Yiming Zhang: Why are We Against Controlling Labor Costs? | Code Class 2016

April 22, 2016 Toutiao CEO Mr. Yiming Zhang speaking on the Code Class stage

A Transcript of the Keynote Speech by Mr. Yiming Zhang is as follows:

Start-ups at different stages and in diverse industry sectors call for different business advice. Therefore, I’d like to share rather timeless and broadly applicable topics. After much thought, I decided that my question would be about talent, because the contributions of talented employees are enduring within a company.

Recently, there was an article widely shared on social media, a story of the wolf and the rabbit. Initially, I felt it made a good point. Everyone wants their team to be a pack of wolves and work vigorously. However, when you give it some more thought, you will notice a gap in this story. Where did the rabbit come from? Is it true that the entire cohort is rabbits? Is it possible for the wolves and the rabbits to transform into one another? If there are many rabbits and only a few wolves, is it still possible for you to transform them? Is it even possible to tell the rabbits from the wolves? The point here is we should think about the underlying problem rather than vent our frustrations and yearn for perfection. The key to solving these problems is the talent development scheme at a company.

Netflix had an excellent presentation titled “Culture and Values,” where they analyzed talent challenges at expanding companies. I will summarize this and incorporate my point of view in this talk. An early stage company should not have complex businesses. Companies are initially simple because they are only concerned with their product and technology, rather than marketing, public relations, media engagement or other aspects. As companies expand, their businesses grow more complex, and they need to hire many people, thus diluting the talent pool. This is when things get chaotic. What do you do about this? Many would propose setting up business workflows, draft policies and establish processes, the run of the mill solution in this case. However, after you became process-heavy, it will take longer to get anything done, just like in large corporations. What should you do then when this company now marches to toward elimination by competition due to losing its innovative spirit?

Let’s answer this question with the help of a diagram. The vertical axis is the business complexity and represents the intensity and multiplicity of coordination between your business functions. The red axis below is the Talent Density, which is the density of top performing talents within your company. The black axis is the weight and burden of processes and policies.

Four possible outcomes follow from this situation:

1. The company avoids more complexity but continue to operate a lean and dynamic team. This approach is not very helpful though, since a platform or scalable company must strive to absorb additional production capital and become a robust system. Only a system with high throughput is well established to generate value. Therefore, keeping a low complexity and a small team is not a real solution for a company aspiring to become a great enterprise.

2. Frequently, as the complexity of a company grows, so does the weight of its policy and process. Trying to prevent problems and chaos with processes might address the immediate concern but comes at a high cost; this is because policies-makers are incentivized to establish procedures as fine-grained as possible to avoid loopholes. This will inadvertently eliminate many opportunities for optimal solutions when we inevitably face situations that require flexibility and agility. With many restrictions, staffs members are discouraged from seeking the optimal solution. The accumulation of policies and process will be especially problematic when a company faces drastic changes that disrupt the industry as a whole.

3. An especially unfortunate outcome happens when a company does not even have any processes or control, and sink into chaos. While we may describe a company with heavy processes as “slow” or “bureaucratic,” at least we would not describe it as a chaotic mess.

4. An alternative way to resolve this dilemma is to increase your talent density. Recruit high performers who can grasp the big picture, bound by strong values, and possess a well-balanced set of competencies. Essentially, the two lower axis on this diagram would compensate each other. If you hire people who lack intellectual capacity, then your policies have to be overly detailed. However, when you employ highly talented people, you can set straight-forward rules, and distill them into just a handful of principles. You can then let the team align themselves with these principles, rather than hand-hold them with processes and policies. They might even be able to act solely based on their good common sense and understanding of your “objectives.”

Among the three axis, the most natural thing to do is often to create more rules, because it is always possible to reference other companies. When the entire industry is stable with a consistent business pattern, it is okay to add more rules, so they stabilize the collaboration between staff members. However, within a dynamic and developing industry, policies turn into a source of problems and a constraint on your flexibility. Many companies run into the problem eventually, as their business grows and they establish rules, and they begin to proceed with inertia. Such inertia constraints and handicaps the company during disruptions of the industry when they need to course correct with drastic internal changes.

We believe Toutiao is in the innovation industry, and constant changes over the upcoming years will especially challenge us. Therefore, we believe we must trim down the rules, so we can keep the organization agile and adaptable to the development of our business.

Thus we also believe the key methodology to sustaining business expansion is to ensure that the density of high-performers grows at a rate faster than the growth rate of business complexity. In our company, we distilled our key insight into the message, “carry out challenging work with exceptional colleagues.” Challenging work is precisely the kind of work with ever-increasing complexity that requires outstanding staff members.

How do you ensure that talent density overtake business complexity? There are three pillars to a talent development scheme. The first one is compensation, which includes both the short-term and long-term aspects. The second is career development, which ensures employees can achieve growth in the company. Finally, there is spiritual fulfillment, which ensures employees will be happy in the company, and they will find their work engaging.

How do you select top talents? How do you recruit and attract the best? In today’s talk, I will focus on the first pillar, an effective compensation strategy. I find this pillar to be the most vital compared to the other two, the pillars of development and spiritual fulfillment.

First and foremost, provide the best ROI. We often come across the word “Labor Cost.” Many companies treat their labor force as expenses and costs. Especially frugal CEOs may feel pleased about finding low-priced workers. In reality, when we measure ourselves against the U.S., we find labor costs to be exceptionally high there. Talented Chinese workers who migrate to the U.S. often double or triple their compensation. Labor costs in China, India, and Cambodia are all much lower, yet the U.S. remains superior in their development and progress. The principal reason behind this is that the U.S. makes better use of their top talent to achieve an excellent return, the key here is not the cost, but the value generated in return.

