Entrepreneur Disrupted Mini-Series – #10: Compensation
How do you know how much you should be paying the members of your team – and how do you go about doing it? What different forms of compensation can you provide? How can you negotiate for your own compensation, and avoid settling for your lowest offer? Dave Asprey and Jay Abraham discuss this essential topic in #10 of Entrepreneur Disrupted. This topic pairs particularly well with our episode of interviewing, as the discussion ranges from favorite negotiation philosophies for interviews, to making sure you’re providing compensation only to those who are congruent with your values and mission. Jay and Dave examine a big problem for entrepreneurs, which is getting and providing equitable compensation that is fair and motivates the recipient to higher achievement. When it comes to incentives there’s equity, and then there’s non-equitydiscussion. Learn how to structure a bonus plan, and how to decide exactly how much to pay someone when they walk in the door for an interview.
Listen to the podcast here:
Entrepreneur Disrupted Mini-Series – #10: Compensation
This episode examines a big problem for entrepreneurs of all kinds, getting and providing equitable compensation that is fair and motivates the recipient to higher achievement. How do you know how much you should be paying the members of your team? How do you go about doing it? What different forms of compensation can you provide? How can you negotiate for your own compensation and avoid settling for your lowest offer? This episode pairs particularly well with our episode of interviewing, as our discussion at points ranges from our favorite negotiating philosophies, doing interviews, to making sure you’re providing compensation to only those who are congruent with your values and mission. I hope you do what is essential to your own business aspirations and take meaningful action from the wisdom and advice and illustrations we’ve distilled in this episode.
I’m Dave Asprey, your host here with Jay Abraham, your strategic marketing growth collaborator. Jay has done every marketing task that I’ve ever seen for hundreds and thousands of companies in a way that’s incredibly impactful. The problem we’re going to help you solve is a big one for entrepreneurs. It’s something that I’ve dealt with in my corporate life in Silicon Valley, at startups, at big companies, and it’s worse as an entrepreneur like running Bulletproof. It comes down to compensation. How do you know how much to pay someone and how do you know when to give him a raise?
What incentives are going to motivate them to stay the distance, over-perform, and be motivated to collaborate with everyone else towards a common goal?
There are a couple kinds of incentives. There’s equity, non-equity discussion. How do you structure a bonus plan? How do we know when someone walks in the door for an interview, how much to pay them, and how do we know how to ramp them up? I spend a lot of time thinking about that.
It depends on where you are on the growth spectrum, but how do you know if the job description you have created is the right one for both you and for that person?
That’s another one, writing good job descriptions. We’ve had episodes about hiring and we talked a lot about interviewing, but we didn’t talk so much about the job description. A good job description is great. Someone 40 years ago wrote a job description that had things like, “Attention to detail required. It must be comfortable in a fast-paced requirement. Works well with the team.” These are all weasel phrases. They don’t mean anything. Any applicant is going to read those and glaze over them and say, “Of course I do that because I want you to pay me.” For all I know, we might have some of those that reappeared in our own job postings at Bulletproof. I play whack-a-mole with that stuff. I see it and I stomp on it, but then we have a human resources team, and this is standard of practice. I don’t like it and I don’t think it serves anyone. A good job description doesn’t say those things. It says things that are meaningful, that described the task, and you look at ways of measuring whether people have the temperament for the task so that they’ll be happy in the role.
Let’s start with the assumption that you’re going to have different dynamics depending on whether they are revenue generators, operators, or cross containers.
That’s a huge thing for compensation. We don’t know what the job is yet, but we’re going to solve that problem saying, “We’ve agreed to hire this person and we wrote an adequate job description.”
It seems to describe the role we think they’re going to fill.
That will change, it always does. How do you address that conversation? Someone walks in the door like, “I want the job. What’s next?” Do you say, “We are offering $42,000 a year. How much do you want to get paid?”
I believe in double sale. I have to sell you on me, you have to sell me on you, and we have to sell each other on the value we bring currently. We both have to sell each other on the value that exists for both sides in the future. I want to get that clear because the moment is irrelevant if you choose wisely.
There does come a time when the candidate says, “I want to work for this company,” and we say, “We want to work with you,” and that’s the time to bring up money. If a candidate brings up money at the beginning, you’re like, “Thank you so much for the interview.”
