Compensation Strategies for Agile Teams

WRITTEN BY Mike Cottmeyer

Money

I don’t consider myself an expert on designing compensation systems, but as of late this issue has come up with several clients, and of course, I have to deal with compensation issues leading LeadingAgile. I’d like to share some thoughts with you guys, get some feedback, and maybe even generate a little healthy debate.

The key challenges around compensation, at least for me, center around figuring out how to reward individual performance without encouraging internal competition, local optimization, or one person feeling rewarded while another feels punished. You want compensation to motivate people, not to have a negative impact on performance.

Ever since I read Dan Pink’s Drive I’ve been very aware of the distinction between intrinsic and extrinsic motivation. While you’d like everyone intrinsically motivated… the realities of having a mortgage, consumer debt, household expenses, kids that need to go to college, or even saving for retirement drive different extrinsic needs.

Some folks want to come to work, do a great job, and go home. Some folks want to go the extra mile and really make a difference. Some poeople really want to kill it, advance their career, and be rewarded for all that hard work. Just saying that everyone should get a fair base salary, with no performance based component, isn’t going to work for some people.

So the question becomes, is it possible to use money or other rewards to recognize performance without introducing the negative side effects? Can we build a compensation system that values collaboration without creating internal competition, local optimizations, or risks leaving one person feeling punished because they didn’t get as much as their peer?

Here is what we are doing with LeadingAgile…

First, we have all our coaches is a pretty narrow salary range and we are working to narrow that range even further. When we started hiring a few years ago, I was pretty risk adverse and you really had to be a true believer to come work for me. As we grew, salaries increased and we are making things right for the people that joined us early.

As a quick aside, I want to be able to justify numbers if we ever decided to publish salaries internally. For the record, I am totally open to full transparency and think it’s a good idea. Some folks aren’t so keen on the idea, so we are respecting that for now. It does influence decision making around salaries when everything might be out in the open some day.

We believe that baseline performance is binary, you are good enough to be on the team or you aren’t. We are starting to get more explicit about what it means to be good enough to be on the team, but if we hire someone, we have very high confidence they can work in our model and be successful. Occasionally something will come up after the fact, but that has been rare.

If you are good enough to be on the team, you share in the team’s success. For us, that means a 20% bonus on top of your salary. Everyone will get the bonus or no one will get the bonus. We are toying with quarterly payouts but for now, it’s annual. The idea is that if the company is successful, we want to share that success with everyone.

Success for the time being is defined as 75% utilization. We’ve debated setting the target a little lower and we’ve discussed a sliding scale. There is a ton the utilization implies about our ability to market, sell, deliver services, and manage cash… so it’s not just about revenue. That said, revenue is what drives our ability to get people paid.

Does this fall into the category of an extrinsic motivator that might actually demotivate people? Maybe. But how else would you share financial success when things are going well? If we just added that 20% to each salary, my cost structure would be too high should we underperform financially. I’d have to let people go in a slump and that’s not the goal!

We are intentionally falling on the side of keeping our cost structure in check and rewarding the team if we are able to perform at a high level. We are building the infrastructure to help the team support marketing and sales, educating folks on how to manage engagements, and really encouraging people to pay attention when we have unexpected downtime.

I’m hoping that by taking a whole team approach, keeping everything visible, and empowering everyone to influence the goal we’ve been able to strike the right balance. Time will tell.

That said, we still haven’t addressed how to compensate the people that really want to kill it. Those consultants that want to help market and sell, grow the practice, lead multiple accounts, and create sustainable economic value for the company. If someone is able to create that kind of value, I need to reward them or they’ll leave our company and start their own.

We are looking at introducing a variable component to our salary structure based on several other metrics we think might be relevant: overall financial contribution based on sales and marketing activity, the ability to keep yourself busy on one or more accounts, willingness to grow and develop professionally, customer feedback and peer feedback.

The idea is that for an individual component to pay, the team would have had to meet its overall goals. No local optimizations. Any compensation model over and above base salary and team based goals would have to meet certain design criteria to make sure it adequately rewards individual performance but doesn’t feel punitive to those that don’t make it.

It has to be inclusive… anything that one person is able to do, everyone is able to do. There can’t be some named subset of people able to participate in the plan.

It has to be based on abundance … everyone is able to be at the top every time. We want to build a system that assumes everyone has the ability to be a top performer.

It has to be transparent… whatever we choose to measure will be tracked openly so you can see where you are relative to your peers at all times. The measures and goals have to be clear and attainable.

It has to be cooperative… there cannot be any penalty for working together to achieve a goal. If two people work on a goal together, the reward has to be as much or greater than working on it individually.

It has to be sustainable… we will only ever reward sustainable growth. Creating incentives that encourage people to only look out for short term economic outcomes won’t help the company grow.

