Can Compensation help identify the right cultural fit?

The Ecommerce startup has been seeing a lot of changes especially in the last one year. The larger companies have become smaller (in valuation), smaller companies have vanished and the survivors, along with the new entrants have found that raising capital has become more difficult than ever. On the other side of the fence, it is a good time to be an investor, as the valuations seem to be more acceptable and less nebulous. It is mind boggling to see how an ecommerce company, which was, valued around $6.5 bn a year back is now struggling to find a taker for even a billion dollar. Has the valuation really dropped or was it over valued in the first place?

 

For companies and investors, the goal post has now shifted from GMV to profitability but the pace of growth stays equally important creating an inherent conflict. Amongst many other indicators, cost of customer acquisition has become an extremely critical indicator but it shouldn’t adversely affect the creation of long-term value for the company. For eg: A CEO of a niche fashion ecommerce company has decided that they will move away from a white label focus model to a mass brand focus model as customer acquisition looks good.In this process, the company is probably losing out on the opportunity of building long-term value and high margins through their own brands.This myopic approach is also evident in the kind of leaders that the companies have attracted and more importantly how they have been acquired– by giving unprecedented salary hikes and stocks. While value creation play through stocks is regarded as healthy, high fixed salary costs have proven to be unsustainable.Understandably, companies have given significant salary hikes to attract exceptional talent from established industries in the hope that these executives willhelp them go to the level next.  This trend exhibits a relation between culture fit and compensation, punctuatedby the number of exits experienced in the ecommerce industry in last one year

The relationship between Culture fit and Compensation

There is no doubt that in the VUCA world, a candidate with the right culture fit is extremely important. Every HR and hiring team today is trying to work out a solution to easily evaluate whether a particular candidate is a good cultural fit or not.  While established companies in large industries have a relatively better idea of what cultural fit means to them, startups are understandably nowhere close to this. However, if implemented properly, they have an inherent advantage to use compensation as a litmus test. While interviewing candidates, all organizations are looking for individuals who canadapt to a chaotic and ambiguous work environment and the decisions made are often ‘inferred guesses’. The fact remains that nobody can guarantee the right cultural fit becauseinvariably in a time bound interview, we are able to see only two aspects:

1. What we want to see and

2. What the candidate wants to show. And unfortunately what really matters to us lies between these two.

If you use compensation as a tool to put culture fit to test, it could give you desirable results.

  • Have a policy to only match current CTC (may want to take into consideration relocation related expenses and impending compensation hikes)
  • Significant wealth creation opportunity through stock play – more than current
  • Be transparent with candidates during the start of the search engagement in order to set expectations and save time
  • Be forthcoming with all possible information that you can share about the company
  • Create differentiators by building policies around non cash benefits to the executive and his/ her family

This will help in ensuring the following:

  • The executive isnot hedging his bets by taking a significant hike and a decent upside on stocks. He genuinely believes in the idea of the entrepreneur and believes that this is a scalable and sustainable business and he will derive enough and more value in the long run
  • He is buying in to the risk that comes in with such a move but is not worried about family lifestyle since his annual cash flow is maintained (hygiene)

Most importantly, the converse of this is also true – someone who comes in for a high fixed cost will jump out of your ship at the first signs of trouble in the water. Going by this approach would mean that you have to take some tough calls, the already slim talent pool will become slimmer, you will take longer to close some critical positions but when you do hire the person, you can be assured that you don’t have to worry about managing the individual and that he has jumped in with both feet because that is the only way this alliance will work.