I have seven children. One of them has gotten every job he ever applied for, most of which he was grossly underqualified or educated. He got it because instead of going in and asking about the benefits and asking about the future, he asked about the last person doing it. He has to talk to the people that person worked with. If that person got promoted, he asked about that. If that person took another job, but there was no acrimony, he has to talk to that. He offered his own time to go out or at least observe. It was internally the job function. He asked all kinds of questions about the business from a perspective of caring about how he could add value, as opposed to “What you can do for me.”Those people are very powerful.
One of my dear friends is an executive coach for very high performing Fortune 500 type companies. He worked with all these C-level guys and all these superstars or an A-player. He’s heartbroken because he said, “All they want, if they’re not deeply connected to the business, is to get either another company offer from a higher job or to get a promotion. It’s very disheartening because of the jaded, ambivalent, almost apathetic attitude they have.”You’ve got to be very careful in a dynamic, disruptive entrepreneurial environment.
At the end of the day, you’ve got to pay a candidate some amount of money. If you’re getting started on the career ladder or as an entrepreneur, when a company says, “How much did you get paid in your last job,” they want to pay you the same amount or slightly more, which means that you’ll never make money. When I was young, it was looked down upon if you were a job hopper except for the fact that job hoppers get paid a lot more. Twenty years later, they figured out with some studies that the average time people spent in a job is three years, and they do that because someone else wants to pay them more for their knowledge because the compensation structure doesn’t work very well. I made one giant jump from 70,000 to 110,000.
Through what device?
When they asked me how much I got paid in my last job, I made up the number that I got paid including my vacation. I extrapolated. When a company asks you for what you made before, 90% of people who are experienced interviewers are going to name the number they want to get paid, not what they got paid before. It’s different for salespeople. They say, “If that’s what you got paid before, show me your W2.” For people not in the US, W2 is the American thing that tax authorities see that says how much you got. That’s important for sales guys, because if you’re on a quota and you are saying, “I made a million dollars a year at my last job,” that means that you’re a good salesperson and you’re worth a lot because you know how to do it. If you are not hitting your numbers and you said a million and you were making less, it doesn’t work. I’ve had a few companies I’ve come across where they say they always ask to see the W2 for the person. I don’t think that’s cool. I wouldn’t ask my people. It’s basically says, “I don’t trust you” at the beginning of the relationship. What do you think about that?
I wouldn’t do that in the beginning either because it shows not just distrust, but it telegraphs the antithesis of what you’re trying to say culturally. However, there are ways to validate that the person is worth the money. To me, what I made last time is irrelevant to why I’m here. We’re giving a duality of perspective because some of our audience are on the verge of being hired into a deal where they will get stock options and they will evolve to wealth players in an emerging company. For the entrepreneur, there are all kinds of easy ways to data check at least not income, but performance responsibility in benchmark equated to the value of the job.
You’re getting paid to do the new job, and what we got paid before is absolutely unrelated.
As long as you demonstrated mastery, proficiency, or skill sets in the other one that translate and are congruent with the job description.
If you’re an interviewee and you say that to the interviewer, you’re not going to get the job. “What I got paid before has nothing to do with this. I’m going to kick ass in this job.” If you’re interviewing with an A-player, they should respect that. However, the odds of you interviewing with an A-player at any company are not that high, because A-players are the exception, not the norm. Being an A-interviewer is good, but you have to be an A-player at a certain point. There are core psychological things you’ve got to do where you’re not afraid of success in order to be an A-player. The real trick when you’re the interviewer, you’re running a small or maybe a mid-sized company and someone walks in the door, you’re not going to ask them what they made in their last job. I’ve certainly done that.
What kind of variation did you get in response?
People usually give me a number but I never check the number, unless they’re in sales. What I’m asking them is, “How much do you want to get paid?”
Let’s say that the answer is in alignment with whatever you have determined that the capable candidate is deserving enough. What do you do?
If it’s an alignment, we’d have an agreement.
How do you really communicate it?
