Apr, 2024

The Big Idea: Successful CEOs share these qualities. Passionate curiosity. Battle-hardened confidence. Team smarts. A simple mindset. Fearlessness.

Introduction

While setting overall business strategy is certainly an important part of a CEO’s job, leadership shapes every part of their day.

The culture and tone starts at the top, and each company reflects the personalities of its CEO.

The leader who understands how to get his employees to work together as a team has an advantage.

Most businesses fail because they want the right things but measure the wrong things, and they get the wrong results.

You can hire a brain surgeon, or you can hire a proctologist at half-price who wants to learn. Invest in better service and employee morale instead of single-mindedly cutting costs.

One good story about leadership and management from an executive who has worked hard to learn it – is equal to ten theories.

Successful CEOs put a premium on direct and frank communication, and flattening the organization.

Successful CEOs try to use questions more than statements, so that their employees take ownership of their roles rather than simply take orders from the CEO.

Many successful CEOs reward honesty and input, and show their interest in learning what others think, by holding town-hall meetings, seeking the advice of people at all levels of the company, and asking employees what they would do if they were in charge.

Successful CEOs also try to create a culture of learning.

There is no single way to lead or to manage. We all have to figure out what makes sense on our own.

PART ONE SUCCEEDING

CH 1. PASSIONATE CURIOSITY

The qualities successful CEOs share: Passionate curiosity. Battle-hardened confidence. Team smarts. A simple mindset. Fearlessness.

The CEO’s ultimate job: student of human nature.

The CEOs are not necessarily the smartest people in the room, but they are the best students.

In the best of all worlds you want someone who’s whole-brained—someone who is analytical and can also be creative.

Jen-Hsun Huang, the CEO of Nvidia, the computer graphics company, said both sides of his brain play important roles in finding new opportunities. “I don’t like making decisions with analytics,” he said. “I actually like making decisions with intuition. I like to validate the decision with analytics.”

Ask: ‘Tell me what you’re passionate about.’

Robert Iger, the CEO of Disney, said curiosity was a key quality he looked for in job candidates.

A trait that sets CEOs apart: an infectious sense of fascination with everything around them.

Though CEOs are paid to have answers, their greatest contribution to their organizations may be asking the right questions.

In business, the big prizes are found when you can ask a question that challenges the corporate orthodoxy.

Some of the most important advances come from asking, much like a persistent five-year-old, the simplest questions. Why do you do that? How come it’s done this way? Is there a better way?

Ask questions. Show genuine enthusiasm. Be interested in the world.

CEOs focus on being interested rather than trying to be interesting.

CH 2. BATTLE-HARDENED CONFIDENCE

You can never really tell how somebody deals with adversity.

Many CEOs seem driven by a strong work ethic forged in adversity.

So when I interview potential executives, I will ask them directly: ‘Give me an example of some adverse situation you faced, and what did you do about it, and what did you learn from it?’

If I’m recruiting people for very senior positions, I will delve quite extensively into their personal lives.

The number one most predictive trait is perseverance, or what we would call internal locus of control.

Many CEOs recognize that failure is part of success.

The best hitters in Major League Baseball, world class, they can strike out six times out of ten and still be the greatest hitters of all time. That’s my philosophy—the key is to get up in that batter’s box and take a swing.

This ability to celebrate failure needs to be an important part of any company that’s in a rapidly changing world.

It is okay for a CEO to say that the strategy didn’t work, that the technology didn’t work, that the product didn’t work, but we’re still going to be great.

I don’t think you can create culture and develop core values during great times.

‘Culture’ is a big word for corporate character. It’s the personality of the company.

What does it take to have a great company? It takes major setbacks and overcoming those. I mean a near-death experience.

Leadership, in my opinion, is best learned, or honed, through adversity. In abundance, it’s very easy to lose focus. But in adversity, one must have extreme focus.

Understand what you can control.

Challenges become learning experiences rather than disappointments.

A dream employee will eagerly accept a challenge, and say those words that are music to a manager’s ears: “Got it. I’m on it.”

CH 3. TEAM SMARTS

The most effective executives are more than team players. They understand how teams work, the different roles of individual players, and how to get the most out of the group. They know how to create a sense of mission and how to make people feel like everyone’s getting credit. They know how to build a sense of commitment in the group.

Team smarts is an essential skill.

Teamwork is developed by conveying a sense that you are looking out for a colleague, that you’ve got her back.

Try to add value to everything.

You know you’re going to drop the ball. If you’re good with people and people like you and you treat them right, they’re going to pick up the ball for you, and they’re going to run and they’re going to score a touchdown for you. But if they don’t like you, they’re going to let that ball lie there and you’re going to get in trouble.

Part of team building is understanding the roles that different personalities play in a group.

People are either “glue” or “solvent” within a team. People who are glue within the team disseminate things effectively, motivate and improve the morale of people around them.

So much of leadership is about trust and belief. People have to believe in you.

Nell Minow of The Corporate Library said her best lesson for building a sense of teamwork is to organize a group around a simple word: we.

Another key strategy for building a sense of teamwork is learning to share credit.

Teamwork can be built by being explicit about the roles people play, and insisting on rules and routines.

If you’re not worried about your own success, but you’re worried about the success of the team, you go a lot further.

Perhaps one of the simplest ways to think about teamwork is to forget organizational charts and titles. Companies increasingly operate through ad hoc teams, formed and disbanded to accomplish various tasks.

