How Incentive Models Skew Behaviour
July 19, 2012
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I have been on a bit of a kick about employee incentive plans lately, and observed an interesting trend earlier this year while we were looking to hire a CFO here at TandemLaunch Technologies. Based on the limited sample of a few dozen finance executives who I interviewed, it appeared that such people in Montreal receive fairly large base salaries, but very little equity (in many cases none). Now, the bulk of the candidates had all worked in start-ups from 10 to at most 200 people so this surprised me a lot. I started my entrepreneurial career on the west coast and the model that I’m familiar with is a blend of low compensation and high equity stakes. A start-up might pay their junior level people at market because, well, they have to eat, but at the mid and senior levels salaries are usually substantially lower than market rate in big companies. Offsetting this are meaningful equity stakes. Out west, I would expect a CFO or comparable executive in a tech start-up to own 2% to 5% equity after having raised meaningful initial financing. And yet (from the sample of people that I talked to) that seems to be very different in Montreal where very few of the candidates had any material equity and almost all had substantially higher salaries than I was paying myself at TandemLaunch!
So why do I find this interesting? It’s interesting in that if this is truly a local phenomenon (and it seems to be) then it might just be an explanation for the results or behaviour of Quebec tech start-ups. When you look at the statistics, Quebec has somewhere around a third of the Canadian population but only 5% of the listings on the Toronto stock exchange (a fairly good measure of the IPO volume of Quebec compared to other provinces). Other indicators, such as the lower rate of exits by population indicate a similar trend: For example, Montreal and Vancouver tend to go head-to-head in the number of early exists except that Vancouver is almost a third of the size of Montreal. While the entrepreneurial ecosystem in Montreal is as strong as it ever was, the city is clearly not seeing as much entrepreneurial action as other parts of Canada.
There are lots of possible explanations for this but I suspect that executive incentives have much to do with it. If the senior executives of your company have no meaningful equity stake but a very high salary then why would they push the company to an exit or IPO? A CFO is probably one of the first positions to be eliminated in most acquisition anyhow, so there is even personal downside to such a move. Much more so than on the west coast, I have observed that status and security are paramount in the Quebecois psyche. So why risk all that when there is no upside?
Thinking about this more broadly, what role do incentives play in an organization? I firmly believe that at the end of the day, even the nicest people will act mostly out of self-interest. At least within the boundaries of legal, ethical and credible actions, people will attempt to maximize personal benefit. So the goal of any incentive model should be to ensure that the natural outcome of individual behaviour leads to the strategic goal of the company. If that’s not the case then you might still achieve the strategic result, but only if you constantly badger people to pursue avenues that are not in their own self-interest. It might work if you have strong enough leadership skills, but you’re really stacking the deck of cards against yourself.