Growing Pains: When Scaling Up Dilutes Work Ethic

Remember the early startup days, where passion fueled productive hours and every small win felt like a moon landing? Steve does. His 10-person team was a tight ship where everyone pulled their weight. Fast forward through a whirlwind of growth and acquisitions, and the company grows to more than a 1,000 headcounts, where the sense of shared purpose has been diluted.

Take Emily, an original crew member. Her dedication is unwavering, her work ethic, a throwback to those startup days.

Emily joined this new initiative earlier this year. But she soon realized her team was a mixed bag of ‘professionals’ who mastered the art of doing the bare minimum. They were so good at it; you’d think they had PhDs in Procrastinatology.

Team meetings were a theatre of the absurd. For example, when Emily presented a well-thought-out plans, her colleagues would counter with vague criticisms like “It doesn’t feel right,” they’d say, or “It won’t work,” as if they were judges on some low-budget reality show. When it was their turn to offer solutions, they’d spout ideas so impractical, you’d think they were brainstorming for a comedy show.

But the piece de resistance came when Emily discovered that her pay raise percentage would be exactly the same as her slacking colleagues. Ah, the sweet smell of corporate fairness! Steve pondered this corporate paradox after a chat with Emily, and was reminded of that timeless saying: “Teams are magical. Ten people start a project, two actually work.”

Steve faces the founder’s dilemma: “How do you scale the business without diluting the drive? How do you ensure the original spark that ignited your startup’s success isn’t lost in the corporate expanse?”

The Theoretical Ideal vs. The Reality

Steve’s experience highlights a gap between the ideal and the reality of workplace incentives, a gap that many of us have felt. It is also a true phenomenon observed by decades of research and stated in theories like the Ringelmann Effect, which we’ll delve into later.

In an ideal world, the weighting for performance wages and bonuses would have no limitations (either up, down, or no bonus depending on each country’s regulation) and would depend on the personal contribution (good or bad) and the company’s overall performance. Though in practice, many companies, in the name of fairness end up giving everyone the same incentive. This leads to several issues:

• Disconnection from Performance: When everyone gets the same bonus, it disconnects individual income from individual performance, discouraging employees from putting in extra effort. It gets worse when the responsibility and expectation of individual in a group is blur.
• Lack of Improvement: when a company doesn’t have a strong system for rewarding good performance over the long term, there’s little motivation for employees to get better at their jobs.
• Rewarding Poor Performance: Equal incentive across the company rewards underperforming employees. This normally ended up eliminates those who genuinely want to contribute to the company.
• No Accountability: When the company fails or underperforms, there’s no system in place to hold underperforming employees accountable, giving everyone, including low-performers, a false sense of job security.

Essentially the four bulletpoints are describing the Ringelmann Effect and its implications. We could better appreciate why so many companies struggle with these issues and why it’s crucial to design systems that counteract our natural tendencies toward social loafing.

Why your proactive employees are the uncommon mutant in Human Species?

Now, you might be scratching your head, wondering, “What’s this Ringelmann Effect, and why should I care?”

Let’s travel back to the 1880s. French engineer Max Ringelmann discovered a curious phenomenon: when people work in groups, individual effort often decreases. He had students pull on ropes and found that the more people pulled together, the less effort each one exerted. This phenomenon was later termed ‘social loafing.

Before we blame this on laziness, maybe take into account of some anthropological and psychological wisdom. According to the Optimal Foraging Theory, humans, like all animals, are hardwired to maximize gains while minimizing effort. It’s not so much laziness as it is an evolutionary survival strategy. Similarly, insights from Evolutionary Psychology suggest that the tendency to conserve energy or “slack off” when immediate survival is not at stake is an evolutionary adaptation. So, could it be that this slacking isn’t a moral failing but rather a feature of human nature?

Now, fast forward to the 21st century, where Gallup’s State of the American Workplace report offers a modern-day validation of Ringelmann’s findings. According to the report, only one-third of the American workforce is engaged at work, while a staggering 16% are actively disengaged. Another 51% of the employees exerting the bare minimum effort required to not get fired. When you think about it, this might just being those slackers following their evolutionary programming.

