The Key To Scaling Your Company Is Hidden In Plain Sight

A board member, concerned about a CEO's performance, posed this question in a private conversation.

"I've noticed that as the company grows, employee morale seems to be decreasing. What steps are you taking to address this?"

"We're focused on scaling and achieving our financial targets,” the CEO replied. “Employee engagement is not a priority right now."

"But without engaged employees, how do you expect to maintain the company's success in the long term? Employee turnover will only increase and productivity will decrease. You’ve lost a few key people already."

The CEO frowned, turning to gaze through the window at the busy street outside.

"I understand your concern, but we need to focus on immediate results for this quarter. We can address employee engagement later."

The board member started to reply, but realizing the conversation wasn’t getting them anywhere, thought better of it and started to leave.

“I’m getting some coffee,” the board member sighed. “I’ll see you at the meeting tonight. But I don’t think I am the only one on the board who’s concerned about this.”

The Key to Scaling Your Company

To a startup CEO, driven by technical passions or visions to change the world, the term “employee engagement” probably sounds like boring corporate HR language. However, employee engagement is the open secret to unlocking the growth potential of a tech startup.

In order to succeed, a startup must be able to build great new products that fulfill a painful need in a growing and accessible market. Excellent product development requires a carefully tuned environment that encourages experimentation and collaboration. There must be a high degree of trust and psychological safety; flexibility and creativity; and, above all, engagement.

The people developing the products—the designers, engineers, product managers, and so on—need to be fully engaged in their work in order to achieve the outcomes required by the business to grow and thrive.

That kind of environment can only be cultivated when it is championed directly by the CEO. It’s not only the responsibility of the leaders of product or engineering to keep those involved in product development happy and productive. It starts at the top.

Sadly, too few CEOs see it as important enough to warrant their close attention. That’s a costly mistake, both for their companies and the economy as a whole. Gallup has estimated the total cost of disengaged employees in the US to be $450-500 billion each year. You read that right—that’s half a trillion dollars!

While some of that burden is no doubt shouldered by larger companies, in startups the relative impact of that lost value is going to feel much more severe. While most startup CEOs tend to focus on sales, revenue, and maybe product, they often neglect the importance of cultivating a happy and engaged workforce.

No CEO would publicly downplay the importance of employee engagement. But the proportion of their total attention that they direct to any particular topic on a daily basis reflects their true values and principles.

When Growth Stalls

New founders often think getting to product-market fit is the hardest part of building a company. And it is hard; there is no question about that. But they seem to assume that once you’ve nailed that part of the startup game, it’s all smooth sailing from there. It is not.

In the beginning, a small group of dedicated founders and their first risk-tolerant hires diligently grind away at building the first version of the first product for the first market the company seeks to service. In those tumultuous and fast-paced early days, direction and communication is relatively fluid between the CEO and the team. There is a clear mission, and everyone knows what their job is. There are still enough people to seat at a large table in a restaurant for a company dinner. The CEO knows everyone’s spouse’s and kids’ names.

With the achievement of product-market fit come much more difficult decisions and excruciating tradeoffs for leaders, as the company scales up to 100 employees and beyond. A successful product creates new expectations in customers’ minds for continued innovations and creativity from the company. They think, “well, you’ve solved my first problem. What else can you do?”

The product grows in complexity in response to customer demand. To manage that complexity teams get bigger. To manage bigger teams, more managers must be hired, and managers of managers. Sales teams expand, and marketing becomes increasingly important. The distance between the CEO and the people on the assembly line building the product becomes several layers deep. Before long, it’s no longer possible for the CEO to know the dog’s name and favorite hobby of everyone in their employ.

Then it happens.

The CEO receives their first report that employees are not engaged, in fact quite the opposite, and that some people are starting to leave for other companies that have a better culture. There are brewing conflicts between various teams and departments. Workflows are slowing down. Customer complaints are mounting. This is where many companies founder on the rocky shores of mediocrity, losing out to competitors and eventually being forced to sell or closing down altogether.

