Every company is a meritocracy

Meritocracy is often denigrated as a sham to prop up the privileged or politically connected. However, most founders I've met strive to organize their company as a meritocracy based on performance.

Are business leaders ignoring reality, or is something else going on?

What is a meritocracy (in theory)?

In a meritocracy, people earn opportunities, raises, and promotions based on their demonstrated performance. In this paradigm, effort, potential, and personal circumstances are not involved in evaluating people for performance.

How else can you run an organization?

In the extreme you can reward people based on a lottery (for opportunities, raises, promotions, etc). A company could also be run by rewarding people the owner likes the most.

What's extreme but still relatively common is dictatorships (or corporations owned by a single or handful of partners); often, rewards are based on loyalty. Whoever demonstrates their ability and willingness to prop up the boss is rewarded.

Where do meritocracies come from?

Although some will argue meritocracies are attempted because they are morally right, or the best system, they're also enforced by law to some degree in the US.

Fiduciary responsibility

Underpinning many of the laws that make corporations possible is the concept of "fiduciary responsibility," where the leaders of a company are personally responsible for making sound decisions that benefit the company's shareholders.

This forces the executives in a corporation to at least attempt to maximize the company's performance (make and grow profits). In turn, this forces executives to set up their corporations to incentivize activities that increase the company's performance. (theoretically a meritocracy)

It's rare to see large companies run any other way. Executives who ignore these laws will find themselves out of a job and possibly in jail.

US employment law

In the US, there are many laws about what factors you can or cannot consider when hiring or firing people (at-will employment laws, discrimination laws, etc).

In some US states (those that don't allow at-will employment), you can only legally let go of someone for poor performance, bad behavior, or if the company needs to do a layoff. How you measure performance can be challenged in court. If a company's standard for measuring performance isn't objective enough, the company will be legally liable for damages to the people affected.

In this way, employment law also reinforces the concepts of a meritocracy in the workplace.

Where meritocracy goes wrong

In jobs where it's easy to measure the outputs objectively, it's easier to directly measure performance. (Sales jobs => revenue generated)

If the outputs from a job are variable in value (R&D) or farther from revenue generation (HR), then performance is harder to measure objectively.

Where meritocracies break down is in how they measure performance when it's more subjective. When this isn't done well, the company gets more political and toxic.

Might makes right

When humans are involved, political power (physical strength, political connections, team size, control of budget) often decides an organization's hierarchy.

In corporations, leaders attempt to use other principles to organize the company (merit, tenure, credentials, etc), but political power always works to re-establish itself as the organizing principle. It takes constant and active work from leaders to maintain a system where merit is defined by performance and skill instead of political power.

Measuring proxies

When measuring performance for a job is more subjective, leaders will often attempt to measure metrics that are related to performance but aren't a direct measure.

These proxies are easier to measure objectively, but each proxy cannot answer the performance question alone. Generally, the goal is to use a combination of proxies to create a set of metrics to measure performance for that role. Often, these proxies are in slight contradiction in a way that the combination of constraints incentivizes the intended behavior.

Bad proxies

Measuring performance based on tenure, likeability, agreeableness, who they are related to, etc, are often the worst proxies for performance (if the goal is to be as objective as possible). In practice, they're more likely to measure political savvy than high performance.

Better proxies

If the job is a leadership position, it's better to measure whether their team hit pre-determined company goals (and how quickly) as well as measure how well that leader can retain talent. Whether they hit a goal is easy to measure. Retention is easy to measure, and together, they may be able to align the leader's goals with the company's.

If a job is building software, companies will attempt to create more objective measures of the size of a project (story points, t-shirt sizing, etc) so that teams can be measured more objectively about how fast they're building. These are more objective than a finger in the wind, but not all story points end up being equal.

These are better proxies, but there are no perfect proxies (the map is not the territory).

Every company is a meritocracy

For those who directly attempt to build a meritocracy based on performance, their systems will always be imperfect. At least they're defining merit and rewarding it.

Others say they are a meritocracy, but if you dig deeper, they don't reward performance in any meaningful way. These organizations are still rewarding people based on something (loyalty, likeability, political savvy). That something is the company's definition of merit.

Even organizations that don't claim to be meritocracies will have systems for rewarding people. Whatever that system is will reveal that organization's definition of merit.

Only an organization that randomly assigns rewards can truly be a non-meritocracy.

Fixing meritocracies

There will always be extreme views on this subject. But in my experience, most people are in the middle. After some discussion, most folks will admit they favor meritocracies if they can be implemented well. (big "if" for some folks)

Here's how I've seen meritocracies work in real life.

Define the organization's goals

Is the goal to change the world? To build passive income for the founders so they can retire? To build something cool?

An honest assessment of the organization's goal dictates what incentives align employees with owners. Being dishonest about the true goals often leads to owners defining merit differently in word than in deed.

Be honest about what's directly measurable

Not every role will have it's performance be directly measurable. Measure directly what you can within a role, and be honest about the parts where you can't.

It's ok to call that out with the team: The organization will attempt to measure performance as objectively as possible, and it won't work perfectly the first time (or maybe ever).

Decide how you'll measure performance when it's subjective

The hardest exercise will be for leaders to define performance metrics when performance is more subjective. Take the time to think through metrics that are as objective as possible while not losing the nuance of each role.

Take the time to think through the second-order incentives of measuring performance with just those metrics. Is there a way to game the system with these metrics? Can we prevent or detect that behavior?

Be explicit and abide by the metrics

To run a company as a meritocracy, you first must define merit for every role. Next, you must be explicit. Without being explicit, employees will be unlikely to guess the right behavior on their own.

For meritocracies, the rubber meets the road when it's time to reward performance based on the agreed-upon metrics. If the metrics are telling you that the performance of a person or team doesn't line up with your intuition on their performance, there are two reasons:

  1. The metrics are doing their job of overriding subjectivity when objectivity is possible.
  2. The metrics need adjustment.

Usually, it's both, but it's disastrous not to abide by the metrics when rewarding performance. That'll teach people that metrics aren't the true system for measuring performance. At the same time, incorrect metrics must be re-evaluated and updated going forward.

Re-evaluate and admit mistakes

The metrics will always be wrong; they will always need adjustment. The key is adjusting them after each cycle, not as you decide on rewards.

Adjust the metrics and be honest that they will always need adjustment, and they're getting better over time. If you've hired well, this practice will build trust in the organization. People will want to work with the leadership team to improve the metrics so they're better going forward.

Don't give up

If every organization is a meritocracy that measures merit in some way, it might as well try to build a system that rewards merit in a way that's fair and helps the organization achieve its goals. It's hard, but it's worth it.