78% of corporate organizations feel threatened by digital start-ups. These start-ups disrupt the marketplace, the consumer experience and entire industries by the rapid adoption of new technologies and the agility to deal with fast-paced change. When these start-ups and scale-ups grow further, their focus on product development and marketing will broaden and they will need to pay more attention to their workforce. As a result, the HR function will be confronted with finding a balance between the need to create a future-fit structure and to preserve the cultural essence of the business.
Attraction, retention and engagement
Digital start-ups are considered a main competitor for corporate organizations in the war for talent, but interestingly, just like corporate organizations, they rank attraction, retention and engagement as their top HR priorities. When discussing this during a round table, it became clear attraction is their main challenge. This challenge is simply due to the fact that the businesses are expanding rapidly and looking for additional employees to support this growth.
Reputation and purpose are the main attraction drivers.
Start-ups are attracting employees by having a reputation as a great place to work and by the strong external projection of values and purpose (e.g. environment-friendly solutions, helping people with diseases). To review the right fit with the company and business culture, (standard) job interviews are typically used. Only one out of three start-ups uses assessment tests in the recruitment process, whereas assessment tests are more common for corporate organizations.
To retain and engage employees, a limited number of businesses (22%) are using assessment tests for the purpose of employee development (again more common for corporate organizations). In addition to using reputation, values and purpose to retain and engage employees, the start-ups and scale-ups are focusing on providing challenging work with a steep learning curve. Typically, in situations of rapid growth, there is an abundance of challenging work. Digital start-ups often have no formal career development framework and learning and development curriculum; this typically follows when the company is further maturing. Currently, half of the start-ups still agree that despite the lack of formal learning and development opportunities and a career development framework, they do a good job providing opportunities for advancement and promotion.
Transition from founding to leading mindset
With the specific start-up culture being key to attracting talent, most of the start-ups that were represented during the round table discussion are in agreement that leadership is crucial to defining and maintaining this culture. Surprisingly, only one of the participants in the start-up study identified leadership effectiveness as a top HR priority at present, but also for the next three years.
Although many participants did not rank leadership effectiveness as a key priority, they did agree on the importance of leadership effectiveness. Leaders within these fast-growing digital start-ups are typically the founders with strong drive and passion for product development, but not necessarily with the people focus that is required as the business expands. Interestingly, most start-ups see leadership effectiveness and the transition from a founding mindset to a leading mindset as a shared responsibility between HR and the business and not necessarily as an HR topic (which it is in most corporate organizations).
Structuring the HR function
Many fast-growing organizations use traditional ways to execute the HR-function, such as benchmarking pay levels against the market, structuring pay levels to control costs and having regular (annual) performance reviews.
Disruptive in nature, traditional in structure.
Start-ups typically have not set a formal pay-for-performance strategy. Our study shows that although 75% of the start-ups and scale-ups have regular performance reviews, less than half agree that employees understand how to increase their pay (44%) and that the business does a good job aligning pay for performance (46%), which is around 15% lower than the average in the general market. However, typical for the start-up scene, a high number of organizations (75%) agree that superior performance is rewarded, while only six out of ten employees in the general market agree with this statement.
When start-ups are further maturing, they will need to think about how to structure the HR function and execute the main HR processes. Will this be the conventional model: a job-based structure and rigid levelling, with a traditional job-based benchmarking and annual base pay and bonus cycles and job-for-life rewards? Or will they be frontrunners and implement a more future focused model: a work and knowledge architecture with skill-based pay, flexible rewards with forward-looking performance management and perhaps a larger proportion as contingent workforce?
Building blocks
The HR-structure within fast-growing businesses has a foundation in its unique culture and purpose that sparks motivation and fulfills the primary needs of employees to find meaning in their jobs. The next layers on top of that foundation need to fit with that culture and the leadership style. Building the HR function in a fast-growing business is a challenging puzzle, and in order to be successful a seamless fit is essential.
Originally published on WillisTowersWatson.com