The people who truly succeed in business are the ones who actually have figured out how to mobilize people who are not their direct reports.

CH 4. A SIMPLE MINDSET

Be concise, be brief, get to the point, make it simple.

Few people can deliver the simplicity that many bosses want.

Next time you’re in a meeting, ask somebody to give you the ten-word summary of his or her idea.

The shorter your business plan is, the more succinct and to the point it is, the better.

Some CEOs put strict limits on PowerPoint slides.

Simplifying the complex is the CEO’s job, and CEOs do it all day long.

Create order out of chaos, to identify the three or five things employees need to focus.

If I can’t simply put what needs to be done on one page, I probably haven’t thought it through very well.

You need to show you care. Nothing today is about one individual. This is all about the team, and in the end, this is about giving a damn about your customers, your company, the people around you.

I don’t micromanage, but I have micro-interest. I do know the details. I do care about the details. I feel like I have intimate knowledge of what’s going on, but I don’t tell people what to do.

As a CEO, part of my job is not only to help develop direction but to teach storytelling.

Be brief, be bright and be gone.

CH 5. FEARLESSNESS

Many successful CEOs try to create a culture of action, in which employees are encouraged to make decisions that are outside the strategy playbook.

I had to learn to make decisions quicker, on the spot, and follow my gut. You’re not going to have all the information.

You have to have people in an organization who are willing to truly embrace change,

CEO of HSN, the parent company of Home Shopping Network, likes to see evidence of risk-taking in the resumes.

CH 6. PREPARATION, PATIENCE, AND OBSTACLE COURSES

Think of a career as an obstacle course.

Much of the CEOs’ advice for succeeding on the career obstacle course falls into two broad categories: preparation and patience.

Prepare for a career, they say, don’t plan it.

On the whole, many professional people are more worried and more afraid than they should be.

The most important thing is to focus on learning experiences.

Several CEOs mentioned selling as an important skill that can pay off throughout a career.

Several CEOs said that travel is the best preparation for a career.

Patience is extremely important because people set goals for themselves that often are unrealistic,”

Do the work well, they say, and the promotions will follow.

New employees should focus on figuring out the culture of an organization. Catch on to who really pulls the strings and where the real power base is, whom you have to collaborate with, whom you have to inform, whom you have to seek out for advice.

I tell people, just show up, get in the game. Something good will come of it, but you’ve got to show up.

Take the time to meet people and to build relationships.

PART TWO MANAGING

CH 7. THE SURPRISES THAT AWAIT YOU

Read everything by Peter Drucker.

As the leader, people are looking at you in a way you could not have imagined in other roles. You have this megaphone attached to your shoulder that amplifies everything you do. Everything that you say or do or amplified. You can’t have a bad day.

You need to be always authentic.

I’ve learned to overcommunicate in a way I never did before.

Be open with employees so that they are not left wondering what’s on your mind.

Be as open as possible about who you are, what they should know about you, what they should understand about you, and how you like to operate.

People like the fact that you’re one of them and that you’re going to sacrifice as much as you’re going to ask them to sacrifice.

People put the CEO on such a high pedestal, and that you get more credit than you deserve for just being friendly and approachable.

CH 8. TIME MANAGEMENT

Ask yourself whether what you’re doing is “action” or “activity.”

Make sure you spend time on the action that’s going to drive results.

One of the things you have to worry about as a leader is to make sure that you’re not just creating activity.

Constantly assess and reassess your top priorities.

What are the three most important things I need to do today?

End each of my three most important meetings each month by saying, ‘Okay, here are the three most important things we’re doing.’

Mark Pincus of Zynga adopted a system called OKRs. The idea is that the whole company and every group has one objective and three measurable key results.

Ask everybody to write down on Sunday night or Monday morning what your three priorities are for the week, and then on Friday see how you did against them.

Successful CEOs make time — daily, weekly, or quarterly—to study their time. The best time-management thing I do is reflect an hour a week on the overall strategic plan for myself. Make sure I can carve out a certain period of time every week to step back and think about the big picture. This gives you long-term focus.

Build thinking time into your daily schedule. Flying time is often a useful opportunity to think in peace and quiet.

Many executives make time for themselves away from their gadgets.

Turns off your work phone and email at the end of the week and encourage your staff to do the same. You want your people to have a life.

CH 9. BANANAS, BELLS, AND THE ART OF RUNNING MEETINGS

Having a clear agenda and sticking to a timetable certainly helps.

People will be more engaged if they’re clear about the point of the meeting from the start.

People I work with know I don’t like meetings and that they will do better to just keep it moving.

Too many leadership meetings are all focused on internals, so half of meetings has to be externally facing — our market share, our clients.

Encourage everybody to be a hall monitor. ‘Hey, are we wasting our time here, or not?’

People like rules in meetings, and they like them even more when the rules are enforced fairly.

The best idea wins.

Being succinct and efficient is also a measure of preparation and command of the facts.

If you don’t speak up in the meeting, you can’t later come back and say: ‘I really hated that.

Meetings can easily descend into a conversation between two people, with others watching.

“Every Friday, we have the senior leadership team come for about an hour-and-a-half operations check, and we have the checklist of items we need to get to, and we will go through that list, but I will never lead that meeting,” she said. “Each one of the executives leads the meeting.”

Waiting for people to contribute doesn’t always work. Sometimes you have to seek out opinions.

