?? Economic Upside Motivates Self-Governed Teams to Perform

File this under #businessresilience.

Our journey toward self-organization (see #302 through #311, as well as #222 through #224) continues. So far, we’ve confirmed the importance of Economic Engagement (EE) and looked at key factors like Customer Engagement, Economic Understanding, and Economic Transparency. Today, we’re diving into another such factor, namely Economic Upside.

How does sharing financial success with employees (i.e., giving them an upside )help us move toward self-governance?

To answer that, define the term:

Economic Upside is about ensuring that the financial success of the company is shared with those who contribute to it. It’s a key factor in fostering ownership, accountability, and alignment. When co-workers are financially invested in the outcomes they help create, they’re more likely to make decisions that support the long-term health of the organization.

Let’s look at three ways to put this into practice.

Application in Organizations

As usual, there are no silver bullets here. Context is everything and these ideas are by no means meant to be complete. That said, they are good starting points.

• Customer-Paid Salaries: As a founder, I’m acutely aware that my salary is directly tied to the value I create for my customers. If I don’t perform, I don’t get paid. However, I’ve noticed that many employees — especially in larger firms — don’t see it that way. They assume their paycheck will keep coming regardless of the company’s performance. “Customer-Paid Salaries,” a term borrowed from Haier (the Chinese white goods company), tackles this mindset head-on. It’s a two-part compensation system: part fixed salary, part variable, with the variable portion tied directly to value creation for customers.
• Team-Based Profit Share: Most companies have some sort of profit-sharing or bonus scheme. At MAQE, for instance, we pay an equal-share bonus every six months based on company profits. This works well for us given our size, but as we grow, this approach becomes less feasible. The key is ensuring that bonuses are tied to outcomes employees can influence. For example, it wouldn’t make sense for Hilton to tie front-line employee bonuses to the company’s stock price — something outside their control. In larger organizations, a bonus based on unit or team performance may be more appropriate.
• Financial Upside for All: The term “upside” refers to a future financial reward, often in the form of equity or stock options, tied to company performance. Unlike salaries or profit-sharing, it’s long-term and typically non-linear (i.e., it can be worth nothing of billions of dollars depending on company performance). Although traditionally reserved for senior leadership, Silicon Valley has shown that offering equity as part of a broader compensation strategy can be a powerful incentive for all employees. It’s an excellent way to align everyone with the company’s long-term success.

Conclusions

How we compensate ourselves is one of the most important decisions we make when building a business. Too often, it’s treated as an afterthought — following the status quo rather than thinking strategically. But compensation is a key differentiator and a core part of your company’s Employee Value Proposition (EVP). If you want to attract entrepreneurial-minded employees, starting with a creative compensation strategy can be a great move. The added benefit? Compensation makes all other factors — Customer Engagement, Economic Transparency, and Economic Understanding — more personally relevant and impactful.

That’s all for this week. Until then, make it matter.

/Andreas

PS. My writing draws heavily on Bill Fotsch’s work on Economic Engagement, where he refers to this factor as “Economic Compensation.” I’ve opted for the term “Economic Upside” instead, as I believe it better captures the distinction between this type of incentive and traditional salary.

How can we build better organizations? That’s the question I’ve been trying to answer for the past 10 years. Each week, I share some of what I’ve learned in a weekly newsletter called WorkMatters. Back issues are marinated for three months before being published to Linkedin. This article was originally published on Friday, Sep 13, 2024. If you like what you are reading, please subscribe at www.andreasholmer.com.