Leading Wisely

Listen to Ricardo Semler's Podcast

Jurgen Appelo is somebody who is ahead of the curve when it comes to management. He has an approach that he calls Management 3.0 and he’s using it as his company, Happy Melly. Jurgen has a history of trying to reconfigure the way that people look at organizations and how they put all of the pieces together. He’s really coming from a different place, but he outlines some practical ideas to help illustrate the new world we live in.

Ricardo Semler (RS):

Can you talk a little bit about why you started Happy Melly and how you use Management 3.0 in your day-to-day operations?

Jurgen Appelo (JA):

I started as a software engineer many years ago, but I ended up as a manager of software organizations. Then I had to learn the ropes of working with people, because I first started by treating everybody like a computer - which didn’t work. After a lot of learning, I figured out how to manage organizations in a better way and I had great results. After I felt like I understood what was happening, I wrote a book called Management 3.0 and it allowed me to quit my job, become a speaker, and to start licensing my materials around the world. Currently, there are 200 people around the world who are teaching the classes that I wrote.

After a couple of years of this, I realized that I needed a company to organize all of this for me rather than having me do it myself. Then I realized that, if I’m going to start a company again, then it needs to be experimental and a place where we can practice what we preach and try out the latest management ideas. So, we do the silliest things just to see what works and what doesn’t work. For example, I have no contracts agreements with any of the people that I work with.

RS:

How do you go about dividing up your revenue and deciding on bonuses? Is there some metric or is it very ad hoc every time?

JA:

I call it merit money - money that that we earn based on our merits in the eyes of each other. So, we use a tool to give each other points throughout the month and it's like votes in a democratic system. Everyone on the team has 100 coins and every day we have opportunities to pay each other points for doing things that are very helpful. For example: "Thank you for helping me out," or "I'm sorry that I killed a web server. Thank you for helping with that." That appreciation turns into credits which build up over time. As the business owner, I decide how much bonus money is available every now and then and then the money gets distributed based on how many credits you have.

RS:

Even though you have a mechanism for attributing the points, the secret of the system is the ideology behind the weight that you give to each item, right?

JA:

It is switching from a dictatorship to controlled anarchy. In the traditional system, we all know that managers decide who gets how much in terms of bonuses. It's not the right way to go because they usually pay themselves the most, right? Having no differentiation between people in terms of compensation doesn't work because the science says that people feel entitled to more because they always overestimate their own contribution. So, they will feel demotivated if everyone just gets the same amount. You need some kind of signal in the social system to say, “Well, in the eyes of everyone else, you did a little bit more than other people,” or, “You did a little bit less.” After that, the social system will figure it out.

In terms of how much everything is weighed, that is completely unregulated. For example, I get five points for writing a great blog post or somebody else gets 15 points for taking over a video interview. As we’ve done this, we notice that we like the appreciation the most. The Thank You’s that we get is the best part of the system - even if we know there is money at the end of this process. I feel the pressure at the end of each month to get rid of my 100 points because I waste my votes if I don’t credit other people’s contributions. So, it’s a good pressure to have to force me to say “Thank You” to others.

RS:

There is there is always the risk that you will create a greater priority for things that are more visible and more short-term. That means that you're not able to give enough credit to the work that is done in terms of mid-term planning or other financial issues that are not evident at the time. How do you compensate for things that have no popularity and have no short-term visibility?

JA:

Good question. Right now we don't. The only thing we do is make everything transparent. Currently, we have over a year of data and the team is analyzing all of the credits that we have given to see if there are any patterns in the way that we grade each other. I’m sure that the visible stuff is more easily credited than the non-visible stuff. While we haven’t done a retrospective based on the data, we know that transparency is the first step towards steering the system in the right direction because we are all responsible for making this work for ourselves. One thing we tweaked in the beginning was that we originally only gave out credits once a month. We quickly found out that that didn’t work because we already forgotten what happened a month ago.

RS:

Let's say the points are the same for everyone but is there a base salary or base pay which is different for every person?

JA:

We do have a base compensation, so the credits are just on top of that. Our salary formula is actually quite quite egalitarian. It is only based on the amount of hours that people work. We don’t even take into account where people live - that is their own responsibility. If they want to live in an expensive part of the world, then that is their decision. If they want to live somewhere less expensive, then that's their decision as well. We pay everyone the same base compensation rate

RS:

As you grow, how will you attract people to your company with this base compensation formula? They’re used to a different system in their previous work, but you only have that one base rate which might make it difficult to recruit them to your team.

JA:

I'm glad to say that we haven't have solved that problem yet. I'm sure it will pop up at some point ,but we're only 12 people now. We don't need to solve all these issues from day one; we will fix them along the way as we get bigger. We are now seeing that some things need to be resolved like, “How do we split ourselves into multiple teams?” I'm quite sure that at some point we'll have to add to the formula a way to distinguish between significant productivity differences or market rate differences between different kinds of jobs. But, currently, the jobs are so fuzzy that everybody basically decides for themselves what they want to work on.

RS:

As you grow, you'll run into issues as an organization. Those issues will force you to reconsider some things that you did in the past and, as you do that, you may find that what worked in the past simply doesn’t work anymore. In fact, that may force you to undo some of the things that you liked most in the beginning. You could look at this is a reality of life, but you could also figure that some of this could have been foreseen in your design if growth is a natural prospect that you have in front of you.

I know that you’ve tackled this issue of “enlightened leadership” or “enlightened despots”. Basically, this asks whether or not you can create a grassroots management structure without any guidance from the ‘top” or do you need a certain amount of leadership? For you, you’re in a position to tackle issues as you grow and say, “We’ll figure this out when we get to it,” but that’s not much of an answer to the organizations that are already bigger and they want to implement something like this. How do you put all of this together?

JA:

I believe that organizations first need to be a network and then form hierarchies within that network instead of the other way around. Usually, organizations grow as hierarchies and then they struggle with the fact that a lot of what actually happens is in the informal network which always exists anyway. I would like to see my organization as a network first in order to optimize the effectiveness of the system. And then when the network works well, it needs to form a little hierarchy that is efficient that can exploit that business opportunity for as long as it exists.

For example, one of our team members split off and started his own little unit called Workshop Butler which is a very nice system to organize and host information around events for trainers and workshops. Now, after splitting off, it should become a little hierarchy that optimizes just that part. So Workshop Butler splits off and tt becomes its own unit. It also split off from the way we compensate people because they have to figure out their own way of compensation and hiring people, etc... It’s possible that 12 people is the maximum amount for Happy Melly and that we’ll split off anything that we find works well as its own business. Then, we’ll have to learn how to collaborate with each other. So, let's have a network where things can emerge and then they can optimize their business opportunity for themselves with local rules that are probably different than how we set ourselves up - including how pay is determined.

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