CEOs said they make it a point to hold back on sharing what they think until they get more input.

As you become more senior in a company, you tend to be viewed as more authoritative when you speak and therefore you have to back off a little bit.

If meetings are fun rather than a slog through an agenda, people will be more engaged and listen to the rest of the group more intently.

CH 10. SMART INTERVIEWING

I love asking people what the meaning of life is.

‘On your deathbed, what do you want to be remembered for?’

‘What’s the most important thing that’s happened to you over the last three years?’

‘Just tell me about your life.’

‘Wherever you worked before, what made it a good day?’

Ask questions about their families, friends, and social networks.

‘What are you passionate about?’

Hire people who are Tiggers, not Eeyores.

Several CEOs said they ask candidates about the last few books they read, the value of teamwork and how to contribute to a team effort. They listen carefully to how often the person says “I” and “me.”

“Who are the best people you recruited and developed and where are they today?”

“I’ll ask somebody to teach me something,” he said. “They’ll get on the whiteboard.”

‘Can you describe a decision you made, or a situation you were involved in, that was a failure?’

Find out if the person he’s interviewing can handle working without a clear road map.

‘Do you know what you’re good at, and what you need to work on to get better?’

‘If you had to name something, what would you say is the biggest misperception that people have of you?’

Know what skills people are trying to develop more, as a way to gauge their self-awareness.

‘Do you know why you want to work at this company?’

They want to know if people have done their homework, and believe in what the company does and its mission.

‘If you could be in my shoes today, what would be the top three things you’d do?’”

Some CEOs know that a piece of writing can provide a window on the way job candidates think.

Many CEOs said an absolute must of the hiring process is to share a meal with someone. Do they talk down to the busboy? Can they read social cues and keep a conversation going? Many candidates have lost job opportunities based on their performance at a restaurant.

I have to remind myself that there’s no pressure so great to fill a job.

CH 11. LOCK YOURSELF OUT OF YOUR OFFICE

Executives have to make the time to get out and walk around. The less time spent in the office, the better.

CEOs say that the investment of time delivers enormous rewards on all fronts — employee retention, insights on company strategy, and worthwhile feedback.

People generally want to bring only good news. When you move into the corner office: “Watch how funny your jokes become.”

Management By Walking Around is essential.

Leadership is about ensuring that you have the right people within your organization. You do that through actively knowing the people.

Try to see a client every day.

The best thing you can do is spend at least 50 percent of your time in the office communicating with as many staff as you have time to communicate with.

Brian Dunn, the CEO of Best Buy, also visits stores, and he approaches his company like a customer so he understands the experience. “I surf our Web pages. I call our call center. I visit our stores.”

Talk to people who are leaving. When people are leaving, they’re often in a very reflective state. And because they’ve often made a very difficult decision, they’re also stunningly direct, because it’s like they have nothing to lose.

Every boss needs people in the organization who are going to tell her that her jokes aren’t funny — in other words, give her straight feedback.

One way to avoid the isolating trap of the corner office is to eliminate the corner office.

Sometimes, all you have to do is ask for feedback.

Dan Rosensweig of Chegg often uses annual performance reviews to ask for feedback on how he is managing.

CH 12. BE A COACH, NOT A CRITIC

As a coach, a manager’s job is to elevate individual players, make the team better, and try to give guidance and input.

A boss will get more out of the people who work for her if her goal is to make them better.

Get a sense of what the one thing is that makes their eyes light up, that they get excited about and won’t stop talking about.

There is no single right way to give feedback.

One way is the “criticism sandwich”.

Tachi Yamada prefers not to mix positive and negative feedback.

“By listening first and trying to understand how we got here and their story, I think it allows them to then hear my point of view later. And then we can move into solutions. When people feel judged right out of the gate, it’s hard for them to open up and listen and improve.”

In sports, this is what coaches do — giving constant feedback in practice to help people get better and help the team win.

Being direct is not a personal attack.

PART THREE LEADING

CH 13. CREATING A SENSE OF MISSION

What’s the difference between management and leadership? Management is about results. Management is quantifiable, measurable.

Leadership is an art. People report to managers, but they follow leaders.

Leaders who can create a sense of mission are far more likely to succeed.

Employees like to be a part of something bigger than themselves, and to work toward an ambitious goal.

The job of leaders is to set a goal that people can believe in.

There is no formula for creating a sense of mission, though certainly one necessary ingredient is conviction, since nobody will follow a leader who doesn’t believe wholeheartedly in what he or she is saying.

Apple is often talked of as a place where people want to build products that will change the world. “We believed in the Mac division that we were making the world a better place.”

What are we? What is our real purpose?

The higher the calling, the higher the compelling vision you can articulate, then the more it pulls everybody in.

A reporter asks a bricklayer, ‘What are you doing?’ And he says, ‘I’m building a cathedral.’

People love to compete, of course, so another way to marshal the collective energy of a workforce is to establish a clear scoreboard to measure performance against competitors, and then reward the team when it wins.

There’s got to be measurable goals that everybody understands, and then you start strategizing on how to get there, and figure out how everybody wins.

Once you’ve established what your organization’s mission is, you must repeat it endlessly. Even when you’re tired of what the message is, you need to do it again and again and again. You’ll know that you’re effective as a leader, because you hear them saying it.

Many CEOs agree on this point — that there is a need for relentless communication.

