Five Questions with Kate Dixon

How Compensation Reveals Culture

GUEST POST from Robyn Bolton

It’s time for your company’s All-Hands meeting. Your CEO stands on stage and announces ambitious innovation goals, talking passionately about the importance of long-term thinking and breakthrough results. Everyone nods enthusiastically, applauds politely, and returns to their desks to focus on hitting this quarter’s numbers. After all, that’s what their bonuses depend on.

Kate Dixon, compensation expert and founder of Dixon Consulting, has watched this contradiction play out across Fortune 500 companies, B Corps, and startups. Her insight cuts to the heart of why so many innovation initiatives fail: we’re asking people to think long-term while paying them to deliver short-term.

In our conversation, Kate revealed why most companies are inadvertently sabotaging their own innovation efforts through their compensation structures—and what the smartest organizations are doing differently.

Robyn Bolton: Kate, when I first heard you say, “compensation is the expression of a company’s culture,” it blew my mind. What do you mean by that?

Kate Dixon: If you want to understand what an organization values, look at how they pay their people: Who gets paid more? Who gets paid less? Who gets bigger bonuses? Who moves up in the organization and who doesn’t? Who gets long-term incentives?

The answers to these questions, and a million others, express the culture of the organization. How we reward people’s performance, either directly or indirectly, establishes and reinforces cultural norms. Compensation is usually the biggest, if not the biggest, expenses that a company has so they’re very thoughtful and deliberate about how it is used. Which is why it tells you what the company actually does value.

RB: What’s the biggest mistake companies make when trying to incentivize innovation?

KD: Let’s start by what companies are good at when it comes to compensations and incentives. They’re really good about base pay, because that’s the biggest part of pay for most people in an organization. Then they spend the next amount of time and effort trying to figure out the annual bonus structure. After that comes other benefits, like long term incentives, assuming they don’t fall by the wayside.

As you know, innovation can take a long time to payout, so long-term incentives are key to encouraging that kind of investment. Stock options and restricted shares are probably the most common long-term incentives but cash bonuses, phantom stock, and ESOP shares in employee-owned companies are also considered long term incentives.

Large companies are pretty good using some equity as an incentive, but they tie it t long term revenue goals, not innovation. As you often remind us, “innovation is a means to the end, which is growth,” so tying incentives to growth isn’t bad but I believe that we can do better. Tying incentives to the growth goals and how they’re achieved will go a long way towards driving innovation.

RB: I’ve worked in and with big companies and I’ve noticed that while they say, “innovation is everyone’s job,” the people who get long-term incentives are typically senior execs. What gives?

Long-term incentives are definitely underutilized, below the executive level, and maybe below the director level. Assuming that most companies’ innovation efforts aren’t moonshots that take decades to realize, it makes a ton of sense to use long-term incentives throughout the organization and its ecosystem. However, when this idea is proposed, people often pushback because “it’s too complex” for folks lower in the organization, “they wouldn’t understand.” or “they won’t appreciate it”. That stance is both arrogant and untrue. I’ve consistently seen that when you explain long-term incentives to people, they do get it, it does motivate them, and the company does see results.

RB: Are there any examples of organizations that are getting this right?

We’re seeing a lot more innovative and interesting risk-taking behaviors in companies that are not primarily focused on profit.

Our B Corp clients are doing some crazy, cool stuff. We have an employee-owned company that is a consulting firm, but they had an idea for a software product. They launched it and now it’s becoming a bigger and bigger part of their business.

Family-owned or public companies that have a single giganto shareholder are also hotbeds of long-term thinking and, therefore, innovation. They don’t have that same quarter to quarter pressure that drives a relentless focus on what’s happening right now and allows people to focus on the future.

What’s the most important thing leaders need to understand about compensation and innovation?

If you’re serious about innovation, you should be incentivizing people all over the organization. If you want innovation to be a more regular piece of the culture so you get better results, you’ve got to look at long term incentives. Yes, you should reward people for revenue and short-term goals. But you also need to consider what else is a precursor to our innovation. What else is makes the conditions for innovating better for people, and reward that, too.

Kate’s insight reveals the fundamental contradiction at the heart of most companies’ innovation struggles: you can’t build long-term value with short-term thinking, especially when your compensation system rewards only the latter.

What does your company’s approach to compensation say about its culture and values?

Image credit: Pexels

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Five Lessons I Learned as an Accidental Entrepreneur

You don’t have to start a business to learn from my journey.

I like think of myself as an accidental entrepreneur. I originally set out to make innovation insights accessible for the greater good. But, nearly 15 years after publishing my first article, I sold a site that had more than 8,000 articles from around 400 contributing authors.

Along the way I learned a great deal of things, some the easy way and some the hard way. Here are the five key lessons I learned from my 15-year journey as a webpreneur:

1. Before turning a passion into a business, nail the business model

My website, Innovation Excellence, started as a passion project that shared my own thoughts about innovation. The site didn’t begin with a business model and sort of evolved as my project grew. Even after bringing in partners to transform my project, everyone had a day job and didn’t have time to develop the most viable revenue streams. I began to experiment with advertising and sponsorships, but everything was difficult and quite manual. From this inability to invest, I learned that you shouldn’t start commercializing a passion project before nailing the business model. If you can’t, leave it as a small, manageable hobby.

2. Don’t give up too much equity too soon

I eventually brought on three partners, but ended up owning less than a third of my creation. I now see that I placed too little value on all of the work that I had done to that point.

Don’t give away half the commercial potential of your passion project to the first person offering you money to grow it. You always have the option of not growing it or growing it more slowly with more control. Make these choices carefully and err on the side of only giving up small amounts of equity for investment. I brought on some great people as partners, but the painful reality is that I gave up equity to fund a redesign that we ended up throwing away for another redesign that I did myself.

3. In any partnership, make sure ownership percentages match contributions

It takes work to run a website. If someone owns a third of your business, they should be doing a third of the day-to-day work involved. Even financial investors should be getting their hands dirty. Refuse purely financial investors unless their money funds the successful launching of a profitable business model.

4. Create as many win-wins as possible

My team was able to build Innovation Excellence into a saleable asset because it was a purpose-driven business focused on creating as many win-wins as possible. Every decision was measured against the mission to make innovation insights accessible, and we were focused on creating value for our global innovation community and value for our contributing authors. We turned down advertising dollars we didn’t think would be a win for our community and our authors.

If I start a new site, it will definitely follow this paradigm of creating value for as many stakeholders as possible. Win-win relationships create value over time, while win-lose relationships destroy value until it reaches zero.

5. When it’s time to sell, make sure the buyers share your vision

I’m proud of what I built with Innovation Excellence and grateful for my partners. Sadly, Innovation Excellence has disappeared. The buyers said they shared our vision, wanted to do no harm, respected what we had built and only wanted to make it better, but they completely replaced the brand nonetheless.

The buyer had every right to do this in pursuit of leveraging the assets they purchased, but it’s still painful as a founder to not be able to point people to the thing that you built. This should be a consideration when you sell something you’ve poured your heart and soul into.

Building and selling the Innovation Excellence was a wild ride, and I definitely learned a lot along the way. But you don’t have to build a company to gain insights. You can learn so much about how investors think by watching Shark Tank or reading articles. Talk to other entrepreneurs so you can learn without going through the hard part. Always look to grow and keep innovating, so you’re prepared when entrepreneurship comes knocking.

This article originally appeared on Entrepreneur.com

Image credit: Pixabay