The Game with Alex Hormozi - Managing Talent To Drive Higher Performance | Ep 646

Episode Date: January 29, 2024

It’s about allowing them to have complete control over their goals. Today, Alex (@AlexHormozi) explores an innovative approach to performance management and compensation structure that drives higher outcomes. By leveraging variable compensation tied to personal goals aligned with company objectives, the strategy fosters motivation, job satisfaction, and reduced employee churn, benefiting both sales and non-sales roles.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(1:12) - The concept of variable compensation(3:18) - The power of autonomy in goal setting(4:32) - The impact of social pressure on goal setting(5:53) - The benefits of this approach for employees and the companyFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition(This episode is a re-run. Original airdate was December 21, 2021)

If everybody on the team has to say what their personal goal is, and they get to set it. And if they hit their personal goal, as long as it's aligned with the company goal overall, if they set that goal, they can set it as bigger as little as they want. What happens is that the social pressure of wanting to set good goals automatically self-corrects. Welcome to the game where we talk about how to sell more stuff to more people in more ways and build businesses worth owning. I'm trying to build a billion dollar thing with Acquisition.com. I always wished Bezos, Musk, and Buffett had documented their journey. So I'm doing it for the rest of us.

Please share and enjoy. A good friend of mine in my building had a really, really interesting way of managing talent to get and drive higher performance and output. And so the reason I wanted to make this is because at the end of the day, every entrepreneur has the same problem, which is they need better people. And they need to get more out of the people that they have. And a lot of that comes from culture and training. But every once in a while, you stumble upon a process that has teeth. And so I think it's super cool because it is reinforced through multiple different psychological levers. And it's got really cool stuff to it.

So let's have it. So one of the things that he shared with me that he did is that he has a level of variable compensation. That's not new. It means that there's some level of performance, check marks, et cetera, that they have to hit in order to get paid. Makes sense. Now, the way that most companies do this, and I'll tell you that what we've done up to this point for us is that in positions that are not directly like sales, for example, it's very easy to have a

commission structure, et cetera. But for, let's say, leadership and executive positions, and so this is important if you're trying to build your, you know, your solo entrepreneurship into an actual company that has values, you need to have people who are all lined and driving hard like owners towards the same goal. And honestly, it's much more enjoyable that way. And so the way that we have split our things up to this point is that we do something called MBO, such as managed by objectives, which are for the company and then also for the individual. So we usually split them 50-50. So let's say we've got a leader who, let's say like a director of marketing.

They're not going to like get a sale, but we know that they're in charge of all of the, you know, rainmaking for that particular business line, right? And so they might get, let's say half of their, so they might have a base. Let's just use round numbers. Let's say they're making their targeted earnings is $200,000. We're going to give them $100,000 base and we're going to give them $100,000 of variable compensation, right? Now, of that variable compensation, that half, we split that again in half, half of that,

which would be 25% of their total cost, is going to be of whether the company grows overall. So if we hit X, Y, and Z metrics, they'll get, you know, of growth or new sales or profitability, then they're going to get those things, right? And the other half is going to be on whether they did something personally that they've control over. So it might be adding a new channel or a new platform or creating some sort of process that we want to automate or bringing in a new XYZ manager, right? Those would be things that they have complete control over that we can check box. Even if the business doesn't do well or it doesn't hit the goals of

growth or just, you know, marginally grows, they can still get half of their variable come. So if you've got 100 grand, they got that guaranteed and they've got 50 that as long as they do all their stuff, they've got, and then they get to purchase being the upside of the business if the business overall grows, right? And so that is how we've done it up to this point. It's worked well, right? But what he presented was a different way that I really, really, really liked. And a key part of this is that the management by objectives and the things that we set, we set for our team. Okay, so they don't have a choice in it. They just accept it or, you know, they might try and negotiate a couple terms, but that's, that's more or less how the

compensation structure works, right? With the way that he sets it up is that every position has a level of variable compensation. And that level you can determine, you know, you can say you want it to be 10 percent or it can be 20 percent or it could be 50 percent. You know, it depends on the role. But But maybe let's say a frontline customer service role, right? Let's say 15% of their compensation variable. So if they're targeting, let's say, $50,000 a year, then that would mean $7,500 would be potential to be variable. So that would be like, whatever, $600 a month-ish, right?

Of their compensation is kind of in the air hung in the balance. And so here's the cool thing. What he does is that he says, this is the variable comp, and you get to set the goal every month. So it's a 30-day rolling goal. And every month, they get to set the goal of what they're going to do. They have to show up publicly. So you get some social pressure in there, right?

You also get autonomy because they're the ones who are picking it. And so here's what's cool is that if everybody on the team has to say what their personal goal is, right? And they get to set it. And if they hit their personal goal, as long as it's aligned with the company goal overall, like if it's going to contribute to that goal, then they can make it, right? They have to obviously prove that it in some way furthers the overall division or department's goal. But as long as it's aligned with that, the extent to it and the amount that they have to take is got to be quantifiable, right? If they set that goal, they can set it as bigger as little as they want. What happens

is that the social pressure of wanting to set good goals automatically self-correct. So you might think, well, what if they just say they get, you know, a half a percent, you know, improvement or something like that. And then they hit it. Cool. But the thing is, is that people on the team are going to be like, dude, come on. That's the goal. And then all of a sudden they raise it. But they raised it. No one else. And so they have complete autonomy and ownership over that goal. Now, for you as an owner, what you can do, obviously, is let's say that you're targeted earnings for the person's $50,000 a year. That's fine. You just take 15% and make a variable. So like they have the potential to earn the whole thing or they have the potential to earn somewhat less.

Like, don't worry about the variable comp. The piece is that we have intermittent reinforcement, which is another way of saying variable reward for an employee. They have complete autonomy and they have social pressure and they have some level of competition. And this is really useful in roles that don't necessarily, A, directly, you know, tied to the bottom line like sales does and are more difficult to quantify, right? And so this gives those roles the opportunity to feel like they're contributing to the overall growth of the company and have something in the balance that matters. So I wanted to share

this with you because I thought it was really, really cool. We're going to be implementing stuff like this in some of our portfolio companies, but I thought it was just incredibly sexy. I didn't want to, I didn't want to keep it from you because I think it's really, really cool because there's just so much psychology behind doing things this way. And it just allows everyone to participate and grow as employees within the company. And as a tangential tertiary benefit of this, your churn will go down because people will feel like they're making progress. Pretty cool, right? They'll feel like they're making progress in that they are growing and that they are challenging themselves. And that at the end of the day is what you want every workplace to fulfill for your employees. Now, whether they feel

fulfilled, you have no control over. But if you can create an environment that increases the likelihood that they feel that way given a normal human construct, I think that you're going to build a better business.