Why I Want to Help Startups Build Great Companies

I despise the methods many established companies use in an attempt to “manage” the performance of the builders and the doers. That’s the short answer, but there’s actually a lot more to the story. Allow me to explain.

I cofounded a company called Envisia Learning 10 years ago with Ken Nowack, Ph.D.  Our vision is to increase the quality of people’s work lives by improving the effectiveness of leaders.

Ken is the brains of the business. He’s a highly-respected industrial organizational psychologist, researcher and executive coach. He’s also a soon-to-be-named associate editor of an American Psychological Association academic journal, and he lectures on leadership at the UCLA Anderson Executive MBA program. He’s basically an encyclopedia of evidence-based best practices in organizational development.

I’m equal parts developer and “business guy.” I first met Ken 15 years ago when I was doing freelance web development. I helped him put a few of his surveys online, and we continued working together on various projects for a few years. Eventually Ken and I decided we liked working together so much that we partnered up to focus on building and selling products together.

What Envisia Does

I head up the technology and business side of things, Ken acts as the research and theory side. Together we’ve built a suite of products and services to help leaders learn how to be more effective. Most of our customers are large, established companies.

Leadership development requires leaders to learn new behaviors, which means:

  1. Leaders need to know what they’re doing well and not doing so well. 360-degree feedback is the best tool for the job, but it has to be done properly (if you just cringed when I said “360-degree feedback,” then you are not alone and probably worked at a company that did it poorly).
  2. Leaders need help interpreting their feedback and setting goals to actually do something about it. Usually companies use seminars, workshops or 1-on-1 feedback meetings with a qualified coach or consultant.
  3. Finally, leaders need someone to hold them accountable and provide ongoing coaching or mentoring.

One of our products is called Momentor. It’s a goal setting system designed specifically to help people achieve behavior and habit-oriented goals. It’s taken us over five years to get Momentor right, and there isn’t really anything else like it on the market.

When we show Momentor to prospects at enterprise companies, the response is overwhelmingly positive, but we don’t convert enough of them. We dug deeper to figure out why, and the reason was almost always the same. They had just purchased SuccessFactors for $X00,000 to do their performance reviews, and part of that is a goal-setting module. Even though they like Momentor way better and felt Momentor was more appropriate, they can’t have goals in two places because (insert political reason here). Ugh.

If We Can’t Beat ‘Em …

We decided that, in order to compete for these big contracts, we’d need to extend Momentor’s features so it could do performance reviews as well. That would mean Momentor would have to evolve from a “Talent Development System” to a “Performance Management System.

Performance management systems are what most established companies have been purchasing over the last 10 years to replace old paper and pen or spreadsheet-based performance review processes. They’re designed to support a Management by Objective (MBO) performance review processes that was conceptualized by Peter Drucker in 1954. MBO has become the de facto standard and is used by just about every established company to determine performance objectives, development plans, raises and bonuses.

I haven’t met any managers that enjoy the performance review process and most employees find it to be downright demoralizing. I was hoping we could win by figuring out a tolerable process for doing them.

After reading through the research and brainstorming alternatives, I realized there is no better way. The effect of any form of performance review that is tied to decisions around compensation and bonuses is a net negative. I realized the only right way to do performance reviews is to not do them at all.

There Must Be a Better Way

Next, I sat down with Ken and we listed the intended purpose of the ideal performance review process. Here’s what they’re supposed to do:

  1. Provide a fair way of determining how much of  a raise and bonus each employee receives
  2. Provide a structured and scheduled way to discuss employee performance (good an bad) and come up with a development plan for the next X months
  3. Provide a way to discuss and mutually agree upon a set of performance goals that are linked to higher-level objectives for the next X months
  4. Provide a legal justification for firing
  5. Support succession planning and decisions around promotions

I looked for practical examples of companies that figured out innovate ways to get all the benefits of the performance reviews without the demoralizing side effects.  I figured we weren’t the first people to see how ineffective and demoralizing performance reviews really were. The single biggest problem was that compensation issues overwhelmed and undermined the whole review process.

I could not find a single established company that was doing anything but a variation of the standard MBO performance review process. Dead end.

Until I Found Joel Spolsky

The first glimmer of hope came from a 13 year old article from Joel on Software (by Joel Spolskly, then-CEO of FogCreek Software) about why incentive pay, and performance reviews, were harmful. I dug deeper and found that he instead offers a transparent compensation policy, profit sharing instead of performance bonuses and ongoing feedback/coaching instead of an annual event (all practices that Joel  has carried over to StackExchange).

I started looking at other startups and small technology companies to find practical examples of organizational structures that ditched compensation-linked performance reviews . I found:

  • Companies like Buffer, FogCreek and StackExchange had transparent compensation policies. Compensation at these companies have nothing to do with whether or not employees achieved arbitrary performance goals. People were compensated purely on their skills, scope of responsibility and experience, which should be what they’d earn if they found a new job.
  • For bonuses, FogCreek offers profit sharing. Shopify pays bonuses based on peer recognition.
  • At Buffer and Shopify (and many other startups), employees receive regular feedback to help employees grow and understand where they stand, but the feedback is completely separate from compensation or performance goals.
  • At many startups, agility trumps the need for annual goals. Instead of employees worrying about achieving a list of three things over the next 12 months, the best founders have a compelling vision and a mission that supports their vision. They work with their team to experiment until they find the best way to achieve their mission.