It gets to be a lot of intuition. This comes from experience negotiating across the table, looking someone in the eye, and understanding my interest as an entrepreneur is I don’t want to overpay. A lot of people are driven by a sick desire to under-pay for value, and that is pathological. If that person is going to deliver, if the job is going to deliver the value that you think it’s going to deliver it, you know what it’s worth. I want people who are not worried all the time about finances. I want people who are paying attention to their work, and people who are happy and fulfilled. If I can knock 5% off what I pay the person, if it’s going to change their life and it’s not going to change the company’s success, I’d rather have a loyal and happy employee. For me, the cost of someone quitting because they got a dollar an hour somewhere else and then we have to train a new person and recruit them, it’s expensive. When it gets to more senior positions at a company, it’s more disruptive. I want happy people, so I’m happy to pay a little bit above market as long as I’m getting A-players and they feel like they’re part of the team and they’re on a mission.
How do you make sure on your onboarding? You are evolving to a diverse, multifaceted, and multitudinous specter of different types of hires. You got senior management, middle management, operation fulfillment, retail, front of the place, back of the place, and managing multiple places.
I’m talking more for things where the salary is not known. It’s very easy to tell what does it cost to have a line cook. What does it cost for someone who works in a retail environment? We have our coffee hackers. There’s a rate for that, and these are roles where some people come in and they work there for a long time. However, there are a lot of students, there’s a lot of turnover. Everyone in the industry knows this is how much you get paid in LA versus somewhere. When you’re like, “What does a Director of Marketing get paid? What does the Director of Marketing in San Francisco get paid versus the Director of Marketing in Chicago?”The cost of living is different in those two cities.
You’ve worked in Silicon Valley. I’ve tried to operate in Silicon Valley, and their definitions are such buzzwords that I don’t even know what the job responsibilities are.
Almost every job title that you have at mid-level company has lost its meaning in the last twenty years. Show me what a Marketing Specialist does, even a Content Manager. The definition of content changes every two years. Does that include social media? I post more on Facebook now than I do on my own blog, and I post long and detailed analytical things on the blog. I’m hiring people who are fluid and flexible and willing to get the job done. The more rigid the roles are, the harder it is to have a flexible company that can pivot and be fluid when market conditions change. They seem to change like on a regular basis.
Is that an automatic thread in the fabric of all your hiring, flexibility, and fluidity or not?
It is. Fear of change and rigidness isn’t going to work. Some people personality types are attracted to certain roles. There aren’t that many people in legal and accounting who are fluid and flexible because those are professions where they’re like, “These are rules,” and you can’t bend around those rules because you go to jail. I very much value the lack of flexibility and fluidity. There are times when the laws are not clear. In fact, much of the time, the laws are not clear. What I’m expecting is a range of, “This is the most extreme interpretation of the law and the most conservative interpretation of the law. Show me how to be in the middle.”If you’re too conservative, then you can’t do anything. If you’re too fluid, you might be within the law, but they’re still going to stick it to you. Some regulatory people I’ve worked with do not have the fluidity, and they’re conservative or nothing. They aren’t a good fit here, because I got to know how much wiggle room do we have on this, so we can achieve our mission, help the people who are going to help, and don’t incur fines and break any laws. I wish the laws were clearer, but there’s ten million words worth of laws.
We’ve got the man or woman, and we are impressed enough with them. They implicitly are either good thespians or they’re impressed with us. We’re ready to extend the offer either linear, “Do you want to tie it to a picture of the future, not just in a promissory way, but in a performance and a connection way? What do we do to make sure, once if and after they accept, the integration and the process is maximized?”
If you are an entrepreneur and this guy is across the room from you, do you say, “This job gets paid $42,000 a year and that’s the going rate.” Some people are comfortable with that. I tend to say, “What are your expectations for this?”
When you say ‘this’, are you talking about the career or the job?
For the job before we’ve talked about money. I’m like, “You want the job, I want to give you the job. What is it going to take to get you in?” The two ways it can go is you make the person say something or you say something first. I like to make the person say something first. I say, “What are your expectations for compensation?” They’re going to come back with a number. What I like to think they’re going to do is they’re going to come back with a number that’s adequate for what their needs are, what they think the job is worth, and what they think we’re willing to pay. They’re not going to make it so high that they think it’s ridiculous or that they think they’re taking advantage of it, because hopefully I’ve screened out people who are going to take advantage. They also know that if it’s too high, they might not get the job. It’s actually very scary to have to name a number, so they will discount it.