We share everything. We believe in complete transparency.

There’s nothing quite as powerful as people feeling they can have impact and make a difference.

Employees need to be won over constantly.

CH 14. SMALL GESTURES, BIG PAYOFFS

Many CEOs said they made time for the small gestures — the handwritten note, the phone call, taking time to drop by an office to chat—because they recognize their power.

Continue to motivate people to do better and better. Get them excited and create the right environment.

There’s an innate need for well-deserved recognition.

There are two things that are very important about recognition. One, it needs to be deserved. And two, it needs to come from the heart.

People leave companies for two reasons. One, they don’t feel appreciated. And two, they don’t get along with their boss.

CH 15. TYPE A TO B

Once they’ve won the top job, many CEOs said they’ve had to learn how to pull back and listen more so that they are not dominating every conversation and meeting.

You really want to get the best out of people, you have to really hear them, and they have to feel like they’ve been really heard.

Being too exciting and too motivational is overbearing, and it turns people off.

The job of leadership is developing people and that it involves not doing everything for them.

Many executives said that one of their biggest challenges was learning to listen more.

Make sure you have the right people in place and they’re motivated correctly. The way to do that is to listen to them.

If I wanted to stay surrounded by great people, I had to get out of their way and create the room and make sure they started to get the recognition and the credit.

What defines successful leadership — earning people’s respect.

CH 16. CREATING A CULTURE

One of the most demanding aspects of leadership is to create a positive culture that engages employees at a personal level.

Creating an effective culture is an art.

Many CEOs recognize that culture is the engine that drives results.

Some of the most successful CEOs have taken steps — symbolic and practical — to create a culture that is less hierarchical, where people can make decisions themselves and learn from one another.

CEOs become facilitators of the culture rather than the focus of the culture.

If you see your job not as chief strategy officer and the guy who has all the ideas but rather as the guy who is obsessed with enabling employees to create value, you will succeed.

How do we push the envelope of trust? By creating transparency. All our company’s financial performance information is on our internal Web site.

Collaboration is one of the most difficult challenges in management.

The point is to get people talking to each other rather than always trying to involve the CEO in every decision.

When you start telling people what to do, they no longer are responsible; you are.

Values in a corporation act as a guide to help make tough decisions. Values also appeal to employees who want a sense of mission beyond dollars and cents.

At Zappos, the company tells employees that values are not just suggestions — they can be used as grounds for dismissal if employees aren’t abiding by them.

“At Zappos, we view culture as our number-one priority,” Tony Hsieh said. “We decided that if we get the culture right, most of the stuff, like building a brand around delivering the very best customer service, will just take care of itself. We would actually be willing to hire and fire people based on those values, regardless of their individual job performance.”

Zappos pushes the culture of transparency to an extreme that might make some companies uncomfortable. It publishes a “culture book” every year.

It’s a real cliché to say that the boss is the one that sets the tone, but it’s absolutely true.

It’s not the words of the mission statement or the words on the value statement, it’s how a company deals with the people who breach the core values. That’s what really defines the values.

Have very clear goals and clear compensation schemes. People don’t feel that they need to be talking about compensation or about their bonus.

For leaders, the ability to laugh at yourself is key.

Does the CEO, as a role model, encourage healthy debate and appreciate tough questions and challenges? Or does she set a my-way-or-the-highway rule?

Ursula Burns of Xerox, who has talked to her employees about overcoming what she described as the company’s “terminal niceness.” Meetings are all about challenging the status quo and questioning what’s wrong and what can be done better.

Jen-Hsun Huang of Nvidia said “intellectual honesty” is one of the core values of his company. “One of our other principles is that people who are successful are the ones who ask for help.”

Some CEOs make sure that people are rewarded in ways beyond their paychecks.

It’s always interesting for me to hear how newcomers feel after they’ve been in the brand for a period of time and to get feedback.

CH 17. SO WHAT IS LEADERSHIP?

What are the intangibles that serve as a kind of connective tissue for all the skills of leadership?

Unbridled Passion for What’s Possible

Why does a line of followers form behind some leaders?

Employees have to trust a visionary leader before they will follow him.

“Trust has a couple of dimensions,” Barrett said. “It starts with competence.” People have to trust that you have a point of view about what the enterprise is going to look like. They have to trust that you understand them.

Build a Story Around Their Capabilities

Leaders also have a feel, an instinct, for what people are capable of becoming, even if they can’t see it themselves.

Leaders who are committed to helping the people who work for them will have committed followers.

Bringing the Group Together

The ability to bring a team together to achieve a goal is a rare skill.

Command-and-control leadership won’t cut it in a world where the real competition is for talent.

“I think of myself less as a leader,” said Tony Hsieh of Zappos, “and more of being almost an architect of an environment that enables employees to come up with their own ideas. My associates can work anywhere they want, and my job is to re-recruit them every day and give them a reason to choose to work for us.”

Leaders think about others first.

You don’t make all the decisions.

A leader has to be comfortable with having the weight on his shoulders. And that’s not for everybody.

Effective leaders must care about people enough to get the best work out of them, yet they must keep a distance so that any difficult conversations are about performance.

People want to follow a confident but not overconfident leader.

Have a sense of everything that is going on at the company, and what needs to be done, yet be present when talking to employees so they don’t get the impression you’re distracted.

Sometimes leadership is about having the right answer. Other times it’s about having the right question.

