Why We Should Not Punish Intrinsic Motivation

Tom, with Viisi, you set out to change the world of finance. What is going wrong in the industry from your point of view?

As in other industries, companies in the financial industry are too short-term oriented towards shareholder value. As a result, a lot of financial activities are simply not sustainable. This is not a model for the future and most people who work in finance see it that way. When we as financial planners launched Viisi in 2010, we wanted to make the financial world better and more sustainable. To achieve this, we turned the weighting of stakeholder interests upside down: Our own employees come first, then our customers and finally our shareholders.

How does this become apparent in the way you work together?

Every employee should be able to follow his or her personal purpose and this works best in self-organized teams. We have implemented elements of Holacracy, but also the "Primus-inter-pares-principle" from ancient times, according to which managers are elected for a certain period of time and then rotate. Who takes the leading or coordinating role in a team is decided by the teams themselves. In addition, there is no higher salary for this leadership role. We have thus solved the well-known problem, the so-called "Peter Principle", that good specialists strive for management careers even though they are not necessarily suited for it.

So what does your compensation model look like in concrete terms?

We now have 40 employees and five teams - Consultants, Credit Department, Digital, People & Coaching, and Administration & Customer Service. Each team has its own pay scale with automatic salary increases based on experience. We use a labor market benchmark to draw five salary curves that show how salaries will change over the next 35 years (See image below). With us, everyone knows what he or she will earn in the future. We as founders are also on the salary curve like all other colleagues. In addition to our main roles, we also have a so-called "shareholder role", but this is not remunerated.

Did you have this system from the start or how did you develop your compensation system?

We have been working on our salary model for a few years now. The starting point was the question of how we could least disturb the intrinsic motivation of the employees and how we could take out demotivating or counterproductive forms of extrinsic incentives.

How did you come to the salary benchmark that suits you?

When we introduced our remuneration system, there were perhaps 15 of us - and it was quite simple: we collected a lot of figures during the analysis phase, such as collective employment contracts from the financial sector or data from the Federal Statistical Office. This has resulted in curves for an average salary development according to vocational education and training. For the salary curves at Viisi, we took the top quartile.

We want our remuneration system to be an autonomous, decentralized system, but if market conditions change, employees can point this out to our Compensation Architect role. In this way, we ensure that our model is always up to date and that we do not miss any developments in the labor market. However, in the three years that we have been practicing this, we have only had to adjust salaries in a team once.

How do you explain that? Were your forecasts for the salary curves that good?

Because we are at the top quarter of the benchmark and salaries are rising automatically, people can overlook minor fluctuations. If there is a shortage of skilled workers in some jobs and salaries on the market rise by 200 euros, for example, employees can still rely on receiving more money on an ongoing basis - this creates psychological safety and you don't have to worry about it all the time. Why should we accept the risk of a change of employer for a short-term salary increase? It's the same consideration as changing lanes on the motorway in a traffic jam: at some point, we realize that it doesn't help.

And to what extent is your system transparent?

We have practiced the greatest possible transparency from the very beginning. Since we introduced Holacracy, all our roles and projects are publicly accessible in our software, (GlassFrog), through our website and email signatures. This was intentional and we are also transparent about compensation. When we published the salaries, it was an issue for just a few days and then quickly became uninteresting. But if salaries are kept in secrecy, it is always on employees’ minds.

What issues came up at the beginning when salaries became transparent?

For example, a client advisor said to a colleague who does social media: "Why do you actually earn as much as I do? Both are the same age, but the consultant thought his work was more important. On the basis of market data, our social media employee then explained that in his area he was paid the same amount as in consulting and his salary was therefore in line with the market. That was then off the table. We also had an employee who had been with us from the beginning and had taken on increasingly important tasks. Almost all colleagues were in favor of increasing her salary, which we then did in two steps. Transparency allows tensions to come out, and to be resolved, that would otherwise have continued to bubble under the surface.

After these initial debates, we started to inform all applicants about their salary right at the beginning of the application process. The candidates have responded very positively to the fact that they no longer have to negotiate.