My hypothesis is that if we can fairly compensate people by way of base salary, give everyone something extra if we hit our financial targets, and create an inclusive, abundant, transparent, cooperative, and sustainable model for paying one person more than another… we might have a shot of making it work and allowing folks to meet their individual financial goals.

If an employee receives a fair salary, is compensated when the company does well, but decides not to participate in the broader plan… they may not like that they didn’t get anything extra, but at least they’d understand why and know what needed to happen in order to participate in the future. If your good enough to be on the team, that door is always open.

Okay… so what do you think? Is it fair or a slippery slope? What could we do differently? I realize we are a services company, but could these ideas work in a traditional software company? Would a model like this work for an agile team? An agile enterprise? If it would work, what kinds of measures might we consider for software developers and other team members?

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11 comments on “Compensation Strategies for Agile Teams”

  1. Tim Zack

    Inclusive, Abundant, Transparent, Cooperative, and Sustainable is a great filter to pass any team based policy or compensation plan through. Those are the qualities that make intrinsically motivated people push harder without alienating those that are extrinsically motivated. It also accounts for the micro-changes in ones motivation based on their personal lives at the time. Even an interracially motivated person may have a situation where for a time they are distracted by paying the bills or needing to be with their family and this is flexible enough to allow that person to change priorities for a season and know what the outcome will be.

    Well written.

    Reply
  2. Steve Spearman

    Some very good stuff, Mike – thanks! One area that I hear a lot from the software companies I work with is how to gather feedback on individual performance within a team – without causing a lot of negative side effects. In most of these companies, individual performance review is not optional and they want an informed basis to provide feedback. I have suggested a couple methods (while pushing for more team recognition) but all the approaches require great care and could easily be done wrong. I’d be very interested in how others are handling it.

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    • Mike Cottmeyer

      I don’t think most companies are really addressing that issue. Our take, as I’ve noted in the post is to give everyone a fair salary, compensate them based on company success, and then create an inclusive, abundant, transparent, cooperative, and sustainable model that everyone gets to participate in. That’s the best I’ve got ;-)

      Reply
  3. Dave Nicolette

    Hi Mike,

    I like the fact you are actively working through options for effective compensation practices that reflect agile values.

    I’d like to share an experience I had at a company of about 33,000 where we introduced a bonus plan for agile teams that gave each team member exactly the same bonus amount. This might suggest another option for those who are wrestling with this question.

    Assuming a team earned a bonus, each team member received the same share regardless of their role, level of expertise, or tenure with the company. This included individuals who started the project but left the team (or the company) before the project was completed. It also included individuals who joined the team after the project had started.

    An advantage of the scheme was that it completely eliminated all bad feelings and discussion of whether and why one person might deserve more than another person on the team. In keeping with fundamental agile values, the unit of labor in the agile area was the team, not the individual. As a result, team members could focus on collaboration and never think about competition among themselves.

    Regarding the question of transparency about salaries, I think that is fundamental to any agile organization. I understand and respect the fact you have business considerations above and beyond agile values, but my observation is that no company that offers agile advice to clients is, itself, an agile organization, and I find that a bit ironic. Agile consultancies don’t practice what they preach, except in limited ways. You say you are fully on board with the idea of transparency, but the present policy around transparency indicates other considerations are of higher priority to the company. I don’t mean that as a criticism; you have to run the business as you see fit. It’s just an observation.

    Beware of the temptation to use money as a motivator. As you know from Pink’s book (if not from dozens of other sources as well), people in our line of work tend to be satisfied with their pay as long as they perceive the level of compensation to be appropriate for their work. An extra dollar dangled in front of them on a string will only serve to make them cynical about management.

    Reply
    • Mike Cottmeyer

      It’s interesting… you’d like money not to be part of the equation, but I think it is. You want people to be inherently intrinsically motivated, and providing them meaningful work and purpose is the primary way to do that. The challenge is figuring out a way to compensate people that want or need to be compensated more. I think it’s a reality we have to deal with. I’m trying to find intrinsically motivated people, pay them fairly, give them a way to share in the company’s success, and then help them accelerate their income by contributing to the company’s success. The goal is to be consistent wight he values and principles we teach our clients. I’d love to share our model with you sometime Dave… I think you’d find that we are doing our best to be internally consistent with our external value system. If you wait long enough, I may write more about that here. We are doing some interesting things to scale in a healthy way.

      Reply
  4. Michael Wollin

    One critical key behavior I like to see organizations foster is mutual support – causing one another to be successful. I’m speaking at the individual and team level. Just doing it at the company level runs the risk of losing power when the company grows beyond a small size. I knew I could have very little impact on whether Turner was profitable. We could have the most effective development team on the planet, but ultimately, the company has to produce shows people want to watch, and our opinions were not solicited :).

