People and investment value: lessons from the $2bn success story shareholders almost derailed

Zappos the online retailer has a novel way of motivating staff without excess remuneration.

Tony Hsieh, the CEO of Zappos spoke before the All Parliamentary Group on Wellbeing Economics at the UK Houses of Parliament late last year. Yet most people could be forgiven if they had never heard of him or of the company he manages. An online retailer (mostly) of shoes, which is also a subsidiary of, Zappos flies largely under the public radar, except, that is, for its hugely devoted customers and the increasing number of business leaders that are seeking to understand the secret of its success.
The company was founded in 1999, funded with venture capital provided by Hsieh, who became its CEO in 2000. It passed $1bn in sales in 2008 and was sold to Amazon in 2009 for $1.2bn – upon which it distributed over 5.8 times the initial sum investors had placed in Hsieh’s venture capital fund to its financial backers. Zappos runs independently of Amazon and now generates in excess of $2bn in sales, employing approximately 5,000 people. It is also a living embodiment of a company in which, from the top of the organisation to the bottom, staff deliver extremes of performance, not because Zappos throws money at them, but because the company taps into drivers of human behaviour that evolved before the advent of money. If you believe executive remuneration has lost its bearings, Zappos stands out as a beacon of rationality for the way in which its use money to attract, retain and motivate staff. We also believe it represents a valuable role model to investors that wish to encourage companies to more thoughtfully consider how they might use instruments other than money to achieve these three objectives. Yet, paradoxically, if the company’s shareholders had won the day, Zappos’ approach to creating investment value through people would have been strangled at birth. We describe the mechanism that companies use to attract, retain and motivate staff as the employee value proposition.Research and experience tells us that money is only a small fraction of such a value proposition and, indeed, is largely absent from conversations people have about what drives them at work. In contrast, the science also tells us:
• People care deeply about purpose – something to strive for, which gives our lives and our work meaning. At Zappos, this sense of purpose is conveyed by the company’s single goal: to make staff happy by making customers happy – and it will move staff around the organisation until they find a role they describe as their calling.
• We are drawn to working with people we can connect to. We are, after all, social animals that thrive and give our best when camaraderie is present in the workplace. Zappos’ approach to encouraging staff to make valuable friendships at work starts with recruiting only people who share the company’s values. (As Hsieh says: if they don’t treat the shuttle driver well, we don’t hire them).
• We value autonomy at work. At a biological level, feeling free to choose how we get a job done reduces stress and grants us access to our higher order thinking skills. This is why the mantra as Zappos is: If you’re passionate about it, run with it.
• We are driven by a desire to achieve mastery – to develop new skills in order to overcome challenges we have willingly embraced. Staff at Zappos are therefore largely recruited at entry level in the expectation that, with the right resources and support, they will unlock the potential to move to senior roles.
• We take pride in and are fulfilled by achievement and progress. Accordingly, Zappos engages in a constant search to find new ways to recognise staff and their performance.
• We are heavily influenced by the context in which we work, particularly how we are treated by our
line managers. Zappos believes if it gets the culture right, most of the other stuff – like great customer service, or building a great long-term brand, or passionate employees and customers – will happen naturally on its own.
The evidence suggests Zappos is onto something. Staff in companies with compelling employee value propositions are almost 90% less likely to leave than staff in companies with inferior value propositions. Such staff are 20% more productive than elsewhere; they deliver better customer service; their attendance is higher, and they contribute to better risk management. As a result, companies with highly engaged work forces tend to grow earnings more than 2.5 times faster than those with staff who are not highly engaged. And this leads to better stock price performance. Nonetheless, Tony Hsieh tells us he came close to being fired because his board members (who were also the company’s principal shareholders) wanted him to focus on selling shoes, rather than engage in “social experiments” that might make for good PR, but which would not move the overall business forward. Hsieh’s solution was to find a better owner – hence the sale of Zappos to Amazon. In the process, he negotiated himself a salary of $36,000 flat, with no bonuses or incentives; all in return for complete operating autonomy. According to Hsieh, these arrangements signalled that Amazon could not use money to retain his services: it just had to make sure that it created the appropriate context (effectively as his line manager) for him to be fulfilled at work. Hsieh adopts the same philosophy with respect to remuneration elsewhere in Zappos. Staff are paid at, or just above, the market rate for entry level roles. However, as they gain seniority, Zappos pays them more and more below the market rate.This formula works at Zappos because, at Zappos, staff do not work for money: they are driven by factors that have far greater appeal, and which have a far larger impact on performance. Yet, this is not an approach that was sanctioned by the company’s shareholder/directors until its sale to an owner that was sufficiently far sighted to share Hsieh’s insight that it was, and is, his “social experiments” that explain the company’s success. To our mind the lessons from analysing the Zappos experience are these:
1. Investors and asset owners that make executive remuneration a primary engagement focus run the risk of overlooking the material role that non-monetary factors can (and should) play in attracting, retaining and motivating staff to perform.
2. Companies that craft employee value propositions that work, which do not resort to using money to make them work, are few in number: but the results, measured in business and in stock price performance, are worth pursuing.
3. If we are to encourage more considered thinking in this regard amongst the companies in which we invest they at least need to know that investors care about this aspect of the people and investment value equation.

James O’Loughlin is a consultant and adviser to the UK Local Authority Pension Fund Forum (LAPFF)