The Big Idea: Compensation is one of your largest expenses and, therefore, one of your most important strategic decisions.

Overview: 5 Principles for Effective Compensation Design

Principle #1 – Be Different: Aligning Compensation with Culture and Strategy

The first principle of compensation design is to Be Different. Strategy is about being perceived as different versus your competition. Ideally, all your People practices (recruiting, leadership, compensation) reinforce these differences. They must incentivize behaviors in your employees that your customers appreciate.

A Good Jobs Strategy means paying significantly higher salaries than your competitors, nevertheless, enjoying lower labor costs per unit and higher profits because your employees are more productive.

You might feel tempted to copy the compensation systems of these outstanding firms. But that would be a big mistake. Your system will only be effective if it is tailored to your unique context. Make compensation a critical part of your strategy, make it your own, and make it different.

Principle #2 – Fairness Not Sameness: Creating a Coherent and Flexible Base Pay Structure

Scaleups need to go to the drawing board and design a compensation system that deserves the name.

The key is to design a transparent and equitable system that allows for meaningful differences in base pay between low, average, and top performers. Performance is not normally distributed, and thus base pay shouldn’t be either.

Principle #3 – Easy on the Carrots: Using Incentives Effectively

Zehnder decides to be deliberately old-fashioned. The firm could do what everybody else in the industry does and pay its people juicy commissions. Yet this would be unwise, given the firm’s culture and strategy.

Financial incentives influence employee behaviors in three ways. They help people decide if they want to work at your firm (selection effect), they tell employees what is important (information effect), and they can motivate people to try harder (motivation effect).

Most bonus plans fail to drive performance. Instead, they become entitlements and cause undesired behaviors. We argue that individual financial incentives only work for simple, routine, measurable, and independent jobs and that your sales roles are likely the only candidates where such carrots will be effective.

Principle #4 – Gamify Gains: Driving Critical Numbers Through Pay/Play

In gain-sharing plans, teams or even an entire company commit to moving the needle (often in a gamified manner) on a metric that points to a specific challenge of the business (productivity, spending, quality). This number is then tied to a bonus and paid out to employees when the goal is achieved.

The power of gain-sharing schemes lies in their information effect. By making goals specific and tangible, and tying a reward to them, gain-sharing plans inform people what is important.

Principle #5 – Sharing Is Caring: Getting Employees to Think Like Owners

While stock and stock options grants are standard practice among Silicon Valley-style tech companies, we find these tools underutilized in the vast majority of mid-market firms.

Compensation is Not Logical, It’s Psychological

In this book, we focus on the monetary elements of your compensation system. However, when discussing monetary compensation, you always need to consider the total reward package as the different reward elements complement each other. Small and midsize companies have great opportunities to offset less competitive salaries and benefits with relational rewards.

Ch 1. Be Different: Aligning Compensation with Strategy

Being different is key to any effective strategy – and that includes designing a “strange” compensation plan that incentivizes the behaviors your customers and other stakeholder expect.

But make sure your comp plan aligns with your culture / core values or risk it being rejected. This is why it is dangerous to just copy someone else’s compensation plan.

Don’t look at people as a cost; they are an investment.

The first principle of compensation design is to Be Different. Strategy is about being perceived as different versus your competition.

The role of the compensation plan is to incentivize behaviors in your employees that your customers appreciate and make them reach for their wallest. Only then do your HR policies create true value for the firm and make you stand out in the marketplace.

Your People systems should be outright strange.

One of the Container Store’s core values is “1 Great Person = 3 Good People.” Therefore, they are willing to pay them up to twice as much as competitors.

The Container Store wants excellence and has the firm belief that performance differences among people are huge and that outstanding people deserve to be lavishly rewarded.

Incentives are powerful shapers of culture.

Your design choices should reflect your culture’s position about people and money. If you trust that team will always work hard, you will pay them a high fixed salary. If you don’t, you pay them variably. If you believe that competition among colleagues improves performance, you will pay individual bonuses. If you think cooperation produces better results, you will reward team bonuses.

Culture (and strategy) influences a company’s choice about compensation and vice versa. You need to start with a well-defined culture. Do you have three to five core values that describe the basic behavioral norms everybody in your organization has to follow?

Don’t just copy another company’s comp plan. Make it a critical part of your strategy.

The Good Jobs Strategy (coined by author Zeynep Ton) directs companies to pay people extremely well to put a powerful flywheel in motion that leads to operational excellence, loyal customers, and increased revenue and profits.

Mercadona, a follower of the Good Jobs Strategy, invests $5k per new employee in a four-week boot camp, offers intensive tutoring, gives regular salary increases, generous bonuses, 30 vacation days, and family-friendly schedules. It is Spain’s largest and most profitable supermarket chain and beats Walmart by a factor of 3x.

Worry about what people do, not what they cost. (From Jeffrey Pfeffer’s classic HBR article Six Dangerous Myths About Pay).

Costco pays 30-40% higher than Sam’s Club.

Netflix says: one outstanding employee gets more done and costs less than two adequate employees.

Hire fewer but far more productive people.

To be clear, the higher worker productivity at these Good Jobs Strategy firms is not the result of paying people higher salaries to work harder and smarter. The higher worker productivity is the result of getting the best talent and retaining them.

A compensation philosophy is a written statement that outlines how people in your organization are paid and why.

PwC pays low salaries but develops its people to land big jobs elsewhere.