All of the startups I found that shunned traditional management and organizational processes had something else in common. They were all either wildly profitable, growing like a weed or both.

From my research came an epiphany.

As Ken and I discussed how various startups organized themselves and compared them to the latest research and best practices, we realized that a company cannot simply decide to kill a performance review and all will be well. The difference between a company like Buffer and Microsoft are systemic and the chances of making any major cultural changes to a company like Microsoft are nil.

We noticed that a company with a traditional organizational structure that thrives without performance review must have:

  • A fair and obvious compensation policy
  • Bonuses that are decided by someone other than your manager, and ideally not linked to performance at all
  • Managers who are committed to developing their people as a daily part of their job
  • Managers who actively seek ways to serve their people and make them more effective
  • Managers to take an active role in advancing their people’s careers

We realized to have the kind of company that didn’t do performance reviews, you needed to basically change the role of manager. You had to take away most of their power and leave them with the sole purpose of coaching, mentoring and serving their team.

Thinking about the limited role of managers in the ideal company lead me to consider another question …

Do Startups even need managers?

If the goal of any startup is to get as much done as possible as quickly as possible, and the best companies are driven by a strong vision and mission, do the builders and the doers even need someone telling them what to do?

Again, I turned to the technology and startup world to find practical applications. It turns out there are companies like Valve, GitHub and Treehouse that offer completely flat organizations.

These companies are 100% doers and creators. The only direction people have is from the company’s vision and mission. There are no politics, no rumor mill, no one to demoralize or get in the way of what needs to be done.

The #1 business-oriented reason to care about culture is to make sure you are attracting great people and retaining them for as long as possible. In a recent presentation on how GitHub works, they gave the world the most compelling reason to consider a no manager company that I’ve ever seen. GitHub made it to 199 hires before a single person quit. They had 0% voluntary attrition for years. This is unbelievably amazing.

To change the world, we must start with the next generation

Ken and I thought maybe other companies should consider doing what GitHub is doing. We compared our notes on how these no manager companies are run and looked at what it takes to make sure employees still get paid fairly, make sure employees still have opportunities for growth and development and make sure employees are working on things that are meaningful to the long-term success of the companies they work for.

As it turned out, there were some universal processes that companies could follow. Even better, most of these frameworks would benefit both companies with or without managers. We realized that our background put us in a position to develop these processes into frameworks and products that would change the way companies are managed.

We can teach founders why no manager companies make sense and how to implement the organizational structures that support them, then build software that makes it easier to support processes around compensation, bonuses, peer reviews, etc. that are required to keep everything running smoothly.

For founders that aren’t ready to give up on managers entirely, we could teach them how to build companies where managers’ only choice would be to act as great coaches and facilitators who exist to serve their people.

We asked ourselves things like:

  • What if we start a blog that helped people understand why traditional organizational and management structures are outdated and there is a better way?
  • What if we wrote a book to dive deep into the specific research, examples and concrete steps to help them create the kind of company that made it impossible for managers to demoralize and demean employees? What if we wrote the book on creating a company without managers at all?
  • What if we offered coaching and consulting to help startup founders and executive teams with the transition?
  • What if we created talent management software that supported the way companies will be managed in the future?

We not only realized we could actually do all of these things, but they’d be a lot of fun, as well.

 The Game Plan

This blog and the new line of products and services we’re creating for startups is my pet project, fueled by my passion for entrepreneurs and the possibility that we can be a big part of a world-changing revolution.

I mentioned in my previous post that we plan on doing things like coaching, consulting, writing a book and developing products that will change the way companies are managed. This seems like a lot to bite off at once, but they all reinforce each other.

For the time being, the team will be small and I’ll borrow folks from the Envisia side of the business as needed until we’re up and running. Here’s how everything will be tackled.

  • I’m writing this blog myself and will continue to do so for the immediate future
  • I’ve hired a freelance writer who recently retired from designing and delivering management training. He’ll be helping with the book.
  • Ken will deliver all consulting work. We can help founders by offering solutions for hiring, firing, peer reviewing, compensating, bonuses, communicating and professionally developing people in a no manager (or minimal manager) company. This is where you need science on your side because decisions you make today may cause failure over the long-term.
  • Sometimes leaders or founders will struggle with how to lead a no manager or minimally-invasive manager company and require some coaching. We have a few coaches that can help with that.
  • I’ll be developing the minimally viable product for our first SaaS product that support “NoManager” (or minimally invasive manager) companies myself. Eventually I’ll bring in others to help, but right now it is actually easier to explain my ideas and solutions by building them.

We’re both excited and a little bit scared about our mission to change the way companies are managed. If anything in our story resonates or if you’d like to begin the process of building a company that is free from politics, rumor mills and demoralizing management, l’d love to talk to you. Just leave a comment below and I’ll get in touch.