Hire the best — and let them go

When I had my software company, in a typical year half of our employees were software testers, for which we hired local college students or occasionally high school students. We mostly got students who grew up nearby, and were attending the local junior college (three miles away) or the CSU or UC a half hour down the road.

The expectation was that this was a temporary job while they were in school. We hired a few college seniors, and a few didn’t work out, but most stayed 3-4 years. We taught them everything they needed to know about both running routine tests and isolating bugs so they could be reproduced by the programmer when it came time to fix it. (I’d like to say I created these processes, but they were created by our former director of product development and QA manager — who both sadly died well before their time).

Most of our business was with HP. When we went to visit their local office for a testing meeting, I was surprised to see how they used a completely different approach. There, QA was a career that you could do after a four year degree and stay with for many years. Because the best college graduates wanted to be programmers, the testers were (for the most part) those interested in computers but not talented enough to be programmers. (Our QA manager had years of experience, but his lack of even an A.A. meant he’d never be hired by HP).

For pretty much all of our student employees, this was the best computer-related job they could get in our local area without a degree. We got brighter employees without prior experience who didn’t stay very long, but we got the benefit of their aptitude and good work habits while we had them. Later on, I realized how fortunate we’d been to have them, as they went on to work at HP, IBM, Microsoft and other tech companies. One has started two companies and has mentored other entrepreneurs. The one student programmer we hired is now a full professor of computer science at MIT.

I was reminded of this when reading a Wall Street Journal column today by Sydney Finkelstein, a Dartmouth leadership professor. I know him from his great book on leadership that (in part) chronicled the leadership failures that brought Motorola crashing to earth in his book Why Smart Executives Fail.

The column has a provocative title and opening:

Why the Best Leaders Want Their Superstar Employees to Leave
By Sydney Finkelstein

Should bosses try to hold on to their star performers?

For most of corporate America, the question might seem like nonsense. Star performers are seen as so valuable that managers should pull out all the stops to keep them—or else see their companies take a big hit in productivity.

Yet some of the best managers not only allow their top performers to leave, but actively encourage it.

He talks about his study of leading execs across 18 industries for his new book, Superbosses: How Exceptional Leaders Master the Flow of Talent. While I might quibble with a point here or there (notably the idea of Larry Ellison as one of “the world’s greatest bosses”), the data are compelling. For example, a sidebar to the article says that at one point, 20 of the 32 NFL coaches either trained with Bill Walsh or someone trained by him.

This is the part of the article that really resonated with my experience:

The stories of these bosses reveal a crucial shared belief: You’re better off having the best people for a short time than average people forever.

The bosses were uncompromising when it came to recruiting. They didn’t want average; they wanted mind-blowing. They searched high and low for unusually talented individuals, often experimenting with nontraditional hires (and tolerating higher levels of churn when some of these hires didn’t work out).

But once unusually talented people were inside the organizations, the bosses accepted that some would leave. Top employees, the bosses realized, were almost always on a rapid growth trajectory. They were ultra-ambitious, perpetually angling for the next big opportunity, and it stood to reason that at least some of them would eventually need to leave the company to keep their careers moving ahead.

Even at our little software company, we were fortunate to have some truly exceptional teenagers and 20-somethings just starting their careers. This lesson is a reminder that — even if I’m no superbosss — for my next startup we should keep a policy of hiring the most talented people we can find, even if we have to train them from scratch or can’t hope to keep them for more than a few years.

Honesty makes employee incentives work better

Cross posted from Open IT Strategies.

The private equity investors who flipped Skype (from eBay to Microsoft) have decided to screw some of their employees out of their “vested” stock options.

The issue came up when one Skype employee, Yee Lee, found he forfeited his stock appreciation rights when he left Skype before the acquisition. He summarized his problem on a blog post last month.

Corporate lawyer-turned-law-school-professor (and New York Times pundit) Steven Davidoff summarized the controversy in two postings at NYT DealBook. (Not yet behind the paywall).