I have a whole team of people who make all the things happen, so it’s not just me who does this. In the early days, it was just me and that’s exactly what I do. A number of things are going to happen. The number’s too high. It also depends on if this is the head of some business division or head of some big function. It doesn’t matter if it’s 20% higher if you need them and they’re the perfect candidate. If it’s really high, let’s say it’s $65,000 compared to $40,000, that’s a lot more money, 50% more. I’d say, “That’s a lot more than I was expecting for this level of role and for this amount of seniority. What’s that based on?” I’d like to have an open discussion and if they say, “In my last job, I made $55,000 and I wanted to get a raise in order to leave my company and my stock options benefits.” I need to do a little research on this, because maybe I’m off with my $42,000 or I’m not in a position to afford them. I’m going to decide not to even though I really want them.
If it’s an A-player and then they’re going to move the needle and it’s not a role where you can swap one person with another without a lot of training and this is someone who’s going to get integrated into your company operations, it’s worth paying a little bit more. I might come back then and say, “We budgeted this number. You’re a lot higher than that number, but I still want to work with you, so let’s work something out.” You get to feel out, what if there’s a bonus plan? What if there’s more stock option? I like to have them open with the numbers because it helps me to know where, and it’s nice because if I thought the position was worth $420,000 and they come back with $42,000, in that case, I’d think something is wrong with them.
Based on that scenario, A-player premium above your benchmark, how do you deal with the implicit expectation that he or she is going to expect at some point in time, some enhancement in some way?
There’s a way to do that. A long time ago, I was leaving my position at Citrix. I was running strategic planning for one of the big parts of the business. I was leaving to go to a small startup without a name. I sat down and negotiated. It helped that I graduated from Wharton, and for a European company that can help. The salary was really good, and the exchange rates at the time made it easy for them to pay a lot in the US. This is a game changer, but I wanted more stock because I thought the technology was amazing and this company is going to sell and I’m going to help them sell. I knew they wanted me because they needed the big name. They needed a marquee name from Citrix for their investors, and I ended up getting an extra quarter of a percent of the company, which is a lot. The company ended up selling for $100 million, so it was a quarter of a million-dollar negotiation. The CEO came back and sat down with me, and he was not the kind of CEO I’d like to work with. He said, “What else are you going to give me? I’m willing to give this more, but you’re going to have to give me more.” I said, “You’re getting all of my capabilities, all of my performance, all my focus, all of my experience, and my connections. It’s either worth it or it’s not, but I can’t give you more because I’m all-in,” which is the truth. He shrugged, and he said, “You’re getting more stock than I did.” I got screwed on that stock. I didn’t get a penny from that company. There are companies that do things that are completely under the table.
The CEO said, “What else are you going to do for me?” You can do that in an interview. You say, “If you’re looking for this much money, are you willing to make additional commitments? Can I add this responsibility?” I usually don’t do that. If someone’s asking for more, I’m assuming they’re all-in like it’s a full-time job. I would be okay to say, “One of the things that you didn’t want to do in this job, but you’re capable of doing, but you just don’t like, I need this done. If we go to this level, are you willing to move to Seattle where my headquarter is because you’re on the fence about that. Maybe we get this number, but we drop the stock options a little bit.” That’s a reasonable thing in some jobs. In a sales interview, it’s easy. If you want higher base, then you’re not that great of a salesperson. What is the big lesson in this very provocative, but multi-faceted discussion?
We’ll give you the lower base for a longer period and we hit your benchmark. There’s a lot of ways to do it. What is the lesson in this very provocative, but multifaceted discussion?
The Dave Asprey recommendation is to ask people what they’re looking for in the job, not what they made in their last company, so that you can get a benchmark for what they are expecting. If you’re going to interview more than a few people, you might get this. I tend to bring money up after we’re sure that you want the job, but my screening team and HR may also ask that along the way to benchmark the position. We didn’t talk about salary surveys because I find them very hard to work with.
Do you start with an arbitrary or you monitor what’s out there?
It’s a little bit arbitrary. Most entrepreneurs are a little bit arbitrary. You can spend $5,000 on a salary survey, but the job titles don’t mean anything anymore. What’s the Jay Abraham thing? Do you ask them or do you drop a number? Do they drop a number?
