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Core Principle of Compensation Design: Value Sharing Attracts the Best Talent and Magnifies Results
To achieve sustained success, companies must attract and keep talented people that know how to compete and are willing and able to assume a stewardship role in representing shareholder interests towards growth. For such a relationship to be properly fostered, owners and other stakeholders (in this case, key talent) must share both the risks and the rewards associated with value creation.
Those of superior talent are attracted to this idea. Individuals best equipped to contribute to the future success of the business will see it as an opportunity to have what amounts to a mini-entrepreneurial experience within the construct of someone else’s business model. As such, they view the company as a mechanism for wealth creation, not just a place to express their passion and talent. And shareholders should want employees with that perspective representing their interests.
In a recent interview with TV talk show host Charlie Rose, Mark Zuckerberg, founder and CEO of Facebook, said it this way:
I actually think the biggest thing for us is that a big part of being a technology company is getting the best engineers and designers and talented people around the world. And one of the ways that you can do that is you compensate people with equity or options. Right?
So you get people who want to join the company both for the mission because they believe that Facebook is doing this awesome thing and they want to be a part of connecting everyone in the world. But also if the company does well then they get financially rewarded and can be set.
… we`ve made this implicit promise to our investors and to our employees that by compensating them with equity and by giving them equity that at some point we`re going to make that equity worth something publicly and liquidly — in a liquid way. Now, the promise isn`t that we`re going to do it on any kind of short-term time horizon. The promise is that we`re going to build this company so that it`s great over the long term. And that we`re always making these decisions for the long term. (From a transcript of an interview on Charlie Rose, PBS, on November 12, 2011. Emphasis added.)
The point Zuckerberg is making has little to do with whether or not a company plans to share equity or go public. There’s a larger principle he’s defining. When companies can attract and retain the kind of people that think and perform as he describes, they are in a unique position to sustain results. This is because a distinct and lasting interdependency emerges between the employees’ skills and the company’s resources that extend those skills (capital, co-workers, suppliers, products, technology, etc.). Talented contributors soon learn that their skills are not as unique and applicable outside the company (that is providing the laboratory for nurturing and magnifying them) as they are within the enterprise. That’s a good mindset for company talent to have because of the mutual dependency it creates.
Such interdependence is reinforced and validated when long-term value creation is rewarded through value sharing, as Zuckerberg indicates. When employee skills connect with company resources in the right way, superior results are produced. To be effective, the compensation program should then provide a remunerative link to that outcome which confirms and magnifies the sense of partnership owners wants to convey. That link “seals the deal,” so to speak, and financially ratifies the interdependent nature of the relationship more completely.
So, whether one decides that newly available Facebook shares are over priced or under valued, Zuckerberg’s approach to value sharing with key producers is a sound one. Long-term value sharing, done right, attracts the “right” people and magnifies results.