In the first article, he noted that PE firm (Silver Lake) could have settled the controversy for less than a million bucks. He attributed the decision to a culture clash between NY financiers and SV venture capitalists. The former is not about reputation or honor, but money.

But in Silicon Valley, the community is not only smaller, the people work together again and again, and so trust and reputation are valued more highly. On his LinkedIn page, Mr. Lee alone lists more than 10 companies where he has worked. When you are going to see and work with the same people repeatedly over many years, $1 million is small change to buy their needed loyalty.

Davidoff argues that while VC has a better reputation, both sides add value equally. Of course, he is a former NY lawyer who advised big companies on their acquisitions.

But the reality is that while VCs do is equally greedy and lucrative, what they do is more rare and economically valuable. Restructuring can be (and has been) done by PE firms, managers who lead a MBO, more traditional corporate acquirers, or even in-house executives with the proper incentives. Best practice in operational efficiency disseminates pretty quickly, so very little about the PE business model (or their value add) is protectable over time.

In a second article, Davidoff concludes that employees are just as likely to be screwed by carefully hidden legal mumbo-jumbo by Google or a raft of other recent startups. (What we don’t know is how each company verbally represented this clause — did they call attention to it or did they bury).

Davidoff’s solution to both cases is that the employee should see a lawyer. (In other words, his philosophy is to create a full employment act for his peers and his students).
In a narrow legalistic sense he's right — that is if Lee were lucky enough to find a lawyer with the right kind of experience. As an entrepreneur, I lost $50,000+ on a business deal that was vetted by my lawyer; my lawyer (of many years) didn’t understand my business well enough to anticipate the scenario that played out, I didn’t volunteer it and he didn’t ask.

However, more seriously, this sort of “ask a lawyer before doing anything” causes an unaffordable drag for startups and their employees. Yes,it might only be $500 for the one consultation that spotted the problem, but it’s also $500 for all those other times where it wasn’t necessary but you paid the lawyer just in case.

There is a non-lawyer solution: we acknowledge that there are fundamentally two types of options: those that actually vest, and those that are only exercisable by current employees.

If the ideas of the incentive stock option is to incentivize employee, then the terms and conditions should be clearly articulated in plain English. If necessary, the state or federal government should require employers to spell it out. (Banning misleading practices is the one place where I believe in aggressive government action.)

I once heard ethicist Michael Josephson say on his radio segment: "Integrity means doing the right thing when nobody’s looking.” (The original author is lost, but similar remarks have been made by quarterback-minister J.C. Watts).

In Davidoff’s world, employers and employees are adversaries using lawyers to duke it out even before conflict arises. In a company with integrity — the only sort I’d put my name to — the terms and restrictions for employee compensation are clearly explained in a way that every employee can understand. As an added benefit, doing the right thing makes sure that the employees and employer have their goals fully aligned (at least until after the end of the lockup period).

Execution matters

The first event of the SVCE fall speaker series was entitled “Getting off the Ground: Ideas and Execution.” The panel consisted of an entrepreneur, two early-stage C-level execs and an intrapraneur:

• Steve Erickson, VP and GM, Audio Products, Creative Labs
• Matt Ready, VP, Sandforce (SJSU ’81)
• Paul McGrath, CEO, Ridespring
• Steve Olson (SJSU ’83), CFO, Ridespring

The one common thread was that the idea was (at best) a small contributor to the ultimate success of the startup venture. I don’t know that this is heresy around these part — in the land of big idea tech startups — but certainty it is contrary to the popular mythology. Given the excess entry (often funded by VCs) and inevitable shakeouts in local tech industries, the opportunity for having a unique idea seem pretty rare.

After taking sales positions at 12 different companies since he graduated from SJSU nearly 30 years ago, Ready said that he evaluated a career opportunity the same way that local VCs do, by looking at the market, the technology and the team

In particular, he looked at the new firm’s market, technology, team. He advised entrepreneurs: “if you come up with a new idea, you have to vett it against all three of these vectors.” The biggest problem that he saw was the first one, specifically the Total Available Market. If the company was going after a large enough market, it didn’t matter how good a job it did.