    It’s the ultimate cooperative game. Everyone is a servant leader to each other. Moreover, and this can be tricky, if you fan the flames enough, it becomes viral and it becomes cultural (i.e., if you create a safe space, it is intrinsically rewarded and it will sustain itself).

    There is a magic to the “we” that gets created, a whole that’s greater than the sum of its parts. “We are all in this together.” “You matter.” “No one wins unless everyone wins.” There is a transformational quality, a free to be safe space for self expression that lets teams flow and, in particular, creates the kind of communion where brilliant and novel ideas emerge.

    I don’t know how to achieve this using money. I did sneak it in sometimes as one of the individual performance goals for the people in my department. I’ve seen success when leadership exemplifies this, and invests in training in this realm. For me, I just find out where people are, and listen for what really matters to them. Starting from there, anything is possible.

    Reply
    • Mike Cottmeyer

      I don’t think you create this using money… you create it by allowing people to do meaningful work. Everyone though has to balance their individual economic needs with fulfillment on the job. Balancing intrinsic vs. extrinsic is the key. Very few people show up willing to work for free. Most people want extra compensation for individual performance. We can talk all day about the ideal… the challenge is when you hit reality of hiring and compensating folks.

      Reply
  5. Michael Wollin

    Hi Mike,

    Taking the lead that you don’t want compensation to encourage destructive or sub-optimal behaviors, what I’m pointing to is particular behaviors I’ve always wanted to encourage (or at least, not discourage). If I knew of a way to encourage “being responsible for the success of others” using monetary incentives as part of an extrinsic/intrinsic balance, I would want to give that a try, and inspect and adapt from there.

    This is in an inquiry within your points, intrinsic, abundant, transparent, cooperative, sustainable. Is there a way to incorporate a monetary incentive for this goal? When I wear a supervisory hat, this behavior matters to me, I assert it makes a difference inside of hyper-performance, job satisfaction, career growth, and loyalty.

    Reply
  6. Gilles Turcotte

    I’d love to philosophize on this … huge interest.
    But i don’t have the time now to do it right.
    I may resume in saying : Treat them like you would have liked yourself.
    Hint : Always see things as a mathematical modelization … so much easier after, no arbitrarity.
    Those you’d like to have with you are those like you, entrepreneurs, so create an environnment for partners and not employees.
    Create a service oriented firm … You ares services interacting and helping each others.
    Create a mathematical model able to mesure the value created by each one, and able to redistribute it in a pre-established negociated %. You create x value, you pocket y% of this value you created, the balance is the negociated parts for the firm and the founder.
    When the math model is strong and known, everything can be clear on the table and evrybody will be fully happy to pocket the value they each create by their willingness …. and they’ll be very willing to work hard for real pre-known money of their own.
    I fully agree that money do not create willigness, but willigness MUST be rewarded by access to the modelized and negociated due part of the value created.
    For motivation …. well, talk it through with them i guess.

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  7. Paul Osborn

    Very interesting post, Mike. I have some thoughts on the matter which may or may not shed some light on some of the interesting questions you raise.

    To understand Intrinsic versus Extrinsic motivation, I believe it is a good idea to go back to the original McGregor. Theory X (extrinsic) is for unpleasant work, while Theory Y is for pleasant work (aka knowledge-work). So following this, I suspect it is a false dichotomy to talk about intrinsically motivated people, versus extrinsically motivated ones. Pink would I think agree – it is the cognitive level of the work that determines whether extrinsic motivation helps or hinders, not the person (be they from Stanford or Madurai).

    Ok, so now lets consider bonuses…how should we understand them? The micro-economics is slightly complicated. With a fixed salary, there is a risk-transference from the employee to the owner. On the other hand, economic rent (or risk premium, depending on how you want to view it) is being extracted from the employee because the employee will be creating more wealth than they are extracting as wages – this is good, and is called profit. However, to the extent that that overall excess wealth-creation may or may not be linked to individual effort (Deming would say otherwise), then this transference may or may not be appropriate. Marx, on the other hand, might argue that Labor should have a stake in the increased profitability of the firm – Employee Share Ownership Schemes are a way that some firms have tried to deal with this in the past. All of this argues for a collective bonus structure based on overall firm profitability, that is uniformly applied, but it doesn’t address the issue of people who just don’t want/need to work that hard/smart.

    So on to wages. A model of wage transparency that I have heard of is to allow all employees to take whatever salary they deem they deserve (so self-determined). The only caveat is that salaries are posted publicly, and all results are made visible, too. Whether this leads to the tyranny of the collective, or to massive self-empowerment would be an interesting question (and not one which I can answer…you’d have to try it, I guess!)

    Reply