Who should decide in a company? Who should make the most money? These are difficult questions with many possible answers. In this post I want to explain how my company, Adaptiv, is set up when it comes to power and money.
The first thing to know is that Adaptiv has four owners and four employees. All employees are majority shareholders, i.e. each owns more than 10% of the company. There is nothing original about this, I mention it only as a background. This setup is great, though, because it ensures that all employees regularly think about what’s good for the company – not only what’s good for them personally.
Compare that to an umbrella company, i.e. a setup where everybody is self-employed but pay a share of their profits or a fixed amount to the umbrella each month for services rendered, e.g. sales and invoicing. In that situation, given I have to choose between earning more money for me and helping the umbrella company, it’s not exactly clear how to choose. Of course, people help out with common tasks in that situation as well, but they don’t really have to. It’s exactly that, “helping out”, being nice. In that system it’s quite rational to look to my own situation first, then helping others. It’s important to have a system, which encourages good behaviour. Of course, by making everybody a shareholder in the umbrella company, you have created (almost) the same situation as ours.
Perhaps more original, but more as a remark, is that Adaptiv doesn’t have a CEO. This might seem strange, but since all four of us are on that board, what point is there to have a CEO? A CEO is appointed by the board of directors and for us everybody on the board is employed as well. Many people think a company needs a CEO, but that’s not correct, at least not in Sweden. I have nothing against CEOs per se, but I think a CEO for Adaptiv would start us down a treacherous path of managers and hierarchies. It creates an opening for unnecessary overhead. Side note: We’re open to having a CEO in the future.
More originally perhaps, Adaptiv doesn’t use budgets. We think it’s important to live as you teach. We help our clients with systems thinking and continuous value flow. Company, departmental, or project budgets are often the root causes of evils we meet daily in our projects. We have a practice of giving a copy of Implementing Beyond Budgeting to most managers we work with. It would simply feel strange to have a budget. A budget is a set of financial goals and as I mentioned in the previous post, financial results are an outcome of many parameters. We fail to see the value in a financial goals for us.
Instead, we have a continuous, empirical follow-up of finances. We track each month how we are doing and what we can afford. We might even, occasionally, compare numbers with previous years. Investment decisions are taken continuously, as needed, not artificially every year or quarter. In our company, a consultant has a lot of discretion when it comes to buying work stuff (remember, the company money is partly the partner’s money). For bigger investments, like a new computer or a conference abroad, we are required to suggest it to the partners for discussion. However, so far, the others have never said no.
We teach our clients that transparency is good. How does that show? Adaptiv follows the rules of Open Book Accounting This means we publish our result and balance sheets openly (sometimes we’re a bit behind with the publishing). We also try to comment on items in the reports that might look odd or simply to explain what they contain. We want our customers to know how we spend the money they pay us for our services. If they like, they can have a look at our reports and give us feedback. We want them to see that even a successful consultancy does not imply a life in luxury like the myth says.
Which brings me nicely to to topic of salary and benefits – a sensitive one. We had some debate around this when we started out. I remember advocating a differentiated salary based on business experience and perhaps other things. However, the idea of equal pay and benefits for all partners had most supporters, even our accountant! I have to admit I didn’t know what to think of it. I was the oldest and felt entitled to a higher salary. It seemed, well, a bit socialistic and naïve. What can I say? I was wrong.
I now think equal salary was one of the best decisions we’ve done. I don’t think I have even begun to identify all the positive outcomes from this decision yet. For example, it takes all the individual hassle off the table, e.g. preparing for the salary talk, gathering statistics, getting worked-up etc. At the same time, from the company side, it removes the need for preparing and holding salary discussions and negotiations, which expends a lot of time for managers. It eliminates the risk of bitterness and envy, e.g. someone getting bitter about how much more some other guy is making. Finally, it frees time to do more productive stuff, e.g. helping our clients.
So how does it work in practice? It’s simple. The salary stays the same until it is adjusted after discussion. A partner can bring salary adjustment as a topic any given Friday and then we all discuss and agree on what we should earn. We all have different life situations; two of us have small kids, one has teenagers and one partner has no kids so we need to balance everybody’s needs. That’s when knowing each other deeply and talking in person so often comes in handy. Only by meeting and having an honest dialogue about it can we resolve these tough questions without sour notes. Of course, we also have our financial history to guide us.
On to the juicy stuff, what do we earn? We started out in 2009 with a totally flexible salary based on the financial results of the whole company the last months. After that, we made part of the salary flexible, based on results the last six months. Gradually, we could move the salary range upwards. After a few years we removed the flexible part entirely. At this point, everybody seems fine with their compensation, even though on paper we make considerably less than our employed consultant friends. Today, we earn a fixed salary of SEK 40 000 (USD 6,255) before taxes. But in addition to that, we distribute some of the profits as dividends. Furthermore, we have generous benefits including a seven-week holiday, compensation for planned as well as unplanned parental leave or caring for an ill child, health insurance, SEK 4 000/month to retirement funds, and more. Of course, some money we also keep in the company, as a buffer for harder times.