KKR believes every employee of its portfolio companies should be an owner.

Unilever offers great management training with guaranteed promotions if goals are met.

Startups and scaleups can’t offer great salaries but can offer long-term wealth creation and dynamic work environments.

Ch 2. Fairness Not Sameness: Creating a Coherent and Flexible Base Pay Structure

Base compensation is rarely motivational – and raises are short-term in their impact. Base pay is considered a hygiene factor. As a company scales, it’s important to establish clear pay grades. Performance is not normally distributed, and thus pay shouldn’t be either.

The 3 drivers of base pay: competencies, sustained performance, relative labor market value

Read Pay People Right! by Zingheim and Schuster.

Base pay does not motivate. People won’t work harder because you increase their base pay. Base pay drives attracting and retaining talent.

However, paying people below what they consider fair is highly detrimental to motivation and performance.

Extrinsic fairness means your people are paid fairly relative to the market.

Intrinsic fairness means your people are paid fairly relative to their co-workers.

Perception of fairness is not logical. People’s assessment of fairness depends on how they feel about their boss.

Read 12 Elements of Great Managing by James Harter

Read First Break All The Rules by James Harter

Humans are not rational when it comes to pay. Receiving $1,000 less per year than the colleague next door can easily be perceived as a massive personal insult.

Although compensation is not rational, a well-thought-out pay structure can go a long way to reduce anxiety, social envy, and drama.

As your company grows, you must introduce pay structures, with standardized salaries and pay bands for jobs.

You might need to create two separate pay structures and career paths for Leaders (managers) and Makers (individual contributors). This allows individual contributors to advance in their career without having to become a manager.

Set up a pay structure early in your company’s life. Don’t wait.

Pay for high performance. For skilled jobs, high performers are 10x+ more productive.

When employees ask for a career path, this is often a coded way of asking “How can I make more money?” The solution: wider pay bands in your pay structure.

If competition and ambition are important values in your firm, a large pay band might make sense. If you want to foster values like solidarity and generosity instead, then you might want to limit the salary spread and pay people more equally.

Read Are You Paid What You’re Worth? by Michael O’Malley for help with pay structures.

Read The Leadership Pipeline by Ram Charan about leadership development.

Base salaries should be reviewed once per year for everyone, at the same time. Don’t be forced to a schedule based on employee start dates.

Don’t mix performance reviews and compensation reviews. Learning from performance feedback is difficult when money is on the table.

Increase base pay to adjust for: cost of living, promotions, increased responsibility, sustained high performance, relative market rates.

Tenure alone is not a good reason to give people a raise.

Quarterly Priorities, Critical Numbers, KPIs are great ways to assess high performance that can be rewarded with raises in base pay or payout incentives.

For smaller companies, a pragmatic way of reviewing performance and comp is for the direct manager to suggest increases and run them by a compensation committee (CEO, CFO, HR, trusted first-line employee).

A raise is only a raise for 30 days. After 30 days, a raise is just someone’s normal base salary.

It’s a sad fact that the majority of workers are financially weak, vulnerable, and living paycheck-to-paycheck.

Peter Drucker believes a healthy CEO:worker pay ratio is about 25:1.

Consider paying your workers weekly.

Consider teaching your workers personal finance management.

It’s hard to predict how people will react if they learn what their bosses or peers make. Until you have a very well thought out compensation system, keep your salaries confidential.

Ch 3. Easy on the Carrots: Using Individual Incentives Effectively

There are 8 conditions in which monetary rewards are effective, but they only rarely apply. Thus, go easy on the carrots.

Egon Zehnder does not pay any kind of performance bonus.

The main rationale is to foster tight cooperation and the long-term view that Zehnder adopted as a core element of its strategy.

Egon Zehnder uses its unique compensation system to retain long-serving consultants and to reward time invested in building client relationships instead of chasing the next deal.

Zehnder looks for consultants with two characteristics: in it for the long haul, team players.

Jeffrey Pfeffer and Robert Sutton explain 3 effects of financial incentives in “Do Financial Incentives Drive Company Performance?”

1) Selection Effect: Do I want to work here, with people who care about this incentive?
2) Information Effect: What is important here?
3) Motivation Effect: Try harder for the reward

Some studies show financial rewards have little or no influence on work performance and can even be detrimental. Other studies show that financial rewards can have a positive effect on performance.

Bottom line is that financial incentives do work. The question is rather how they work and how they can best be applied in practice.

Inappropriately applied incentive schemes can have multiple “side effects”.

Unwanted side effect: too much of a good thing. Employees focus on the incentive at the expense of other job duties.

Unwanted side effect: too complex or too simple. A too-simple model ignores relevant variables and will not deliver optimal results. The right balance is rarely achieved.

Unwanted side effect: cooking the books. People can get creative about hitting the metric but not achieving the intended goal.

Unwanted side effect: performance measures tainted by biases. It’s rare to find a task that is measurable and dependent only on one person. Performance evaluations are subjective. 97% of executives believe they are among the top 10% of performers.

Eight conditions for successful incentive schemes: 1) role is repetitive and focused on one task; 2) goals are unambiguous and one-dimensional; 3) easy to measure both quality and quantity; 4) employee has complete control of process and outcome; 5) cheating or gaming the results is practically impossible; 6) role is independent; 7) employee is not expected to help or support others; 8) employee considers the incentive as meaningful and payout is frequent.

