Skin in the Game

When it comes to watching sports, I’m a real homer: if Boston’s four major professional teams aren’t in it, I’m not interested, except maybe in the final few minutes of a close game. So last weekend’s four NFL playoff games promised to be a real snoozer for me – the only pertinent question was who would play the Patriots, coming off their bye, the following weekend.

But while I was hanging out with some of the neighbors on the prior Thursday night, my weekend plans suddenly got altered. As I tossed in another lousy pair of hole cards en route to a quick exit from a game of Texas Hold ’em, my friend Jack said to me, “We’re putting together an investment syndicate for this weekend’s NFL games. Do you want in?”

Now being a homer with a bunch of successful Boston teams usually provides all of the “action” I need to fill in the occasional gaps in my week’s professional activities. While I’m not averse to $5-10 table stakes as a means of keeping score in a card game, Las Vegas, Atlantic City, and Foxwoods hold no attraction for me. But I sensed some new solidarity developing among the guys in our local ‘hood, so I decided to be a player, too, at $25 a game.

Eight guys, eight hundred bucks, four games, picking against the spread. Heavy negotiations among us in the selection process, majority rules. We pick three favorites – the Saints, Colts, and Ravens – and one ‘dog – the Packers. We connect with our emissary in Vegas. Surprise! He’s making the same picks for the same bucks.

Cut to the chase: Without a stake in the outcome, none of us would have had the staying power to see the four games through to the Eagles’ last-gasp intercepted pass by the Packers on Sunday night, which allowed us to break even. None of us would have resisted the pressure to be “doing something constructive” with the weekend. (Our wives responded by going en masse to a movie.) But we were focused. Our chosen teams needed our support – right through the TV set. Las Vegas needed the economic boost.

Having thus experienced once again the benefits of making a real financial commitment, I went back this week to my youngest client company (4 years old) described in the lead above. The First Believers, who are now middle managers, are restless. Despite the fact that a number of them have stock options, most feel that their sacrifices, which have been recognized positively by the founders, need to be offset by something more tangible. But the economic model isn’t yet proven – the breakthrough to sustainable profitability has yet to occur.

These second-tier managers are the ones who can make it happen. As the company has grown, they’ve added direct reports and gotten caught up in administration, in process. They have begun to confuse input (“I’m putting in a lot of hours…”) with output (“I need more people to get that job done on time…”).

So the senior management team has decided to rekindle the entrepreneurial flame among the First Believers before they take their vested options and start looking elsewhere. To stay on board, they will need skin in the game in the form of…

  1. Incentive compensation – No increase in base pay. The greater reward is variable.
  1. Aggressive goals, with a significant payout for achieving them (up to 20% of base).
  1. Frequent feedback – “Here’s how you did last week…”
  1. Tangible reward – The payout comes frequently (at least quarterly) and publicly. Among them, everyone knows who won.
  1. Negotiated and consistent metrics – “I win or lose on the measures I choose.”
  1. A full understanding of the economic model – how the game is played, and won.
  1. A commitment to quality in product, service, and delivery. No more trial and error learning curve.
  1. Enthusiasm, without which nothing great will happen.

The “boys in the ‘hood” had no impact in the outcome of last week’s NFL games, nor will the cash that we let ride do anything more than keep us engaged for another weekend. But the energy and camaraderie that resulted from our shared enterprise will be a great salve even if we eventually get burned. And if that happens because my Patriots failed to cover the eight points that I am giving the Jets, so be it. As long as we win by one, we’re all happy.

Draining the Swamp

Thinking of adding more employees? Consider the following calculation by Doug Tatum, excerpted from his book No Man’s Land :

7 year, 8 percent term note
BorrowedEquivalent SalaryMonthly AmountAnnually
$100,000 $1,559 $18,703
150,000 2,338 28,055
200,000 3,117 37,407
250,000 3,897 46,759
300,000 4,676 56,110
350,000 5,455 65,462


This schedule lays out the capital cost equivalency of a single employee making approximately $56,000 per year. The economic equivalent of hiring one person can be compared to borrowing $300,000 at 8 percent, amortized (i.e., paid back) over seven years. In other words, paying a salary on $56,110 requires the same amount of resources as borrowing and repaying $300,000. What this means is that hiring three people is the economic equivalent, on a cash basis, of borrowing $900,000.

Alligator Bites

“I recently had an interesting meeting with a locksmith… this locksmith was penalized for getting better at his profession. He was tipped better when he was an apprentice and it took him longer to pick a lock, even though he would often break the lock! Now that it takes him only a moment, his customers complain that he is overcharging and they don’t tip him. What this reveals is that consumers don’t value goods and services solely by their utility [or] their benefit from the service, but also [from] a sense of fairness relating to how much effort was exerted.

“Now imagine how much more people would pay if they knew the effort that goes into all kinds of products and services?”

“Irrationally yours” blog, by Dan Ariely 12/15/10