The Challenges Managing Pay in a Small, Entrepreneurial Organization

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I had the chance recently to join a group of HR professionals who serve entrepreneurial, small to mid-sized organizations to talk about the realities and challenges of managing pay in this setting.

Great group, great conversation.

In my experience, having worked with organizations ranging from the Fortune 500 to those with under 10 employees, there is one near-universal challenge faced by the HR pro in these businesses: Determining when and how to introduce structure to compensation decisions.

One big challenge: The organization’s founder

Part of the challenge is recognizing the right time to make the move to more formal pay policies and guidelines — identifying the point where informality and complete discretion are leading to pay decisions that are getting more and more difficult to explain and defend.

The other part of the challenge, for many, is the organization’s founder.

From Noam Wasserman‘s classic Harvard Business Review article, The Founder’s Dilemma:

Founders are usually convinced that only they can lead their start-ups to success. “I’m the one with the vision and the desire to build a great company. I have to be the one running it,” several entrepreneurs have told me.

There’s a great deal of truth to that view. At the start, the enterprise is only an idea in the mind of its founder, who possesses all the insights about the opportunity; about the innovative product, service, or business model that will capitalize on that opportunity; and about who the potential customers are. The founder hires people to build the business according to that vision and develops close relationships with those first employees. The founder creates the organizational culture, which is an extension of his or her style, personality, and preferences.”

Overconfidence and emotional attachment

Many founders, Wasserman notes, become emotionally attached — using parenting language and referring the business as “my baby.” They can be overconfident about their prospects and abilities and naïve about the problems they face as the organization grows and matures.

This emotional attachment, overconfidence and naiveté may be necessary to get a new venture up and running — says Wasserman — but they create problems later on.

Case in point: Employee compensation. Founders will resist delegating important people decisions like those about pay, as they believe that only they have the perspective to make them correctly. This can take the form of resisting the release of decision-making authority to others in the organization and, particularly, resisting the creation of systems and rules that remove them from the decision loop.

I recall meeting with a founder and a couple of his managers after beginning an engagement with their company. The purpose of the meeting was for me to report on the findings of some early information-gathering work and to talk through some options for moving forward.

I had discovered enough about them to know the importance of choosing my words carefully; nonetheless, the moment the word “structure” came out of my mouth, the founder launched into a monologue (cheered on by his two colleagues) ridiculing organizations that relied on structure, formal policies and rules to do business.

Clearly, they viewed their lack of structure as a badge of honor. And fairly enough — they were trying to upset the status quo in their industry and build something exceptional. They were also, based on the evidence I’d gathered so far, sitting on a mountain of pay issues which were causing tremendous morale issues among their workers.

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A rigid, best practice system probably won’t help

Introducing pay structure and rules into an entrepreneurial organization is both a challenge and an opportunity.

It helps to show the founder that keeping too tight a grip on pay decisions will make it difficult, especially as the organization grows, to get a clear return on the pay spend. Basing pay decisions on the founder’s “secret scorecard” often means squandering the opportunity to focus attention, reinforce critical messages, and direct employee choices and efforts with those dollars.

Even more problematic — especially for performance-based pay — is the founder’s fondness for keeping all power and control over award determination. Wild card in hand, they are now free until the moment the reward decision is made to do whatever feels right, based on their personal judgment call.

What feels good to them, however, represents an act of disempowerment for the employees whose reward “destiny” is entirely in someone else’s hands.

Better instead to embrace the opportunity to work with the founder, not to push a “best practices” same-as-everybody-else rigid system of structure and rules, but rather to define the particular principles, values and core beliefs that she or he thinks should guide employee rewards and begin the baby-step process of putting the pieces in place that will help memorialize that wisdom. (And ensure that it is implemented in a clear, consistent and appropriate manner.)

What experiences and advice can YOU share about managing pay in a founder-led organization?

This was originally published on Ann Bares’ Compensation Force blog.

Ann Bares is the Managing Partner of Altura Consulting Group. She has over 20 years of experience consulting in compensation and performance management and has worked with a variety of organizations in auditing, designing and implementing executive compensation plans, base salary structures, variable and incentive compensation programs, sales compensation programs, and performance management systems.

Her clients have included public and privately held businesses, both for-profit and not-for-profit organizations, early stage entrepreneurial organizations and larger established companies. Ann also teaches at the University of Minnesota and Concordia University.

Contact her at abares@alturaconsultinggroup.com.

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