TMC abolished all individual and group incentives (except sales) and tied 80 percent of everybody’s bonus to the company’s financial performance.

Bosch eliminated all individual bonuses for all 378,000 employees.

Rockstar companies like Netflix, Mayo Cliic, and SAS Institute never had any performance bonuses.

Intrinsic motivation is much more powerful and sustainable than extrinsic motivation.

SAS avoided trying to attract people with money so that they don’t also leave for money.

For sales teams, it does make sense to additionally motivate people with monetary incentives.

Smaller firms often have difficulties competing with larger competitors in terms of base salary and benefits. But they can make up for the difference, especially if they are growing, by generously sharing the upside with their people.

“People now join us for our culture, development opportunities, and many other reasons, and we like that. Pay is still very attractive and up to 30-40 percent above industry average, but it is only one of several decision factors.”

Compensation is anything but an exact science. Human psychology is too complex to capture in universally valid formulas.

Ch 4. Gamify Gains: Driving Critical Numbers Through Play

Shorter-term gain-sharing plans are used to gamify the business and add a level of fun and excitement (and dopamine addiction) to achieving FAST (vs SMART) goals.

In a gain-sharing scheme, teams or even the entire company commit to moving the needle on what Jack Stack would call a critical number, i.e., a metric that points to a challenge of the business (productivity, spending, quality, customer service).

Because people engage and change their behavior purely to have fun, the monetary incentive becomes secondary or even irrelevant.

You can apply gain-sharing schemes as one-time thrusts to accomplish a particular objective and then move on to the next thing.

Group incentives have the advantage of fostering collaboration and teamwork.

Drawbacks are: 1) First, most people don’t want to depend on others when it comes to their pay. 2) Second, top performers are the least fond of group schemes. 3) Third, the free-rider effect (people slack because they trust that others will carry their load) can bring average performance down instead of up.

If you use gain-sharing schemes, make sure that individual performance is monitored as well.

A way to reduce unintended side effects of group incentives is to link rewards to metrics that reflect the overall performance of the organization, like company profit.

Organizational learning is an important by-product of gain-sharing schemes. People understand causalities and make better decisions because of these plans.

Walters tied everybody’s compensation to the achievements of the firm’s three annual priorities. Team members received a percentage of base salary when hitting the target for each priority.

Axiometrics’ priorities were operationalized through FAST goals (Frequently-discussed, Ambitious, Specific, Transparent–an update to the acronym SMART goals).

The real payout at Axiometrics was quarterly yet based upon YTD performance so that late performance could catch up with early non-performance.

Another example of a simple yet highly effective gain-sharing scheme is Continental Airlines’ punctuality bonus. It wasn’t the size of the bonus that mattered as much as the focus it brought to the airline’s on-time performance.

Sebastian at TMC paid a small bonus (= 0.5% of annual salary) to everybody when the team achieved the goals of the quarterly theme. It wasn’t the money that moved people to put in the extra effort but rather the game-like spirit these schemes created.

Read Great Game of Business by Jack Stack

Intermittent Reinforcement Schedules: Using financial and non-financial rewards in an irregular, ad hoc matter is an excellent tactic to increase the motivational effect and avoid the creation of entitlements.

Surprise bonuses are fun and tie into the one-minute manager concept of catching people doing the right thing.

“These surprise bonuses are one-time nonrecurring expenses,” concludes Berman. “They help to build culture and have been highly effective for me for a long time.”

TMC has the Invisible Hero Award. Anybody can suggest a colleague they think has made an extraordinary contribution or effort. The suggestion is presented and decided informally at the weekly senior leadership meeting. The award can be anything from a dinner for two to a voucher to a material gift. The upper limit per award is $ 1,000.

Verne advised HSN to turn its call centers into casino-like environments. Instead of earning a consistent bonus, reps earned the right to spin a big wheel installed in each call center.

Read Bringing Out the Best in People by Aubrey Daniels.

Non-monetary rewards come in countless forms: extra vacation days, sabbaticals, special projects, training or educational events (i.e., paying for a conference at an exotic location, including spouse or family), travel privileges (business class flight, 5-star hotel), or simply throwing a great party for your people.

Research indicates that non-monetary rewards have a more substantial impact on performance than monetary rewards of equivalent value.

People won’t remember the zeros on their bank statements, but they will never forget how you made them feel with that trip to Hawaii.

Paying for education is also more impactful than just handing over a check. Eg. Starbucks.

Spending money on others (whether coworkers or charity) increased the happiness and job satisfaction of givers and receivers and improved team performance.

Yes, many companies give to charity. But the twist of letting the employee choose the organization and deliver the money is crucial – the employee receives direct recognition by the charity for the gift instead of the company.

Some employees and teams will value non-monetary rewards over monetary. The idea of non-monetary rewards also allows you to customize your compensation for specific employees.

Incentives can trigger a great variety of responses in people, and the exact causes of behavior changes are difficult to establish. Variables like leadership, culture, or training influence heavily, regardless.

Ch 5. Sharing Is Caring: Getting Employees to Think Like Owners

Profit-sharing is also a way for mid-market firms to compete for talent. Longer-term value sharing (stock and stock options) goes even further in aligning the interests of owners and employees.

Phantom stock is a special form of value sharing that retains control for the owners but can create liquidity issues.

