Large organisations can learn a lot from dot-com
compensation systems, but should duplicate them with caution, says Professor
Lisbeth Claus
The hype of dot-com salaries, stock-option millionaires and
frivolous benefits to reward the 24/7 work-style of start-up employees is now
being countered with doom stories generated by a fledgling NASDAQ stock market,
IPO postponements, union activities, security-seeking burnt-out workers moving
back to traditional companies, dot-com lay-offs and folding bankrupt start-ups.
While start-up dot-coms have been criticised for ignoring
traditional HR practices, new economy practices have a profound impact on how
traditional companies deal with knowledge workers. One of the most important
influences of dot-coms lies in the way they reward employees in order to
attract, motivate and retain the best talent.
The first start-up high-tech companies, mainly out of
arrogance and lack of HR competence, ignored the established way of designing a
compensation system that includes job description, job analysis, job
evaluation, pay structure, salary survey and written procedures for
administration. Instead, they designed ad hoc compensation
"non-systems", which resulted in wide variations between and within high-tech
companies, even for comparable jobs. However, there are a few constants in how
dot-coms compensate and reward their employees.
As is the case in small, entrepreneurial companies, start-up
founders recruit employees from their personal and professional network and,
without HR expertise, negotiate ad hoc compensation packages. Competition for
scarce talent and cost-of-living market demands in high-tech hubs forces them
to pay competitive salaries. Driven by the need to use their venture capital
cash for business development, and befitting the entrepreneurial context in
which they operate, they favour equity compensation through the use of stock
options. The human demands of the 24/7 work style, innovative environment and
lifestyle of their young workers, leads them to offer creative benefits such as
gourmet meals and massages. In addition, the rewarding and challenging work
environment of the dot-com allows employees to grow and develop the business,
as well as their own competencies.
Now that many dot-coms have matured into larger high-tech
companies, a three-tier compensation model is emerging in line with the three
broad categories of workers. The first category consists of the founders and
seasoned professionals who were attracted to run the dot-coms because of their
management experience in traditional companies. Their compensation system
reflects executive compensation patterns (often with substantially reduced base
salaries compared to traditional companies) supplemented with large equity
compensation through stock options. Dot-com employees commonly refer to
themselves through their serial number, "I was employee number 26".
The lower the number, the more impressive their stock portfolio.
The second tier consists of the high-tech and knowledge
workers who were attracted because of their technical know-how and skills in
implementing the business idea and strategy. Their competitive salaries are
augmented with generous lifestyle benefits and a substantial amount of
negotiated stock options. A number have already become millionaires or at least
hold a vast paper portfolio of stock. The stage at which they joined the
company (ie their employee number, whether the company was pre-IPO or whether
it had a successful IPO) impacts on how lucky they were in reaping the
entrepreneurial financial rewards (or lack thereof) of dot-com company success
(or failure).
Finally, there is a third tier of employees who occupy
lower-level jobs in rapidly growing, successful dot-coms. These employees often
receive relatively low salaries, a minimal amount of stock options and have
less secure jobs than if they were working for old economy companies. It is
these workers who have been the target of unionisation efforts.
One cannot talk about dot-com compensation without referring
to the widespread use of benefits in the total package. Stock options,
flexitime, lifestyle benefits and employee development programmes are
increasingly standard components of the new economy benefits package. Equity
compensation through stock options takes a prominent place in the total
compensation package.
Dot-com employees are usually entitled to stock options when
they join the company or after a specific period of time. This gives them the
right to purchase a given number of shares of the company stock at a specific
price. If, at that time, the share price is higher than the option price, the
employee can sell the shares at a profit. However, if the stock price is lower
than the option price, the stock option received as a reward has no current
value to the employee. Equity compensation, once reserved for executives, has
become the trademark of the corporate culture of the dot-com, with stock
options being pushed down the corporate ladder to reward all employees for the
company’s success.
Sign up to our weekly round-up of HR news and guidance
Receive the Personnel Today Direct e-newsletter every Wednesday
Compensation packages are intended to achieve a variety of
common objectives. Dot-coms have designed some unique compensation types that
befit their small size and entrepreneurial culture. However, duplicating a
reward system without managing the localisation from one economy to another,
from one company to another, one culture to another or one legal and tax
environment to another, is dangerous. Before attempting to do so, it is
essential to take into account the individual, cultural and structural
differences that have an impact on meeting the common objectives of any
compensation system.
