from Stanford’s Graduate School of Business, studied how eight companies, from Men’s Wearhouse to Cisco, ignore the pernicious assumption that compensation should be the foundation for management systems:
“First, each of these companies has a clear, well-articulated set of values that are widely shared and act as the foundation for the management practices that… provide a basis for the company’s competitive success. [e.g. Southwest’s 'Work should be fun… it can be play… enjoy it.']"
“Second, each of these organizations has a remarkable degree of alignment and consistency in the people-centered practices that express its core values. [e.g. Southwest: 'We hire happy people.']"
“Finally, the senior managers in these firms, not just the founders or the CEO, are leaders whose primary role is to ensure that the values are maintained and constantly made real to all of the people who work in the organization… The senior managers in each of these companies see their roles not as managing the day-to-day business or even as making decisions about grand strategy but as setting and reinforcing the vision, values, and culture of the organization. Dennis Bakke at AES [a $2B company] claims that he made only two decisions in 1998, one of which was not to write a book on the company.”
The book’s subtitle is “How great companies achieve extraordinary results with ordinary people.”
Every rational company in the world is trying to hire the best people in the world. And all but one of them will fail at this task. There can only be one company with the best people. Hiring the best is a failing strategy.
Organizations must be designed to thrive with ordinary people. If businesses can thrive with the capabilities of ordinary people, they can also thrive with extraordinary people. Practices like Extreme Programming that were designed for programmers with ordinary skills work even better with extraordinary programmers.
Read Hidden Value for specific recruiting, training, information-sharing, and rewards practices that aim to exploit the capabilities of ordinary and extraordinary people alike.
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“If people come for money, they will leave for money.” — James Treybig, CEO of Tandem Computers
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Read the original post here.