Rothschild of Access Fixtures implemented a profit-sharing plan in 2019 where 20 percent of the firm’s annual pre-tax profit is distributed on a pro-rata salary basis among his employees,

“For me to make serious money, the employees need to get a serious bonus.”

Profit-sharing often leads to sharing P&L information with employees.

Improving individual and group performance with financial incentives can be tricky. Yet as discussed, pay schemes like Zehnder’s or Access Fixtures’ that link rewards to the performance of the entire organization produce far fewer issues.

What’s the effect of profit-sharing on employee behavior? First and foremost, it is a way of aligning the interests of shareholders and employees (the information effect). Employees tend to decide more like owners when they have skin in the game.

Profit-sharing also helps attract employees and keep them loyal (the selection effect). If profit sharing is a significant component of overall compensation, employees are incentivized to stick around until their share is paid out.

At Allied Printing, 50% of the annual bonus is paid sometime after the end of the year, so it doesn’t get lumped in with base pay in employees’ minds. You don’t want annual bonuses to become entitlements.

The other 50% of the bonus then vests over the next six years, and is divided equally into six chunks. These future buckets of money increase with each year, and employees only receive them if they are still with the firm.

But as Steve Rothschild found out, profit sharing is not effective if you want people to work harder (the motivation effect). A profit goal is too aggregated and detached from people’s work, and first-line employees generally have little influence on the outcome. The payout is also too far away from the task.

The problem can be partially overcome with an open-book policy and financial education as promoted by Jack Stack and the Great Game of Business approach.

Cascading priorities, KPIs, and a planning process that drives top-down strategy and bottom-up execution, which are at the heart of the Scaling Up methodology, can also provide this critical line-of-sight between the employee’s task and the firm’s profits.

A profit-sharing scheme is a gesture of fairness and a way for owners to reward those who generated the profit in the first place.

Read Ownership Thinking by Brad Hams.

1) It is best to include all employees in the plan, from the cleaning staff to the CEO.

2) Profit-sharing shouldn’t happen from the first dollar. Start from a minimum threshold that allows the company to serve a return on capital, be it in the form of a minimum dividend to shareholders, debt repayment, or recapitalization of profits.

3) The amount of profit that you aspire to generate in the upcoming period should be determined.

4) Decide the percentage of profits (beyond the minimum threshold) that you want to dedicate to the pool. He would not cap the plan but generously share whatever profit was generated beyond the profit goal.

5) Decide how to distribute. One option is to distribute equally. The more common solution is to pay the amount in proportion to the employee’s base salary. A third option is to differentiate the percentage according to job levels (first-line, coordinators, managers, execs, etc.).

6) Profit sharing is generally done on an annual basis but consider half-yearly or quarterly payouts

7) Consider conditioning the payout based on available cash flow as profitable years can occur with poor cash flow. You also want to pro-rata the payout for people who have recently joined or already left the company.

8) An open-book policy is critical for any profit-sharing program. Management maverick Ricardo Semler, who implemented a generous profit-sharing program at the Brazilian equipment manufacturer Semco, shares regularly financial updates with employees.

9) To avoid entitlements, don’t give consolation prizes when profits are down.

The danger of profit-sharing programs is that they can incite short-term thinking, i.e., sacrificing future “good” profits for today’s “bad” profits.

That’s why it is best to combine such short-term programs (which are appreciated by employees because they also provide short-term payouts), with long-term, value sharing programs, (e.g., stock, stock options, performance units),

If you would like to share profits with your team but want to avoid the dangers of short-termism, then value sharing schemes are an option to consider. Value sharing is the category name for financial instruments that grant employees either real ownership (stock or stock options) or similar economic rights linked to the value of the company (phantom stock, performance units, etc.).

Read www.vladvisors.com and www.phantomstockonline.com.

Once people are on board, value-sharing programs also have a retention effect because of the long payout and vesting periods of these instruments.

Value-sharing programs also communicate what is important to employees (information effect). Partial ownership is enough to reinforce the role of employees as stewards of the company’s assets and interests. Owners and employees share the risks and rewards associated with the business activity and align their interests through these programs. Employees who are also owners think and act more long-term, strategically, and holistically.

As with profit-sharing, it is beneficial to allow all employees to participate in the growing value of a company. Freeman’s research shows that the broad-based programs are the most successful.

Industrial firms like Chobani and Harley Davidson have granted large amounts of stock to their team, including all their blue-collar workers.

There are several ways of implementing a value-sharing program.

Do I allow employees to participate in the full value of the company or only in the appreciation of the value from the moment you grant these titles?

An Employee Stock Ownership Plan (ESOP) is a form of equity sharing with significant tax advantages for owners and employees that is unique to the US.

An ESOP is costly to maintain, given compliance and administrative burdens. Get solid legal and financial advice before you pursue an ESOP.

Phantom stock is a private contract between company and employee wherein the company promises to pay cash to the employee upon certain conditions. The agreement replicates the financial outcomes of granting restricted stock but with fewer strings attached.

Phantom stock will not be the right choice for everyone (e.g., stock options are much better if you are going for an IPO), but we would encourage you to explore this less-known option.

Closing: Get Pay Right and Out of Sight

The plan needs to be fair in the sense that employees feel their salary is an expression of your respect, appreciation, and equitable treatment.

First, your compensation plans consider the inscrutable nature of human psychology–the counterintuitive and irrational perceptions and reactions people have to compensation decisions.