The core competency of a company is to maximize ROI by effectively configuring and allocating production factors and to offer a high ROI for its staff members at the same time. Thus, its core competitive advantage is the ROI, rather than cost control mechanisms. When a superior ROI is established, the higher the compensation is paid out, the higher the return on this investment. Thus, I have always instructed our HR department to pay at the top of the market range. We proactively require our HR department to re-evaluate market compensation annually, so we remain at the top of industry compensation band. On the other hand, we also require the company to allocate and utilize our talents properly. This attitude puts our company precisely in a development-oriented position.

Secondly, the compensation ceiling has to be high enough so you can attract top-talents who can generate excellent values for your endeavor. In the last couple of years, when I was interviewing candidates, I often hear an opinion that because Toutiao had been expanding for quite a while, they already missed the best opportunity to join. I was disappointed when I hear this. (Even though I had used the same thinking to persuade talent from other company when we first started.) For a decent-sized company, if all great candidates choose to pass on offers and join start-ups instead, this will constrain its sustained competitive advantage. An early stage start-up would often provide stock option incentives and give a significant stake to its engineers. As a mature company, you would naturally not be able to offer the same relative stake, because you already have a large team. So, how should we address this dilemma?

I think the stock option itself is not the key here. A stock option is only one way to give the possibility of rewards beyond expectations, and hope of financial freedom. So the real key is the possibility of an irresistible incentive which offers the opportunity for life-changing rewards. We decided to emphasize the proportion of our annual bonus within our compensation structure. So we announced an annual bonus that is up to 100 months of salary for the most outstanding performers within our company. With this, we send the message that regardless of the timing to join Toutiao, it is possible to have a very, very high reward. With this possibility and our excellent platform resources, we are more competitive than start-ups.

I noticed a complication with front-loading stock options. They do not reward the professional ability of our staff, but their acumen as an investor instead. The timing of the hire and allocation of equity and cash determines an employee’s compensation. Someone outstanding in their job functions may receive subpar compensation just because they opted for more cash when they joined due to financial pressure. Whenever it is feasible to do so, I strongly encourage a compensation structure that would defer incentive to after the results, such as at the end of the year. So we can provide more incentive based on an individual’s contribution rather than their investment decisions.

Finally, compensation should be determined rationally and equitably, based on the job role, level and performance evaluations. Our studies found that biases not related to performance often influence the compensation level, such as personal familiarity, market rate inflation, and perceived tenure. Thus within Toutiao, we set compensation to be based on job roles and levels, which reflect the sustained baseline contribution of an employee in his domain. We do not allow business managers to control compensations directly, but only via job roles. We also do not consider compensation history or compensation in our employees’ previous jobs. Such factors will not impact the leveling decision. HR will consider the job role and level, factor in the current supply, demand, and competitiveness of the talent market, and construct the offer.

When we perform our annual performance review, we hope to treat this process as a new round of interview. We ask what we would offer if the employee were to re-join the company and what compensation should they earn if that is the case. If you would offer an exceptionally high job level to someone, then it’s time to consider substantial raises to be commensurate with his rapid career development. From the perspective of your industry, if you can find someone qualified to be the CEO of his start-up, then he should earn an excellent compensation as well.

With the same evaluation technique, if an employee is deficient in some respects, consider whether you would still make him an offer, and decide whether reassignment or termination is required. Because the working relationship in a company extends beyond doing business, there is often a bias premium from the familiarity between colleagues and managers. Therefore, we encourage managers to evaluate rationally, and imagine whether they will be relieved, merely accepting, or very disappointed if an employee were to resign and move on to a better role elsewhere.

A CEO should also be an excellent HR executive. Imagine a company as a product with three outputs. The first is money, the inflow of financial resources. The second is the inflow of opportunity and information, the awareness over new industry developments and changes that challenge a CEO’s judgment. The third is the inflow of talent. A company’s output is its profitability, its product, and the product and services. The relationship between the input and output is determined by the quality of its inputs as well as their allocation. Are you using your financial and human capital effectively? This control is the purpose of management. Because the inputs, and the management of this input, determine the output. So, the most critical consideration besides a company’s business direction is its talent input.

Finally, not only does a CEO need to be an excellent HR executive, but HR professionals must also be outstanding HR professionals. Currently, the bar for HR staff in our industry is low. I think the role of HR professionals should extend beyond recruiting. They should participate actively in a company’s organizational management, advice CEO and business managers about staffing and talent utilization. They must dive deep into a company and have organizational competence. If you can precisely understand the business objective and derive an understanding of the role and the talent pool in the industry, then all of the top talents in the industry are yours to use. This is because talents are in constant flux. On the other hand, someone who cannot properly understand talent is not in true possession of his employees. Often, a low performer in one company achieves great success by going elsewhere, or by founding a start-up. This situation indicates that the company was not in real possession of this talent, and there is a breakdown in understanding or utilization. If I were to propose a higher bar for the HR profession, it would be someone who can author a book like “How Google Works.” If an HR professional cannot understand how to organize and motivate people to create efficiency, but can only work on routine work such as recruiting, then there is still a long way to go towards excellence.

This sharing represents some of my personal understandings. Our company is still in a constant and diligent learning process, and we hope to improve ourselves by exchanging ideas and working together with everyone here. Thank you all.