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Thursday, September 02, 2004

I have been thinking a bit lately about the best way to compensate employees. Especially in small companies.

As I see it, people join companies for different reasons. As a generalization, people join big companies for reasons like: job security, career advancement, career challenges, prestige, and conformity. People join small companies for reasons like: money, enjoy risk taking, small companies can be more fun / take more risks, have more decision in company direction, and ...money. For a very small company, I see money as being the biggest incentive to hiring the best people. ...and when I say small company here, I am talking about less then 10 people. Google is not a small company.

So if you and your mate start a company - and it is growing so fast it makes your head spin. How do you hire that third person? How do you know that the third person will be the best person for the job? How can you compete with the likes of Microsoft? Stock, sure but how much? After all, you only have 100% to give away.

What if, every year executives in a small company set the tasks for that year where a task is defined as one man week of activity. Then a score is assigned to that task. Tasks are open to anyone in the company. At the end of the year, the higher your score, the higher the percentage of company profits you receive (out of the available pool). Effectively making every employee in the company a consultant to some degree.

I can see lots of problems with this, especially from a large company perspective. What about team work? How do you define a task? What if the estimate for the task goes over budget? under budget? What about job specialization?

All of these are legitimate points. But I think that they can all be delt with in a small company through effective communication. With a company of ten people these issues really shouldn't be issues at all.

So, if I me and my mate founded a company that grew 100% last year and made $300,000 in profits. Would you want to join if next year (potentially) a third or more of those profits could be yours - depending on how hard you work / what skills you bring? Well, I don't know, but I like the chances of hiring an outstanding 3rd better with this model then if you were to offer a flat 50k + 5%.

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