So we now know the Ringelmann Effect is a living, breathing phenomenon that’s alive and well in today’s workplaces. And perhaps the real solution isn’t about picking out the slackers but the examine the failed organizational structures that did not account for basic human nature.

Harnessing Human Self-Interest for a Better Corporate System

If you’ve been nodding along, and wondering, ‘Is there a way out of this quagmire?’ Good news: there is. And it starts with understanding that the problem isn’t just human nature but also the systems constraints, and the types of company we want to create.

Constraints of human’s ability in orchestrating everything

Who likes free-riders?

I definitely don’t. The best way to remove this issue isn’t trying to monitor the workers and try to orchestrating everything so it runs perfectly optimum. It is simply impossible. But the best way is to get the right talents, provide them with well-defined while the biggest decision power allowed, finally to incentives them accordingly.

As Friedrich Hayek once pointed out, the more we try to regulate from the top, the more blind spots and flaws we introduce into the systems we create.

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

This highlights the limitations of centralized planning and the importance of leveraging individual talents and knowledge. The best approach is to harness the human self-interest that is written in our DNA.

Charlie Koch, in his book Good Profit, emphasizes the importance of a values-based culture and educating the employees being principled entrepreneur themselves. Koch Industries places a strong emphasis on integrity and compliance, and based on these principles, they foster a dynamic structure that leverages individual talents. By making sure the rewards actually match the effort and skills your talented employees bring to the table, the company can offer them virtually unlimited opportunities for growth and reward. This freedom, coupled with a robust set of principles, encourages employees to take calculated risks and innovate. Turning employees into intrapreneurs within the larger corporate structure.

Let’s delve deeper into the mechanisms that Koch Industries employs to mitigate the shared indolence, and how my experience suggest you can try in practice.

Cultivating Virtue and Talents: The Foundation of Role Clarity

One of the most effective ways to counter systemic constraints is by focusing on role clarity and the people who fill those roles. Clearly defined roles, filled with individuals who possess both moral and professional attributes, are essential for success. Virtues like integrity, respect, and entrepreneurial sprit, along with skills and abilities, help create a competent and morally aligned workforce.

• Alignment is the key problem to solve for, and it is coming from shared values rather than skill. That is the key to building a high performing organisation, or moving a company through transformation.
• With that in mind, it has to reflect in your hiring process. So while skill matters, you need to think about values and probe for those just as much as you do for relevant skills.
• Those values are often on display as much outside professional environment as in, so broaden your interviews topics to talk about other parts of a candidate’s personality/life rather than just experience at work (volunteer, what do their friends think of them, … ).

Handle Skill-Virtue Dichotomies Carefully

Hiring the person with high value match and high skills is obvious, just as a low match /low skill shouldn’t get far into the process. You’re likely to come across candidates who are either high in skill but low in virtue or the reverse. The question is what you do in a high skill / low virtues or low skill / high virtues situation

1. Never compromise on virtue. Assholes are assholes, they will kill your overall team cohesion by setting the standard for acceptable behavior
2. Consider cultural fit during restructuring, don’t just look at salary cost but also consider cultural fit if you need to make cuts.

This practice acts as a deterrent against slacking. When roles align with an individual’s virtues and allowing self-actualization, they’re more likely to take ownership of their tasks, tapping into intrinsic motivation and fostering a culture of accountability.

However, many organizations, even those that adopt frameworks like Lean or Agile, often fail at this crucial point. The issue frequently isn’t the framework itself but its implementation. Framework like Agile may provide a structure for defining roles, but if those roles aren’t filled with individuals who possess the right combination of virtue and talent, the framework alone can’t prevent social loafing.

A well-defined Responsibility and Expectation Model is key (another topic I will cover in another time). It assigns responsibilities and clarifies the unique value each team member should bring, reducing ambiguity and enhancing accountability, thereby mitigating the risk of disengagement.

Empowering Decision Rights: Fostering an Entrepreneurial Culture

Once roles are clearly defined and filled with the right individuals, empowering them with decision-making authority is crucial. Many organizations where I’ve worked claim to foster empowerment, but a top-down culture is actually deeply ingrained, leading to employee disengagement. An entrepreneurial culture tackles this by granting decision rights aligned with roles and responsibilities.

