The Other Side of Paradise

Arguably the most valuable resource for any business is the minds and commitment of its employees.  This is especially true in the technology sector.  Larger companies such as Google, Facebook and Amazon are battling for “talent” to maintain their edge and are continuing to invest in research in continuously expanding areas, most of which are uncharted and in which success will depend in large part on the creativity and innovativeness of engineers, developers and designers.  In many cases, these giants have purchased entire companies primarily to gain access to their technology and people who helped developed it, even though the acquired companies were far from achieving profitability independently.  An article in The Economist noted that smaller startups are also scrambling to attract talent, and that established manufacturers in other sectors seeking to compete on the basis of technology are setting up research outposts in Silicon Valley (e.g., leading automobile manufacturers from all over the world including GM, Ford, Nissan and Toyota) that need to be staffed, thus creating more intense competition for human resources.

The result, according to The Economist and others, has been a “pay-and-perks arms race” as companies invested lavish sums to make their firms into a “paradise for talent”.  At larger companies, workers enjoy generous compensation packages and a dizzying array of perks such as free food cooked by Cordon Bleu chefs, nap pods, workouts in on-site gyms, in-house yoga classes, dry cleaning services on the premises and buses to take them to and from work (a perk that has caused dismay among others in the communities where the buses operate for the additional congestion they create on the roadways).  While the founders and other senior executives of these companies site these strategies as signs of their commitment to the value of their staffers, critics and skeptics argue that they are nothing more that “golden handcuffs” used to keep people at their desks and that everyone is expected to work so hard that they wouldn’t have time to go outside the building and have a meal, exercise, run routine errands or just talk to somebody other than a work colleague.

Startups lack the resources to replicate what employees find at Google and Facebook, but they still work hard to provide a friendly work environment to keep employees engaged and in the building all day long.  In fact, it’s possible to put together what is almost a standard menu for “startup perks”: free snacks, coffee, beer (and even hard liquor in some cases); happy hours; company swag including a wide array of branded goodies such as shirts and hats that employees can wear to get the company name out when they’re allowed to leave the office; discounted gym membership or health and wellness stipend; employee discounts; casual dress code; fantasy football and March Madness tournaments; dog-friendly offices; and ping pong tables, pool tables, foosball tables or basketball hoops.

The Economist observed that the tech economy has long been, and continues to be, a “ruthless meritocracy” in which the best and brightest are extremely well compensated in relation to their peers and the others, those who are merely good but not great, are expendable and can expect to labor in obscurity while the stars get the credit.  It appears that tech workers can benefit from mobility in the sector, jumping from one company to another if they perceive a better opportunity; however, Silicon Valley companies aggressively track former employees to ensure that they don’t use the same knowledge they employed in their previous posts, even if the employee developed that knowledge on his or her own.  This sort of activity creates particular difficulties for startups that lack of the resources to get involved in a legal war with a new developer’s former employer threatening a trade secrets misappropriation lawsuit.   Moreover, what seems to be a great opportunity often turns out to be a dead end like Sidecar, a ride-sharing service forced out of business in the face of competition from still-expanding rivals such as Uber or Lyft.

And the mouthwatering stock grants offered by Silicon Valley firms to attract talent?   They make people dream of being millionaires before age 40 as long as they give over their lives to helping their companies go public or get sold at a huge valuation, but the reality is that companies often use multiple classes of shares that preserve the biggest gains for insiders, leaving the employees with common stock that can easily lose value. The traditional method of raising money and providing liquidity for employees, an initial public offering, has given way to additional rounds of private financings at historically high, but often mysterious, valuations.  But, instead of providing more value for employees, these rounds often come with guarantees to the investors from the founders and other senior executives that the investors will make their money back at a liquidity event, a promise that can only be kept by issuing more common shares to the investors that dilute the holdings of employees.

The Economist conceded that the tech industry offers fabulous rewards for a fortunate few, but cautioned that a career as a software developer or engineer came with no guarantee of job satisfaction.  In fact, The Economist cited the results of a 2015 survey of 5,000 workers at both tech and non-tech firms regarding employee satisfaction that found that many tech employees felt alienated, trapped, underappreciated and otherwise discombobulated”.  Specifically, only 19% of tech employees said they were happy in their jobs and only 17% said they felt valued in their work.  In addition, tech employees were significantly more discontented than their colleagues in marketing and finance in several important areas including a clear understanding of their career path, an understanding of their companies’ vision and good relations with their work colleagues.

While people will always be willing to sacrifice to pursue what they perceive to be paradise, it seems that many otherwise intelligent folks are being misled, sometimes unintentionally, by the founders and other senior managers of the companies they work for.  New hires cannot possibly know all they should know about the company’s organizational culture and expectations that will impact their work-life balance.  They also don’t have access to information about deals that have been made with investors that will impact their compensation and return on their investment of time and effort.  Will the arms race slow down?  That’s not likely.  But recognition of, and respect for, the growing dissatisfaction outlined above will hopefully prod founders to practice more transparency with their workers and find different ways for workers to contribute and derive satisfaction from their participation in the pursuit of the company’s business model.  The list of startup perks above is shockingly devoid of options for workers to make time for their personal lives, work remotely so that they can help their mates and relatives with family matters and pursue personal growth opportunities that will not only benefit their current companies but prepare them for the inevitable day when it is time to move on to the next startup or project.  Fixing this problem requires making placing commitment to the well being of employees on the same footing as business growth and profitability.

Sources: Schumpeter: The other side of paradise, The Economist (January 16, 2016), 74; and L. Drell, Are These the Best Startup Perks You’ve Ever Seen? (May 28, 2012).

This article was written by Dr. Alan S. Gutterman, who is the Founding Director of the Sustainable Entrepreneurship Project (seproject.org), which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  This article appears in the chapter on “Human Resources” in “Launching a New Business: A Guide for Sustainable Entrepreneurs”, which is prepared and distributed by the Sustainable Entrepreneurship Project and available for download here.

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