Attracting, Motivating and Retaining Employees
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“How do we attract, retain and motivate employees?” Anyone who has experience in human resources or practiced business law has heard some variation of this question. The honest answer is that it depends on a number of factors, some in the control of the company, some outside of the company’s control. Moreover, whatever strategies are employed by the company, the company has to recognize that employees and potential employees are individuals, each with his own set of motivators.
Generally, companies focus on different forms of compensation when discussing the attract, retain, and motivate question. And so, this post also focuses on compensation. Other components to answering the questions such as culture, personality fit and other social feelings are more subjective and to manage and change culture is a process that can not simply happen by management mandate.
The three buckets of compensation that most companies look at to try to attract, retain and motivate employees are (1) base salary, (2) bonus and (3) equity (stock, options, RSUs or some other evidence of ownership or path to ownership in the business) or equity like rights (phantom stock or some other payment right based on the appreciation of the value of the business).
Businesses at different stages of existence tend to allocate the focus of these compensation buckets differently.
Looking at the typical early stage/emerging growth company, where revenues are highly volatile or non-existent, cash is king and should be preserved as much as possible. These companies do not tend to pay big salaries or bonuses. They need to do everything possible to slow the burn of cash to give the business more time to achieve its business objectives. On the other hand, the potential significant growth of these businesses can be used to attract, retain and motivate employees. These businesses tend to allocate a relatively larger part of their compensation packages toward granting equity and equity like rights. Aside from preserving cash, granting equity and equity like rights is also believed to align the interests of the recipients of these grants with the interests of the stockholders of the business.
Conversely, companies that are stable with a steady revenue stream, but that are not likely to materially appreciation in value typically will focus their compensation packages toward cash in the form of salary and/or cash bonus. Although grants of equity or equity like rights are not uncommon in these companies, the perceived value of those grants is not nearly as meaningful as in the early stage/emerging growth company.
Employees have become increasingly sophisticated and, I would suggest, self-selecting over the past few decades. Employees who are most likely to succeed working at an early stage or emerging growth business have come to understand and appreciate the risks and rewards of those businesses. They are willing to make less in salary at these businesses because they are excited and enticed by the possibility of making more money in the long run through equity and equity like rights grants. Conversely, those who are more interested in the perceived stability of a higher paying position tend to migrate to the larger, more stable companies.
Companies and employees alike though need to recognize that a company’s circumstances are continually changing. Emerging growth companies mature. Stable businesses stumble. As such, companies should regularly review their compensation plans to ensure that they are in the best position possible to achieve the company’s objectives at that point in time.