Boiled Frogs

How do employees become disengaged in the first place? It seems like yesterday that the buzz and excitement of building something cool, something customers really need, reverberated through the office. Now it’s just one crisis after another.

The factors that lead to disengagement of employees have been well documented over the years. To pick just one example, a study by Rastogi et al. in Human Resource Development Review in 2018 identified four key factors: lack of resources, lack of control, lack of creativity or complexity, and lack of support from the organization.

These and other findings echo those of Dan Pink’s best selling book Drive, often cited in our articles, that illustrates how intrinsic motivation for knowledge workers must comprise autonomy, mastery, and purpose. All three are relatively common for employees in an early stage company. But the loss of any three of these as the company scales will erode intrinsic motivation leading to disengagement and eventually attrition.

Autonomy often goes first. As the company workflows become more complicated, most companies respond to that complexity by adding process and management in a misguided attempt to control the uncertainty inherent in product development. Process and management are both important to growth. But more process also means less control and choice over daily tasks for those doing the work. Creative, intelligent people will quickly tire of these constraints.

Next mastery goes. Employees will outgrow their roles and positions, finding work that was once challenging to now be menial and repetitive. Without the opportunity for increased responsibility, including delegation of some of their earlier workload to newer hires, engagement further erodes.

Finally, purpose is lost. As the company struggles to find new markets and new sources of revenue, various projects and initiatives begin to compete for attention. The slow erosion of single-minded purpose leads employees to become lost in their own isolated pockets of situational awareness. Alignment breaks down, leading more conflict and disagreement among departments and staff about what really matters.

As these themes converge, employees’ excitement wanes, and the prospect of finding a new and better environment starts to look more and more enticing. When they ultimately decide to leave, they take a big chunk of the company with them, both in the form of the lost morale of their remaining colleagues and in the lost institutional knowledge they carry with them out the door.

The impact of employee churn cannot be overstated. Work Institute’s 2017 retention report estimated that replacing an employee costs the company a whopping 33% of their annual salary. The average salary in the US for a senior engineer as of this writing was $142,000 plus benefits. That’s almost $50k to replace every senior developer that decides to seek work elsewhere.

Breaking The Cycle

So how does a CEO properly manage this situation. The solution is both straightforward and yet subtle.

Like most things in leadership, employee engagement is not an outcome you can affect directly. You can only create an environment that allows it to emerge. But creating that environment requires immense focus and attention, and must be part of the leadership team’s regular work. In fact, it’s the most central component of company leadership.

• First, a CEO must become fully aware of the extent of the problem. They cannot hope to address the issue without a clear picture of exactly which aspects of the company are negatively impacting employee engagement. This awareness is best surfaced by some kind of diagnostic or assessment process. Diagnosing the problem includes more than just distributing employee satisfaction surveys. It requires going in depth with each employee through conversation and carefully reviewing that feedback for common patterns of disengagement.
• Second, once a thorough diagnosis has been performed, the CEO and leadership team must develop a comprehensive plan to address the issues that have been identified. This plan should include specific steps to improve employee engagement, as well as a clear timeline and measurable goals. The plan must be communicated clearly and frequently to all employees, so they understand the company's commitment to improving engagement.
• Finally, the plan should include ongoing monitoring and feedback mechanisms to measure progress and make adjustments as necessary. This can include regular check-ins with employees, revising the plan as needed, and celebrating successes along the way. Employee engagement is an ongoing process that requires continual attention and effort from leadership.

The stakes are high. Once a company is large enough that the leadership team cannot personally check in with every team member each week, factors that degrade employee engagement can increase unchecked until they are too broken to be fixed. It's critical for leaders to avoid letting the problem fester for too long.

However, if a CEO fully commits to creating an environment that encourages autonomy, creativity, psychological safety, and experimentation, the results can be astronomical. Companies that have such an environment regularly beat out their competitors in the marketplace because they offer products and services that are built by teams who are committed to the company purpose and feel deeply connected to their work.

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