Making both your investors and employees happy…
By Bridger Pennington
In the last few months I have more than doubled my team. My partner and I are constantly talking about how we are going align the incentives of everyone. One thing that is clearly mutual: we both hate hourly wages. Hourly wages can be detrimental to small businesses. It can initially be easier to set up, but toxic in the long run.
If an employer pays someone a low hourly wage, you are basically telling them not to put that much effort into their job.
I like to start my employee’s off at $15 hour, but as soon as possible, I want to transition them over to a profit sharing pay scale.
Starting this way works great because it allows both parties to see if the job is going to be a good fit. If it is, change the structure and get them fully onboard.
Jack Welch, former CEO of General Electric, wrote a book called ‘Winning’ that I really love. I’ve always looked up to Jack and his personality.
As a young man, Jack once spent a day with an executive, to learn about his business. The executive said that after that one day, Jack probably knew more about the business than he did!
Jack was an incredibly respected employee, manager, and CEO. One thing that Jack did when he was CEO, was he issued a statement along the lines of – ‘We will promote 15% of our employees this year, we will fire 15% of our employees this year, and, we will keep the remaining 70% of our employees this year. And not only this year, but every year moving forward.’
Jack said that he wouldn’t want to work in a job that didn’t pay him what he earned. Ultimately, Jack wanted to set expectations and align the incentives of his employees. ‘If you are performing well, then we want promote you. If not, we’ll fire you’.
At Investment Fund Secrets, we have had rapid growth lately. Just booming! We have actually had to slow things down a bit just to catch up.
Let me explain. You need to make sure that your systems can handle the growth that you are having.
Entrepreneurs are in the business of building and creating visions. CEO’s are in the business of systems. If one is far outpacing the other then you don’t have much of a business… or you won’t.
Every entrepreneur reaches a point in their life where they need to decide if the they want to keep being an entrepreneur or transition to the responsibility of CEO. This is a crucial period.
You will see that if entrepreneurs try to build their vision without building the systems, then they will either get voted off by a board, or one way or another, it will fall apart.
I recently hired a content development manager to grow our presence on YouTube. Great guy. He told me that he had a flat rate of $____ per month. I countered his offer by saying-
“Well that isn’t very exciting. What incentives you? What if pay you slightly less than what you requested a month, but if you meet these benchmarks then I will pay you $_____ extra. (far more than his original proposal).”
We built out different metrics together and planned out different performance bonuses together. We were both much happier.
Incentives for your investors & fund managers
Why do you think that I am such an advocate of not collecting a management fee on first fund launches?? It’s because it misaligns incentives. It promotes a moral hazard for both myself and my employees.
“I hate the fact that Fund Managers can make money even when the investors don’t!”
When you tell investors that you are willing to run a fund without collecting a management fee, it shows them that you are willing to put in the work. Investors want us to align incentives with them.
In my funds, I will typically do one of two fund structures:
- I will have an 8% pref with a 80/20 split after that. This means that I (the fund manager) don’t make a dime until I return 8% to my investors. Anything above 8%, the GP (the fund) will take 20% of profits and the investors will take 80% of the profits.
- I will have a 20% pref with a 50/50 split. This means that I won’t make anything until I return 20% to my investors. And anything above that, I will get 50% of the profits. Pretty crazy right? It really shows how confident you are in the deal.
The same types of incentive structures are the best way to compensate employee’s inside of the GP. You want all of you employees focusing on that goal of generating a high return!
A lot of Fund Managers will say, ” Hey team, if we get above a 15% return on our fund, you’ll get $X,XXX in bonuses. AND If we reach a 20% return then you can get a $XX,XXX in bonuses.
Aligning incentives enables everyone to focus on the same thing. It organically builds unity and collaboration as everyone has the same goals in mind.
Ultimately, incentives are important on all fronts- So make sure that incentives and expectations are well defined with all parties and affiliates.