Legendary Investor Ben Horowitz On How To Handle Raises And Demotions

Ben HorowitzBIAndreessen Horowitz co-founder Ben Horowitz

Ben Horowitz, the co-founder and general partner of Andreessen Horowitz, is one of the most experienced tech leaders in Silicon Valley.

He played a major role in creating Netscape in the 90s, and was the CEO of Opsware, a company that was later sold to HP for $US1.6 billion in 2003.

His VC firm Andreessen Horowitz has invested in some of the hottest startups, including Facebook, Twitter, Airbnb, and Lyft.

With so much experience, Horowitz has many interesting stories to tell, which he often shares through his personal blog. He even published a book titled, “The Hard Thing About Hard Things,” based on his own experience.

Last week, Horowitz spoke at Stanford for “How to Start a Startup,” a course run by Y Combinator’s Sam Altman, and explained the importance of having “one management concept.”

We pulled out some of the slides from Horowitz’s presentation and put together his advice on how to deal with employee demotion and what to do when someone asks for a raise.

Disclosure: Marc Andreessen, co-founder of Andreessen Horowitz, is an investor in Business Insider.

'This management concept is the thing I see CEOs mess up more consistently than anything else…It's the easiest thing to say and the most difficult to master.'

'When making critical decisions, you have to be able to see the decisions through the eyes of the company as a whole…Otherwise, your management decisions could have potentially dangerous consequences.'

For example: How do you whether to demote or fire someone?

For instance, what do you do when you have an executive who works hard and is well-liked, but doesn't have the skills to take your company to the next level? Demote or fire?

It's a tough decision. You can't just say, 'Sorry, nice effort, but you don't get an A for your effort. You get an F because I fired you.'

From the executive's perspective, a demotion is good in the sense that it enables him to keep growing with the company, while not feeling as embarrassed as he would if he'd been fired.

But the big question is: 'What's the equity package this executive has?' For example, should he still own 1.5% equity like other senior executives, or should you drop it down to 0.4% like other engineers, now that he's been demoted?

Because if he's no longer Head of Sales, how fair is that? Are you going to take away that equity compensation? How productive will he be if you take it away? Will people respect him the same way as in the past? 'In different situations and different levels, the answers will be different…all these things come into play, and you have to understand what it's going to mean to everybody, not just the person you're talking to.'

So while you may think you're dealing with one person, what you're really showing is a) what it means to fail on your job and b) what is required to maintain your equity. You've got to understand what it's going to mean to the rest of the employees, not just that one single executive.

Example 2: What do you do when an excellent employee asks for a raise?

You want to retain that employee, and you also want to be fair. Plus, you know you'll be liked if you give that raise.

How would the employee react to a raise? For him to get to the point of asking for a raise, he probably would have thought about it a lot. So if you give the raise, he'll feel very proud and happy about it.

This is the likely reaction.

The problem is: 'What will the other employees who did not ask for the raise think?' The employee that didn't ask for a raise may be doing a better job than the one who got the raise. They might think it's unfair. (And by the way, no raise remains confidential. It becomes pretty clear to everyone.)

So you might be sending the message that you're not evaluating people properly. You're saying whoever asks, gets it. The employee who didn't ask for a raise may even want to quit and go to a company that evaluates properly. He'll feel pretty upset about it.

Now, everybody in your company's going to feel like they have to ask for a raise all the time. 'Because if they don't, they may be missing out on a raise that they would have otherwise got…If you give out raises whenever people ask for them, you'll have a lot of people asking for a raise.'

So what do you do? You need to keep a formal performance evaluation process. 'The right answer on raises is you have to be formal to save your own culture.'

Because with a formal process, you're saying, 'I'm not going to give you a raise, but I'm happy to hear your story. I'll talk to all the people you work with and get an understanding to evaluate all the work that you've done.' And you're saying you'll only do it periodically, not daily. There's one process and that's it.

'Having a process like that, basically gets people to be more comfortable.' Employees don't have to worry about missing out on a raise opportunity, because they know your process.

'So the most important thing you can learn as CEO, though one of the hardest things to do, is you have to discipline yourself to see your company through the eyes of the people that you're working through, through the eyes of the employees, through the eyes of your partners, through the eyes of the people who you're not talking to, and who are not in the room.'

Now that you've seen Ben Horowitz's presentation…

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