The Pricing of Output/Contribution in The Transaction Company
This is my reply to Ron’s comment on Transactional Remuneration Based on Work Relations. In that post I focused on remuneration in The Transaction Company. Now I’m going to write about the pricing of output/contribution and why we shouldn’t be worrying about it.
Here is the central bit of Ron’s comment:
But I’m going to push back a bit. For me, systems thinking is one key to the transformation of the corporation. One reason is that ultimately we have these complex systems that produce value in ways that aren’t always particularly clear to the managers of them, much less the participants in them. Your system seems to casually assume that people actually know the value of their output, or the value of someone’s contribution to them. So often, projects are 18 months away from launch and the revenue is uncertain, much less what any one person would do to help generate those revenues. Lots to talk about on this score, but what kind of system would you suggest for creating market signals akin to stock market indices or commodity prices?
The Transaction Company says only two things about the pricing of output/contribution:
- People are free to value output/contribution as they see fit
- Transaction value is mutually agreed upon
These two points are enough. To attempt to specify more would lead to a sub-optimal organisation. If you look at the market, you’ll see that it’s defined by the same kind of conditions. They may seem too minimal, but they work: the market is the most efficient and proliferating economic system today.
The rationale behind these two points is simple:
When we look at value, we see that it’s man-made concept. It’s a subjective measure of worth given by man to things. There is no such thing as intrinsic value. Therefore, value cannot really be “known”.
The Transaction Company recognises this subjective and fluid nature of value and eschews distorting it in any way, e.g. by pretending that there is a “right formula” to value output.
The second point simply says that people are free to set the terms of their work relations between themselves, implying that no central authority will be dictating how output is to be valued.
This unrestricted way for valuing output, of course, doesn’t automatically install a system with market-like mechanisms and efficiency. It only creates an environment that allows this to happen, gradually, depending on how fast people in company learn and grow.
We shouldn’t therefore worry how people are going to go about valuing output and contribution. They’ll sort it out, with excellent outcomes, so we should just step back and allow this to happen naturally. This is how the market functions.
An engineer, for example, might get the latest IEEE salary survey and check the average salary level that matches his skills, then aim at a monthly transaction balance that matches this pay level. If the company where he works is able to make economic use of his skills, he’ll get his reward. Else, he might look for a different place to work.
A salesman might try to negotiate a certain percentage that he finds acceptable and rewarding. If his sales contribution is valued, he’ll get his reward, maybe even a bonus.
But once again, we shouldn’t worry about these things.
The question of project management under uncertainty is a topic worthy of a separate post. For now I’ll just say that one has to distinguish between internal uncertainties (coming from within the organisation) and external ones (coming from the external environment), but understand their interplay as well. The Transaction Company has no formula for estimating revenues. But it does reduce business risk by making the company more nimble and responsive.
Very clean!
So, it would seem as though the success of this is predicated on the notion that each employee has personal money or a budget with which to pay peers? I imagine that in a start up, this suggests an infusion of cash into the system and some means of distibuting authority over how that money is spent? Or am I making this too hard?
Every employee in the Transaction Company gets a personal account. The employee uses this account to facilitate his transactions, that is, to pay peers/ receive money from peers.
At the end of the month (or any other suitable period) he can withdraw the remaining balance, from which the shareholder dividend is deducted (some percentage, e.g. 10%), and the rest is basically his (gross) salary.
This account system can be somewhat fine-tuned and elaborated to allow employees to withdraw money and make deposits at any time. The individual accounts can be technically regarded as current accounts.
I have plans to investigate the possibility of using a real bank to host the accounts, so that users can also earn some interest rate. It won’t be a big percentage, but you can still earn a few dollars each month, especially if your monthly transactions are in the order of tens of thousands.
I think this would become an interesting new service for banks once more companies adopt internal transactions.
All in all, I don’t think the technicalities of the employee current accounts pose significant difficulties.
Regarding authority: the money in the current accounts belongs to the employees, so you don’t really have to give them authority to spend it.
More fundamental questions arise with the procedures for internal investing.
Because employees can pay their peers, they practically turn into investors. I want to extend this concept, so that employees are free to pay not only for services rendered by their colleagues, but also to invest in fixed assets (such as machinery). My guiding principle here is “investments should be managed at the level (divisional, departmental, team, etc.) at which they are utilised”. Contrast this with the traditional situation where internal investment management is largely centralised.
To facilitate internal investing, especially for mid- and large-size companies, it makes sense to introduce an internal system for credit rating. Last year I had a talk with an analyst from Experian-Scorex (a big intl. firm in the business of credit rating systems, doing the back-end processing for a number of banks). Unfortunately, she told me they had no such systems. Again, here you have the potential for another interesting banking product.
Why is internal credit scoring needed?
Let’s say, a particular employee decides he needs a $10′000 infusion into his account for some new project. In such a case, the internal credit scoring system would estimate the credit risk and may suggest a (minimum) interest rate. This estimation may be based on his credit record and/or on his monthly transaction revenues. The money could be provided by a colleague or by the bank for example.
I hope I managed to answer your questions. If something I wrote doesn’t seem clear to you, please do ask for a clarification