In the future, most startups will probably allocate stock options the way we do at Coffee & Power. The graph above is the results for the latest quarter, in which 14 team members each allocated an identical number of stock options anonymously to their peers. I had previously done this very successfully with cash bonuses/profit sharing at Linden Lab with upwards of 200 people participating. At Coffee & Power we chose to try allocating stock options in this manner as well. Possibly we are the first company ever to distribute equity in this way (tell me if you know of any others). It works really well:
- More brains are better than one at evaluating performance: Our process correctly identifies and rewards the same ‘top performers’ that would be identified by a management-led process, but then also identifies individuals lower in the organization that deserve ‘hazard pay’ or have contributed in other extraordinary ways. By letting everyone contribute to the decision, you outperform even the most well-meaning and skilled management team, because they simply do not have the time to spend on the discovery process. But the ‘crowd’ of everyone acting in parallel can do it easily.
- Managers are freed to focus on leadership, not performance assessment: Managers should spend their time making tough decisions, evangelizing, setting strategy, and mentoring their teams. It is painful, fractious, biasing, and inefficient to have them also forced to analyze performance. This process replaces the majority of that work.
- Improved productivity, culture, and hiring: Wouldn’t you be inspired to go to work at a place that trusted every employee equally to allocate the company’s stock? Would you work harder and better, knowing that not just your manager but everyone you interacted with would ultimately be evaluating you?
The several risks most people imagine actually don’t come up, and we’ve tested this repeatedly:
It doesn’t become a popularity contest: The ‘crowd’ automatically factors for popularity and visibility, typically finding/rewarding unsung heroes, as mentioned above.
It is easy to prevent cheating: You simply give a few random people the ability to audit the distributions other than those received by them.
There are many industries and processes being affected by the power of different types of ‘crowdsourcing’, but I predict performance review will be one of the ones we will look back on as truly revolutionary. This recent WSJ Article has a similar message.