Not surprisingly for a finance exec, Olson was even more blunt in favoring operational excellence: “it’s less about the idea than the execution” because success is “90% execution and 10% a great idea.”

His advice to entrepreneurs was twofold. First, the entrepreneur has to be tenacious, finding creative ways to overcome the inevitable obstacles and surprises. Secondly, (s)he has to have a startup team that share that philosophy — one that is flexible and willing to roll up their sleeves to get things done.

The latter point reminds me of my longstanding observation that beyond entrepreneurs and non-entrepreneurs, many employees seem better suited for startups. Perhaps it’s because they thrive on chaos, perhaps it’s because they prefer being generalists — or maybe they just prefer an environment that provides the freedom to be creative.

As a board member of various startups, Erickson also agreed execution is what separated the winners from the losers. Without directly criticizing his employer, he noted that one of its employees created a hard disk-based MP3 player two years before the iPod . We all know who won, although getting their first brought Creative a $100 million royalty payment from the big A.

Even the one CEO offered only qualified support for the importance of the big idea. In particular, McGrath has given up on the idea of hoarding his ideas and keeping them secret for fear someone will steal them Instead, he encouraged entrepreneurs to “be brutal with your own ideas” and share them widely, encouraging others to identify any flaws.

He was blunt in encouraging entrepreneurs to get honest criticism sooner rather than later:

It’s painful if you find out your idea sucks, but it’s a lot more painful if you sink a lot of money into it.

Ending performance reviews

The WSJ small biz blog this morning highlights a provocative column on HR practices by UCLA Professor Samuel Culbert. That it’s provocative seems to go without saying, since Culbert’s motto (and subtitle of his latest book) is “straight talk at work.”

Culbert wrote in Monday’s WSJ arguing that performance reviews are a bad idea. On the WSJ (inside the paywalll?), he also has a video on dealing with bad performers and a podcast for employees on dealing with a bad review.

From my days as a software entrepreneur, the column resonated with me, because my employees (including the software engineers and testers) always wanted a review, and I always hated doing them. So having someone telling me I shouldn’t do them seems like found money.

To summarize from the pullquote:

The Promise: Performance reviews are supposed to provide an objective evaluation that helps determine pay and lets employees know where they can do better.
The Problems: That's not most people's experience with performance reviews. Inevitably reviews are political and subjective, and create schisms in boss-employee relationships. The link between pay and performance is tenuous at best. And the notion of objectivity is absurd; people who switch jobs often get much different evaluations from their new bosses.

He lists 7 reasons why they’re a bad idea:

1. Two People, Two Mind-Sets. The review is confrontational because the two sides have different goals.
2. Performance Doesn't Determine Pay. Often the review is a rationalization for the eventual (budget constrained) salary decision, rather than a review of performance.
3. Objectivity Is Subjective. Objectivity is a myth: employees change bosses, their reviews change dramatically.
4. One Size Does Not Fit All. The same checklist is used for all, although people have different strengths and should be evaluated by different criteria.
5. Personal Development Is Impeded. Employees won’t be honest about areas where they need to improve if it comes back to haunt them at review time.
6. Disruption To Teamwork. The boss is supposed to lead a team but the review causes employees to conceal and be dishonest, undercutting trust.
7. Immorality Of Justifying Corporate Improvement. The reviews are supposed to improve performance and the company, but actually they just encourage political behavior.

I don’t completely buy his proposed alternative, which he calls a “performance preview.” However, as a teacher, a parent and someone who was a tech employer for 15 years, I do agree with the goals of his alternative process:

Holding performance previews eliminates the need for the boss to spout self-serving interpretations about what already has taken place and can't be fixed. Previews are problem-solving, not problem-creating, discussions about how we, as teammates, are going to work together even more effectively and efficiently than we've done in the past.

Anything that turns a review from a win-lose to a win-win is a good idea in my book. Also, my personal and business philosophy was always look forward, not back.

The only thing missing is how to adjust salaries, since that was the entire reason employees all pushed for a review. I guess for that I have to buy the book.