I don’t want to talk money until I talk about ability. I want to get the number, but I want to know not just why, but what. What do they think that’s going to get them in me? I’ve learned in life that no two people hear each other the same way at the same time. I’ve seen enough people start a job and think it’s something even though they heard you completely. Let’s say tomorrow you start, we’re fine on money. You’re excited about our future. I’m entrusting you with whatever it is, if it’s a big responsibility or you’re going to be groomed by such. What do you see yourself doing and how do you see it playing out? I want to make sure they have heard and that their expression or their verbalization is in alignment, because I’ve found that half the people, it isn’t. At that point, I would make an offer, but my offer would be predicated. I’m very big in tying people to the crusade, the vision, and the ability that as the growth of the company evolves, the opportunities for them evolve into a multiplicity of ways.
For example, I had a huge company once and now I got a little one. The option is you got wear many hats. We have someone who’s a top salesperson, but now she’s our assistant. She likes sales, and our proposition is, “You could come up and create in the future any propositions to us you want if you can sell us on its viability.” Almost every job I ever had never existed.
You have different approaches. For an entrepreneur, there isn’t an answer that says there’s a right way. What I would recommend you do is if you’ve never read a book on negotiation, you should read it. If you prepare for a negotiation properly on both sides of the table, both people benefit.
You’re enhancing the betterment of both sides if you do it rather than just react to it. I don’t hire that many people anymore. My colleague who used to interview every executive for every company the portfolio had, he spent more time on learning about the individual. Once he was comfortable with the skill sets, proficiency and the ability, his biggest concern was compatibility to the culture.
Do you lead with the number? Does someone else lead with the number when you’re talking about the base compensation?
I’m a bit of an iconic force. Anybody in their right mind who Googles me before an inteview, I’ve already started at an advantage. I’m very eclectic and difficult, but I’m also very nurturing and educational. Anybody that works with me and talks to anyone, we grow everybody. It’s inherent in our whole thematic basis. I normally know what I want to pay somebody, but I also know that I’m willing to not overpay them to start, but reward them richly throughout the process if they over-deliver. I was influenced years ago by Napoleon Hill. One of my clients gave away 2 million copies of an excerpt from Going the Extra Mile, and it was a soliloquy that was from his book about all the people in the world that we’re rewarded so richly by either their employers or their partners or their stakeholders because they did so many wonderful things above and beyond. I like people who are so committed. I’m not talking about just working eighteen hours a day, but things that are very impressive that confirm the commitment to the big picture culture and purpose. I’m not concrete about this as you are because I’m very fluid about it.
You and I both value who the person is, what do they bring energetically, culturally, and spiritually to the company, as well as what their skills are. That is more important than final entire compensation plan. What you do want to do to help you solve this problem is that you should look at this as a negotiation and you should prepare for that negotiation in the way that you would negotiate whatever a deal is. Do not negotiate to very lowest number you can get, because you will always lose as an entrepreneur if you do that. If you squeeze every last drop out, it’s going to be painful. If you are floppy, remember you’re going to have to keep giving raises after this and it will become unaffordable. Don’t squeeze too hard and negotiate whatever you negotiate.
In most of the works I do, I’m dealing with not the moment but the future. How you set that is going to be a driving force of good, of mediocrity, of resentment, of uninhibited, committed, and liberated passion. However way you set that, that’s what you’re going to get, because this isn’t a static transaction. This is the beginning, not the end. You should think in terms of what you’re creating in that mind, because it’s very important.
I heard on my first big job interview after college, I did get the job and I had good qualifications. I was looking for California farming area wages for an IT guy, which were not very high. I went in and this guy was salivating for me just based on my resume. He looked at it and he’s like, “I’m not going to be able to afford him.” I said, “I’m looking for $40,000 a year.” He looked at me, and these are the two words you should never say, and he said, “That’s it?” I found out that my paycheck was for $42,000 a year. I went in and I’m like, “In the interest of integrity, you’re paying me more than what you said.” He goes, “Don’t worry about it.”Keep in mind that negotiate professionally and be good at negotiating. Oftentimes we do not get trained on how to do it. One of the most impactful things you can do is learn that. Don’t grind the guy into the ground.
The ultimate investment you’re going to make is in your game and your intellectual capital.