It’s a Chain Letter!

…As Mary Jenkins exclaimed to Jeff Greenberg in the HumanTech story. HumanTech’s management formalized a  compensation system at the heart of most large companies – you’re paid based on how many people you supervise in the command chain beneath you. It’s called Span of Control:

When given enough levels of hierarchy, any manager can control any number of people – albeit indirectly. But when it comes to direct reports, the theory suggests entrepreneurs must respect managers’ inborn limits.
                                                                      – Entrepreneur Magazine, Jan. 2001

Those inborn limits are consistently about eight people. Successful managers delegate to no more than about eight direct reports, who in turn manage another eight or so, out to the edges of the organization. Everyone is paid based on the population beneath them, not, as we’ve learned, based on the company’s profitability. Since the constant ratio is about one manager to eight people, the size of the organization – and the CEO’s compensation – is based on how many 8-person levels there are.

So organizations are hierarchical and pay is hierarchical and command structures are hierarchical. If you wanted to found the next big success story, you’d plan to hire eight people and grow until you had to hire another 64 people for those eight to manage, then another 512 people for those 64 people to manage, etc. When you had succeeded to the point that you had five levels of management, then you’d have almost 30,000 people in your company, and your compensation would be some small fraction of all those workers’ average salary, times the 30,000 employees.

If your average worker earned $40,000 per year (sound low? the math says that 7/8 of them are at the lowest pay level), then you might be receiving 1% of 30,000 employees’ salaries, or about $12,000,000 per year. That sounds typically outrageous but, well, typical. It seems that most companies are based on the same algorithm as a multi-level marketing scheme, like Amway or Mary Kay.

In other words, it’s a chain letter! If managements sound cynical, you should see the workers.

Desperately Seeking the Right DNA

The only problem with your success formula would be how to get your people to do consistently valuable work and get your marketing and sales departments to represent and quantify that value to your customers, and get your organization to respond quickly to new opportunities and let go of old ones just as quickly and be sure you hired skilled people exactly when you needed them to respond to opportunities. Good Luck!

Some organizations have the DNA to do much of this well and most do not. Why not? Because most people don’t care about the company’s silly Mission Statement, they care about their pay check.

Why do most people come to an organization? Dreams? Hopes? Challenges? Recognition? Sorry, it’s the money. The most interesting thing about a company is its likelihood to spit out cash regularly and to look like that will continue for a while. If you’re not convinced, ask the kids’ mom what a company is for.

We don’t go to work for a company – We go to work for an accounting system. If we could find a reliable accounting system outside a company, we might go to work for it.

Xpertweb’s viral expansion plan is based on real mentors doing real training and getting 1% of the prices paid or received by their trainees. The mentors are also expected to find their own trainees – four to eight of them. But mentors are not expected to supervise their trainees. Instead they get automatic reports on the grades and comments each trainee earns or gives as they sell and buy. The mentor’s only concerned if the trainee disappoints someone who’s a proven fair grader. Otherwise, the mentor is busy herself, buying and selling under the peer-to-peer protocols she was taught by her mentor.

The formula is just like the example company: train four people who buy or sell $1,000 per month, and collect $40 per month from them. Inspire them to train 4 each, so another 16 people are sending you $10 per month. Keep the growth happening and in a couple of years you’ll have 1,364 people sending $10 per month into your account. Where’s the accounting system? It’s distributed among the web servers of all those participants and their mentors, each of whom has formally committed to do work they get good grades for, and no other kind.

It’s not a centrally managed accounting system, but it has all the characteristics of one, except there’s no way to change the rules. An accounting system is a money allocation system that causes people to do work today in reliance on a future reward.

People learn who to trust and who to avoid, so they work or purchase today in anticipation of compensation next week. They also form a confidence that their trainees will forward the required 1% fee every month. As those responses accumulate a history of reliability, they will be relied upon.

And that growing reliance is the basis of any ambitious microeconomy.

11:55:24 PM