Aspects of a Compensation model

In this blog, I aim to list and explain the considerations regarding Compensation Models in healthy teams, based on transparency, intrinsic motivation, and decentralization.

Why?

A compensation model that is transparent, decentralized, and based on intrinsic motivation fosters a healthy team culture by promoting trust, fairness, and shared responsibility. Transparency ensures everyone understands the compensation process and its fair application; decentralization empowers each team member to have meaningful input, creating a sense of ownership and commitment; and focusing on intrinsic motivation helps in aligning individual interests with those of the team, encouraging personal growth, and fostering a sense of purpose. This combination cultivates an environment where contributions are recognized, valued, and rewarded equitably, leading to increased team satisfaction, productivity, and unity.

Key points to consider

1. Intrinsic motivation
2. Extrinsic motivation
3. Measuring value brought
4. Culture
5. Permissionless onboarding

Intrinsic motivation

Studies show that the more creative and complex work is, the more extrinsic motivations don’t work. Models such as reward punishment are just not as good for this type of tasks. In order to build a team that’s strong and has the motivation to realize the dream project - there needs to be a Compensation Model that motivates intrinsically.

Aspects of intrinsic motivation

A team member should have these things in order to be intrinsically motivated:

1. Autonomy - the urge to direct our own lives. Or in the context of a project/work - have sufficient level of independence, time and feel heard.
2. Mastery - the desire to get better and better at something that matters; Or in the context of a project/work - have the space to develop new skills, have options to change roles and become better every day.
3. Purpose - to do what we do in the service of something larger than ourselves; Or in the context of a project/work - to be value aligned and truly believe in the mission of the project.

In order to create an environment of autonomy and purpose, co-ownership is also crucial. In the traditional startup world, this is done through equity.

A 2013 study conducted by researchers from MIT's Sloan School of Management found that equity can be a powerful tool for attracting and retaining employees in a startup.

The study, titled "Equity vesting and investment", analyzed data from more than 4,000 companies and found that when employees are offered vested equity (stock that they receive gradually over time), they tend to stay with the company longer and show increased productivity. It found that startups that offered employees equity saw a 4-5% increase in company value.

The researchers attribute this not only to the financial appeal of vested equity but also to the increased sense of ownership and loyalty that equity can engender among team members. They concluded that, properly structured, equity compensation can align employees' interests with those of the company, incentivize hard work, and ultimately boost the company’s value.

Extrinsic motivation

The more stressed and financially dependent one is, the less productive and creative they are. There is a need for regular monthly payment, to ensure the feeling of security of the contributors.

So, Extrinsic or Intrinsic?

Both. The Missionaries vs Mercenaries conversation in the DAO space doesn’t bring much value, as the question is more complex - they are both valid and true. In order to have a high-performing and healthy team, there needs to be intrinsic motivation, but also realistically - everyone has bills to pay.

It’s also interesting to see what’s in between intrinsic and extrinsic motivation - co-ownership, growth and recognition.

Contributors are not all the same

Another thing to consider is that not all contributors are the same, and they don’t need to be in terms for what kinds of reward mechanisms they are interested in. People who are just getting into the project, don’t know the team yet are most likely not going to be as interested in ownership as the people who’ve been contributing for a while now.

Measuring value

In defining value, there’s lots of subjectivity. In order to create an environment of transparent, and feedback-based compensation, you need to give the autonomy to the contributors to self-assess. More than that, there’s lots of subjectivity when it comes to defining value. And The Wisdom of Crowds can help here. The wisdom of crowds is a book, written by James Surowiecki about the aggregation of information in groups, resulting in decisions that, he argues, are often better than could have been made by any single member of the group or..

💡 The error of the average is smaller than the average error.

That being said, I believe that this is where peer-to-peer assessment and distribution of funds kicks in.

Deciding who brings how much value is always subjective, no matter whether in a traditional company or not. Instead of having a top-down distribution of funds and guessing the value of the contributors, we can turn back to the community to assess the performance of each member this month. Utilizing the collective intelligence of the team.

Considerations regarding The Wisdom of Crowds

The properties needed for the Wisdom of the Crowd:

1. Reasonable crowd size
2. There is no definitive number, as it can depend on the complexity and type of decision being made. However, numerous studies suggest that the wisdom of the crowd becomes reliable and stable with a group size of around 100 individuals. With larger crowds, the accuracy of decisions does not significantly improve. A team of 100 individuals is quite big, and will most likely be split into smaller teams either way. There’s a way to lower this barrier though
3. Diversity is critical for the wisdom of the crowd due to a few reasons:
4. Different Perspectives: With a more diverse crowd, there is a higher chance of representing a wider range of experiences or knowledge, which can contribute to a more comprehensive and accurate collective outcome.
5. Avoidance of Groupthink: A sufficiently diverse group is less likely to indulge in groupthink or conformity. This ensures that individual opinions aren't lost or overshadowed, maintaining the independence of opinion that is vital for the wisdom of the crowd.
6. Reducing Bias: A diverse group can balance out individual biases and make the overall decision more objective and fair.

Onboarding permissionlessly

Recruiting contributors through bounties is a great way, because the contributor can assess if the culture is good for them, if the team dynamics are good, how’s the work itself and also make some money for the time that they put. Often in web3 core team members start from bounties, and then grow into a more committed role, because they’ve already proven their skills and the ability to work with the team, as well as had enough time to assess if this is a good workplace for them or not.

Culture

Although the discussed compensation model could be an effective way to distribute and measure value within a team, these measures largely depend on the team's health and culture. The team members should be comfortable having difficult conversations constructively. Transparency and peer-to-peer evaluation, although beneficial, could be harmful in a toxic team environment, leading to unnecessary comparisons and bias. Therefore, it's crucial for the core team and founders to invest in building a healthy culture from the beginning.

Conclusion

After doing a lot of talking to founders and contributors, as well as reading a bunch about what’s been done in the space, I firmly believe in a future with compensation based on collective assessment of value, based on intrinsic motivation and transparency.

Very excited about how the research develops. 🚀🚀🚀