If there were any doubt about what is the hottest and most important issue to fast-growth entrepreneurs, we now know what it is. Hands down, it is the poaching of each other’s employees.
Look no further than the antitrust case that revealed that executivesfrom Apple, Google, Intel and Adobe held secret talks and made agreements not to recruit each other’s employees, notably marketers and coders. I have to say that I find it fascinating and revealing that Steve Jobs was personally in the mix of all this while companies like Adobe and Intel delegated it away from their chief executives. Actually, this is one of the things I liked about Steve Jobs. He was hands-on when it was a critically important issue for Apple, and he put his own butt on the line. “If you hire a single one of these people, that means war,” he told competitors.
When employees got wind of the secret collaboration, they filed a class-action lawsuit, arguing that the collaboration suppressed wages. The primary motivation seems to have been to retain talent, but no doubt a direct consequence was that it also kept a lid on salaries.
This is a tough issue because both sides think they are right.
The former employees say it is illegal because it prevents them from earning a better living. They are very much aware that the secret pact violated the very free market principles that helped all of these companies demand higher pricing and earn higher profits. And they are correct.
But as an entrepreneur who built a fast-growth company, I see the other side, too. The employees affected by the secret talks were not exactly coal miners who had been exposed to black lung disease and low wages. Total compensation ranged from $100,000 to $1 million and more. And, boy, it hurts so badly when you invest time, money and resources to ramp up new hires and then they walk out the door for a few dollars. Not only do you lose your investment in the employees, they also often take your intellectual property, your business processes and critical customer information. It can be a huge and demoralizing loss for the culture and the profits of a company.
But there are things that can be done to make it better – things that don’t involve secret meetings and breaking the law. In fact, I put a dent in this problem with the information technology company I founded, STI, where we had a consulting division that would train new hires on how to customize software and then bill them out at $2,000 a day. Even taking into account the substantial cost of training those employees and the risk we were taking and the customer-acquisition costs, there was a lot of margin between the full-time salaries and the revenue generated from their billable hours. Of course, those margins were even greater for competitors that were able to lure away our already-trained employees, which is why they were able to offer to pay them more.
It was especially embarrassing to lose one of these employees because they were our connection with our clients. Our chief financial officer would just frown at me when he heard one was leaving. Then one day it hit me: When recently hired employees leave, it costs them nothing. They come out ahead on the separation. Likewise, my competitors make money because they bill their clients for work that I trained the employees to do. So I came up with the idea of a new hire “break-up fee,” much the way there’s a break-up fee in merger talks when one side decides to walk away after a deal has been struck.
Here’s how it worked: We offered talented new hires an ascending salary structure that started low but guaranteed automatic increases each month. These employees started at about 50 percent less than market rate, but by month 12 they were 20 percent ahead of the market. By the end of the second year, they were 40 percent ahead of the market, and by year five they could be as much as 100 percent ahead of the market — and worth every penny.
The idea worked because it attracted people with a long-term mentality and because, if they did choose to leave, they had something to lose. It did take us longer to find people who were willing to sign up for what I called the new deal but once they came on board, their hearts and minds were with us. While I’m sure there are other ways to solve this problem, this one worked for us, and I’m sure it would work for others as well.
This problem is not going away. Whether they are in Silicon Valley or New York or Atlanta or anywhere in between, when entrepreneurs gather, they talk about how hard and how expensive it is to hire real talent, especially top computer engineers. I have no doubt this problem is going to get worse before it gets better. The number of millennials entering the workforce does not match the number of baby boomers leaving it, and these crucial positions already have an unemployment rate of less than zero. And if it’s a problem for Apple and Google, you can imagine how hard it is for a fast-growth start-up.
And please don’t suggest that we should all just treat people nice and they will stay. Apple, Adobe and Intel know how to treat people, or they would not be where they are today. This is a money problem, and when all else is equal, money talks and people walk.