Sean’s blog

One of my employees did something slightly awesome yesterday.  He made a good relationship with semi-popular blog and arranged to write some content for it that highlights the products that we sell.  It’s a great situation all-around - great content for the other site, great for us as a business, and interesting work for the employee.

I wanted to make sure that he know his ingenuity was appreciated, so I made sure to explain to everyone at the company (we are small) what the employee did and why it was smart.  I also stopped by the bank and got him $100 cash so that he could do something fun.

We occasionally reward our employees that way - with “surprise” bonuses - sometimes cash but more often a videogame or something a little more thoughtful.  I felt a little weird after giving him the cash, since he was already really excited about his work in a more intrinsic way and I didn’t want to diminish his intrinsic satisfaction.

Then I read this article “Why Incentive Plans Cannot Work” -in the Harvard Business Review way back in 1993.  It is highly salient to startups since, particularly those that are venture-backed, use incentives - stock options, bonuses, etc. to motivate behaviors.

Some highlights from the article:

“Research suggest, by and large, rewards succeed at securing one thing only: temporary compliance. When it comes to producing lasting change in attitudes and behavior, however, rewards, like punishments, are highly strikingly ineffective”

“In general, the more cognitive sophistication and open-thinking that was required, the worse people performed when working for a reward.”

“Jenkins tracked down 28 previously published studies that measured the impact of financial incentives on performance.  His analysis ‘financial incentives’, published in 1986, revealed that 16, of 57%, of the studies found a positive effect on performance”

“Rewards have a punitive effect because they, like outright punishment, are manipulative. ‘Do this and you will get that’ is not really different from ‘do this or heres what will happen to you’ … managers are creating a workplace in which people feel controlled, not an environment conducive to exploration, learning and progress”

“Rewards, like punishment, actually undermine the intrinsic motivation that results in optimal performance”.

The content of this article really “feels” right to me, as a manager.  It is also completely contrary to much of what is practiced in venture-backed startups.

Today hasn’t been a good day. First, my business partner and I got our taxes back from our accountant - not pretty. The problem with bootstrapping a “profitable” business that requires working capital is that increases in working capital are considered as profit by the IRS. That may well be true, but it really makes it hard to grow such a business. While our taxes are about 30% of profit, they are well more than that of our cashflow. Ok, whatever, I can live with that.

However, I was also informed by the government today that I must garnish the wages of one of my employees for $8000 of student loans that he didn’t pay. Now, he didn’t get a degree and it’s not like he benefited at all from the somewhat sketchy school that he was attending. My take: that school probably shouldn’t exist and certainly shouldn’t charge what it does, the bank shouldn’t have lent him the money, the bankruptcy laws shouldn’t be such that student loans cannot be dispatched, and I DIDN’T SIGN UP TO BE A BILL COLLECTOR. Hopefully Paychex knows what to do with this, because I have no idea. I’m not happy about it.

Things could be worse with our government, but they certainly could be better. Movie recommendation - Maxed Out.

I recently had the opportunity to dig around in the marketing effectiveness data of a friend’s company. The results were really interesting, so I figured I would share. This company is an ecommerce company that sells a physical product to consumers online. They sponsor several blogs, one forum, do a significant amount of offline advertising and spend on Google CPC ads. Conclusions:

1. Over the time period organic search on Yahoo and Google generated $100Ks of revenue and cost nothing

2. Google adwords returned $18 of revenue for each $1 spent on ads, around 18x the effectiveness of the offline advertising.

3. The rates on the blogs are not efficiently priced, there is wide variance in cost -effectiveness across blogs.

One issue with online advertising is that there is a limited audience. It is often argued that you reach an entirely different set of potential customers when advertising in a different medium and that you cannot reach the same volume of people online as you can offline. Therefore, while online advertising may have a higher ROI, offline advertising is still important. That may well be true for some very mass-market things that don’t get a lot of search attention, or for companies with a much larger marketing budget, but in this case the company is spending most of their ad money on offline media and getting the majority of their visitors from online marketing.

Someone just asked me how I came up with the offline advertising impact. I used a multiple regression model that I will write about tomorrow.

Another modification - it is important to note that I used the direct sales impact from the online ads and the indirect sales impact from the offline ads.  This isn’t really fair and it actually underrates the effectiveness of online ads (because they have an indirect component as well) - see this HBR article for interesting data on the indirect effect of online ads.