Nathan Sykes

March 21, 2021

Incentivizing Your Team With Performance Based Pay

I hold a lot of beliefs related to private equity, but one that I've come to hold pretty highly is the importance of retaining great people who do great work at all levels of an organization, from data entry, to middle management, to the folks helping me in my head office. I wrote a little bit on how you can make that process easier on March 17, but a large part of successfully implementing the environment where employees, contractors, and freelancers can do their best work comes down to the money they're earning.

Incentives are incredibly important because without them, your team isn't particularly invested in your company. I don't mean financially - I mean emotionally. They might be excited to get started, but their interest in the work will eventually dwindle to where they'll only be going through the tasks of the assignments that are on their plate. They won't have the emotional investment to really care about the work they're doing, and to be honest, why would they? You're the one making the money, not them. They have no obligation, purpose, or drive to continually push the company to become better. That's all on your shoulders, and if you're not at the hub making sure that actively happens, you can bet it won't.

Important to note: Performance-based pay, commissions, dividends, or anything that's paid after the company makes money are considered bonuses at Howdy Interactive. They're not a replacement for base salary, and should never be in any business environment. If the only pay your staff get is performance-based, it'll cause them to do desperate, unethical things to earn that money. 

It's a huge priority for us at Howdy to make sure that our team is emotionally invested in the work we do, so we place a lot of emphasis on performance-based pay. We implement these strategies at all levels throughout our head office and portfolio companies, and the payout schedules look a little different for each.


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We have two types of performance based pay for our head office staff. Our project managers are folks who are spearheading new projects. In a traditional private equity firm, these would be akin to associates. Since we're smaller, we don't use that terminology. Project managers are entitled to a cut of the net profit of their respective ventures - past and present. This is paid out monthly as a dividend bonus after we settle our books. In addition, they're also entitled to our net profit pool, which covers all Head Office team members. Each year, 10% of the net profit that our head office generates (from all of our portfolio micro-companies) goes into a pool, and is distributed in shares based on tenure. We take this benefit from Basecamp, with one small addition - because we're a new firm, we only require one year of tenure to be eligible for our profit pool, and you become eligible on the first of the next year. Head Office team members that joined us in 2020 became eligible for the pool on January 1, 2021, and anyone who joins us this year, regardless of start date, will be eligible on January 1, 2022.

The majority of our team, however, works on one specific micro-company in our portfolio - they don't work in our head office. How do incentives work for them?

It's quite similar to our head office, just for the specific entity they work for. Take OYM, for example, a rare example of a micro-company that we publicly disclose we own (we typically don't disclose our holdings, but it's easier to write blog posts if I have an example I can point to). We have two types of performance based pay for a micro-company like this. Because we're selling a package worth several thousand dollars, we have sales representatives that meet with our prospective clients. Those sales representatives earn commission for each package they sell, paid monthly (since our packages are monthly). In addition, we have a smaller profit pool that kicks into effect immediately for all team members who work on the micro-company after the micro-company hits organic profitability (if we're building out from scratch).

If we ever decide to sell one of our portfolio companies, we've committed to giving 10% of the net proceeds of the sale to our staff - 5% to the staff of the specific micro-company we're selling, based on the same shares principle that Basecamp uses (one share per year of work), and the remaining 5% to our head office staff.

Our team now has the emotional investment in getting our micro-companies profitable as soon as possible, and to continue maintaining or exceeding results. All it takes is performance-based pay, and it's totally worth it.