So everyone can see the salaries of the employees, even people outside the company?

Until recently, all salaries were only transparent internally. Then word got around and many companies found it exciting. That's why we also shared the salary curves in presentations. This makes it easy to draw conclusions about the salaries of individual employees if you know their job profile and professional experience. We also plan to put the whole salary model online with the corresponding Excel spreadsheet so that everyone can work out what they would earn with us. We also know the salaries of people in public office. Why should it be different in the financial industry?

In a holacratically organized company, new circles and new roles are constantly emerging. How agile is your salary system adapting to this?

We keep it simple: Salary is based on the roles someone plays in their essential circle or team. This is comparable to IT, sales, or finance departments in traditional companies. Anyone can also perform additional tasks or roles in other circles or try something out. For example, someone from the IT department can also blog or organize a Christmas party. But this does not mean that you work in a completely different area. That's why it doesn't play a role regarding salary.

Your tariff model is similar to that of the public sector. Can this be a model for companies that will have to reinvent themselves again and again in the future?

Our approach may not sound so innovative at first, but we follow the science that has extensively studied incentive systems and performance. Many will be familiar with Daniel Kahneman's research or Daniel Pink's videos, which show that rewarding more work not only doesn't work but is actually counterproductive. And people often no longer give honest feedback when it has consequences for compensation. Most companies ignore this and still work with the carrot. But this counteracts the teamwork. On the other hand, if all the haggling and bonus payments are dropped, it promotes collegiality and intrinsic motivation.

In the best case, yes, but there are also other examples - for example, that civil servants like to work to rule...

This may be true for hierarchical organizations, but in self-controlling systems, insufficient performance is solved by the group. If the framework conditions are right, people have an intrinsic need to become better, a principle that Daniel Pink calls "mastery". And in a team, people help each other. Only if someone is a real "asshole" or does not do his or her part, will the team colleagues not accept it. In the long run, the person then leaves on his or her own, because you can't stand the pressure of the group for long.

To what extent is the remuneration at Viisi dependent on the overall performance, i.e. the economic development of the company?

The remuneration is completely decoupled from that. There is no team bonus for good performance because that would also be a kind of carrot that is held in front of you. This leaves the danger of being seduced by an economic goal. But perhaps the company would be more successful in the long term if you were to do without short-term sales, a customer, or a colleague. The team bonus then creates the wrong incentives and can thus attack a corporate culture from within. The corporate culture, the company, and the whole team are more likely to be strengthened if the human aspect weighs more heavily than the financial aspect. But what we do have is participation in shares.

How does share ownership work?

Ten percent of the shares are reserved for employees. Everyone gets one point every year, regardless of job function and working hours. In the event of a sale or IPO, all points are added together and the value of the employee shareholding is divided by the number of points. The decision-making process was also interesting here: we discussed a lot about what we base the points on - salary or length of service. And what if someone works part-time or takes a sabbatical? We came to the conclusion that in the end this would balance out and everyone would work a little less at some point in their career for personal reasons. But you could also make that infinitely complex and that happens in many organizations. It's much harder to keep things simple. It requires more mental effort.

However, a salary system that provides for automatic salary increases could run into difficulties if the company does not grow continuously. How crisis-resistant is your approach?

The salary model is independent of the growth of the company as a whole. For example, we have converted the salary increases for client advisors to see if a sales increase is realistic and for us it is. Put simply, a salary increase of 200 euros times 12 months, i.e. 2400 euros per year, means about one more customer per year and that is more than realistic in practice.

We are a small company, but we would like to keep up with the remuneration of the big corporates. If start-ups pay less because they think they and their working conditions are so cool, that only works at the beginning. When they get bigger, they quickly become less sexy, and then it's hard to correct that - you may have to increase salaries by 10 or 20 percent to find people. It's also a question of attitude. We find: people should not be punished for being intrinsically motivated.

Interview: Stefanie Hornung. This guest blog is a translation from German. The original interview was published on the New Management Portal.