Alternatives to stock options as a way to motivate software engineers

Question

I'm in the early stages of a relatively new company that is already cash-flow positive (despite the gloomy economy!), and I soon hope to hire some software developers.

I'm thinking about some kind of profit or revenue share as a way to align employee's interests with those of the company as I'd prefer not to complicate the company's ownership structure by allocating stock options.

Does anyone have any experience or suggestions about exactly how such an incentive might be calculated based on the company's revenue and/or profit? Clearly the goal is for the incentive to be meaningful without necessarily making employees so rich that they can quit their jobs any time soon :-) Note that this incentive will be in addition to a good salary, and that the skill set is quite specialized (statistics, AI, that type of thing).

Edit: We are developing a software product that is licensed by the month, you can read all about it here.

Answer 1

Random rewards for doing a good job, even small ones, are a proven behavioral tool for keeping motivation high. Like giving someone $100 in cash after they fix a particularly bad bug, for example.

Answer 2

The best incentive you can give your employees is a good work environment, managers that respect them, and a bit of empowerment in making decisions. If you do that, you'd be surprised at how much lower salary your employees will accept.

Joel has a pretty good writeup on this though: Fog Creek Compensation

Might I also suggest this topic? http://stackoverflow.com/questions/306708/must-haves-for-developers-office

UPDATE

Understood, but I'm obviously going to strive for all those things anyway. I want a way to give them a piece of the company's success, without granting stock options.

I think that you're overestimating the effect of monetary rewards. Believe it or not, it is possible to be paid too much. The reason being that employees begin to feel that they're doing the job for the money rather than feeling like they're doing the job because they like it. If you're already paying them a good salary, you might even hurt yourself by giving them more money.

So let me put what I just said a different way: Instead of giving them the money directly, why not spend it on creating a better work environment? There are lots of things you could do here. Buy better computers, better chairs, build developers their own offices, hire more developers so that they can work on more personal projects on company time, etc. Or shoot, you could even consider asking them what they want.

Answer 3

It depends on many things. For example, is your company developing and marketing a product, or is it selling consulting by the hour?

The product option could be royalty based.

Consulting wise, you could agree on a budget and give them a large percentage (such as 50%) of anything over budget. Remember to base it on profit, not income. And don't base it on salary, everyone should get the same bonus. Worked very one place I worked.

Another place I worked every department was it's own profit center and could manage income and spending by itself.

There are many ways of aligning. Also discuss it with the employees, and do a lot of calculations before deciding.

Answer 4

A couple things my manager does (or that I wish he did) that (would) make me happy:

1) Personal project time. Nothing big, but it's nice to spend a couple days/month doing something not entirely company related.

2) Weird rewards. Might just be my personality type but coffee mugs and pens don't do it for me. Some interesting things I've gotten are an utterly ridiculous company-branded swiss-army kind of thing, and a replica watch from China (it's really neat!).

3) Understands the programmers (or joyfully tolerates?). I currently have 3'x2' ASCII Santa Claus poster taped to a window next to my desk, in an open-style office.

4) Paid conferences. Even the ones not quite on-the-job related. Maybe not 10 conferences a year, but it would be nice if developers could get some professional development time that isn't the typical webinar or conference call. (Note: I'm actually still barking up this tree, as it stands)

5) PD Allowance. 500-1000 per contract year to buy our own keyboards, mice, and other peripherals that lets us customize our work area and make things more personal.

6) Local Admin rights on workstations. Obviously this depends on your IT security. At least let one computer in the office be the one that your employees can install "anything" on for when they need to get something done and can't wait 3 days for IT to get around to it.

Answer 5

If it costs less than two man hours, buy it for me, no questions asked.

(books, hardware, software, coffee machine, anything)

Answer 6

Accrual Bonus.

Its basically 10% of your salary paid to you after six months. So in essence you earn 110% each month.

Answer 7

Good developers do not need external "motivation". If you want to reward good developers and share the profits that is an excellent idea - but adding things as an "incentive" or motivator can cause problems.

My plan is to just allocate some set of earnings based on company performance and allocate that to employee retention/profit sharing.

I think a better way to keep employees and generate good will is to give more intangible benefits - like working more flexible hours, telecommuting, more vacation time, better work environment, etc. Some of these are things that initially look like costs, but end up generating incredible good will and long-term retention and low turnover. In the long run they save money and tend to attract and retain the best people you can find.

When I receive raises I always ask for vacation time in lieu of a raise. Not one of my employers has taken me up on it. The result of this is that I will continue my search for a more ideal employer and i will keep at the goal of building my own company.