Could we earn more? Yeah, a bit more, I guess, but that’s not really very interesting at the moment. As a life-style company, we have to look at the whole picture, not just the basic salary. This would include all monetary remuneration, but also our Fridays together, flexible work hours and some other perks I will talk about in upcoming posts.
So that’s how we’ve attacked the tough issues surrounding power and money. I would love to hear stories of how other, small companies have thought. Of course, this setup is made possible by the fact that the company is small and all consultants are working partners, but as long as we are in that fortunate situation, I think it has worked out beautifully. So if having equal pay makes me a socialist then count me in.
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Very interesting post! I really like your discussion on the free rider problem and how important it is to balance power and responsibility, self-interest and the whole. As far as I understand it you are organised much like many law firms. I guess next step would be how to handle it when start hiring administrative personnel that supports your work but does not work with the same stuff you do. The hierarchies are truly hard to avoid.
In many ways you look muck like an old guild, where they often shared the income equal among all “partners”. How do you handle situations like: this it not fun any more, I want to quit my assignment. I end up at the bench. Still 40 k a month? Even tough you are out of work voluntary? At Crisp that is one of the reasons we do not have any solutions for when you have no work, since many are afraid that it would end up being harder to quit boring contracts.
Anyway, thanks for sharing.
Thank you for your great comment as always, Peter! I hadn’t heard of the Free Rider Problem before, nice to have a name for that.
Yes, as far as I’m concerned, a partner should definitely quit an assignment where they feel less useful or challenged, which could lead to feelings of boredom. It’s part of optimizing for life, not for profit (see upcoming post). I don’t care if they end up “on the bench”. All of us will still make the same salary. In the event that two or more of us are out of assignments, then we might consider bringing back the salary range mechanism, which adjusts all salaries down based on our result the last six months. But since we’re a team, and everybody benefits from everybody having an assignment, the other partners normally chip in and create opportunities for new assignments pretty fast. Also, the guy quitting the assignment will feel an obligation to start contributing financially again. That’s one reason why its so important to have the right people. At least in the current economy, this has worked out fine.
The other issue you bring up, hiring administrative staff, is one we’ve discussed extensively. We’ve reached the conclusion that this move would essentially create a new type of company, where many of our ideas would need to be reexamined. Then, suddenly, hierarchies are needed. I’m not ruling it out, but we have no plans for this in the foreseeable future.
We are doing the same with our consultancy, and I do believe the outcome is more positive than negative. But that only works when you have THE RIGHT PEOPLE WITH YOU. I always wanted a company with lightweight processes, communications, ideally “no meetings” and to focus on our work, simply avoiding intermediate things that do not directly add value. When everybody is responsible enough to know what they have to do in order to grow the business for their own good, you forget that you sharing the same amount, because in the end everybody is motivated to do their best. The problem starts when you realize that you are doing much more than the other ones. But if that ever happens to you, I believe you shouldn’t think about: “shit, I earn the same amount as my partners and I produce twice as much”. You should change it for “shit, I didn’t find the right people yet”. So being a “socialist” works when you have the right people with you. The biggest challenge is to find people that have similar personal and professional values in common.
In our case, I founded it, but I got two guys with me (now my partners) which hold the same share as me. Hopefully we are sticking together until the end, however we know that life changes and so does people. My main concern, is how to handle the contract when it comes to ‘quitting’ in a fair way for the three of us.
Also, when it comes to hiring and growing the company, I’m always afraid to throw money away with people that do not add value to the company, specially those ones that has the ’employee mentality’. Those ones are the worst, they need you to ask them everyday how was the progress of their work.When you always need to charge, that is when something is going wrong.
Thank you for your interesting comment, Felipe! You do point out something that I didn’t see because it was too obvious: You need people that share the same values. This also relates to growing the company. You need to be very careful when bringing in new partners. We have been trying to grow to five partners for a couple of years now, but still haven’t found the perfect match. Finally, how do you handle people leaving in a fair way? This is a big topic, worthy of a blog post in itself, almost. One idea is to keep assets rather low. Then buying people out for their share of the estimated company worth might be possible. Happy to hear other suggestions, though.
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Thanks for sharing. I’ll love to follow how this scale. At Crisp we are 30+ but technically an umbrella with equal sharing, as your example.
As for the comment about the right people, that is an issue for any small company anyways. A scheme like this or ours, just make you stand more on your toes when recruiting,