Of course, empowerment isn’t just about granting authority; it must be more thoughtful. While frameworks like Agile emphasize decentralized decision-making, however I see a lot of them fall short because lacking the practical approach on delegating decision right.

The key is to design an environment so the decision rights sit with those with the skills, knowledge, and virtues that align with the organization’s values, ensuring responsible and effective decision-making. I understand assigning decision rights is easier said than done, here are some practical tips that be a good start

• Empowering people is something that happens based on how you react to situations, rather than something you do by proclaiming they’re empowered to make decisions.
• Think about the level of autonomy people can have in their role, aligned with their skill and quality of decision reflected in the outcomes.
• Keep in mind you already have people with the right values, which inform their decision making. Alignment is the basis of trust.

Some examples to help you think: engineers and live systems

• With engineers who work on SaaS products the outcomes we care about primarily are availability of the system. Which we look at through uptime (=the system is available for users) and mean time to restore (=when it goes wrong, how long before we’re back to a usable state).
• Those measures drive technical decisions related to making changes. As a leader I don’t go down to the details of how they achieve that because the experts are already on the ground making decisions. And the outcomes tell me if their decisions are going in the right direction.

By aligning decision rights with individual roles and responsibility, organizations foster a culture of accountability and empowerment, employees are both motivated and equipped to contribute effectively.

Aligning Incentives with Roles: More Than Just Checking Boxes

Empowering employees is essential, but it’s only half the battle. The other half is crafting incentives that drive responsible and effective decision-making. Too often, organizations focus solely on task completion for rewards, which can lead to disengagement or even freeloading. This is especially true in many Agile (or claimed to be Agile) environments, where team achievements can overshadow individual contributions.

Some examples to help you think:

• Measuring velocity and story points delivered. And allocating annual bonus based on the amount of story points. If teams start to focus on these numbers, the easiest way to achieve that is to inflate the estimates to fit the required numbers, rather than change the work.
• Quarterly sales quota tied to a bonus. It promotes sandbagging sales and moving them into a different quarter to get a bonus. How about uncapped commission as an alternative?

The solution is to align incentives with individual responsibility or impact instead of depending on the cooperate hierarchy.

So organizations can mitigate disengagement and encourage meaningful contributions. Employees are motivated to excel, knowing their unique value is recognized and rewarded. A practical note here is that not everybody reacts well to the same kind of rewards. Some people like public recognition such as being called out on an all-hands call for something outstanding; others would rather never show up on those. Everyone likes money though. Be sensitive to this.

The Synergy of These Elements

The beauty of this synergy of virtue&talent, decision rights, and incentives lies in its self-reinforcing nature. Employees who are virtuous and talented are more likely to make responsible and effective decisions. In turn, when they see that their decisions and efforts are rewarded appropriately, they are further motivated to uphold the organization’s virtues and contribute effectively. This creates a virtuous cycle of continuous improvement, and serves as a powerful antidote to the Ringelmann Effect.

Employees are not just motivated by extrinsic rewards but also by the intrinsic satisfaction of doing meaningful work that aligns with their own virtues and talents.

By mastering the synergy of these three elements, organizations have the chance creating a high-performance culture that not only discourages disengagement but also fosters a sense of purpose and fulfillment among its employees. This is the epitome of a win-win situation, where both the organization and its employees thrive.

The Adam Smith Fix: Align the Management System with the Self-Interest Gene

The Ringelmann Effect and the illusion of workplace fairness are more than just theories; they’re real challenges we face daily. But the key to overcoming them isn’t changing human nature; it’s aligning our systems with it.

Remember Emily and Steve? Imagine if her company had a culture that rewarded virtue, decision rights, and aligned incentives. She’d be fairly rewarded, and her colleagues would be motivated to contribute. It’s a win-win instead of a zero sum.

Adam Smith said it best:

In today’s complex commercial environments, this principle remains as relevant as ever. We can’t expect altruism from everyone for a collective success; we need systems that channel self-interest into productive and virtuous behavior.

So, what’s your next step? Whether you’re a leader or a manager, it’s time to examine your organization’s structures. Are they encouraging engagement and fairness, or are they perpetuating the Ringelmann Effect? The time for action is now. Let’s harness human self-interest to create workplaces where everyone-not just the organization but every individual-thrives.