The Power of Compound Interest in Company Building

by Josh Backer
COO and Co-Founder

Company culture has been a hot topic in start up land for years and even storied firms like Berkshire Hathaway identified culture as critical to their success. However, despite being such a hot topic, culture is also a hard topic to talk about directly and its often talked around with squishy concepts or described in examples specific to a particular company.

How do we talk about culture in a way that any company can relate to?

Photo by Brooke Cagle / Unsplash
Photo by Brooke Cagle / Unsplash

The best definition I’ve found is from the book Rework by Jason Fried and David Heinemeier Hansson of 37Signals:

“Culture is the by product of consistent behavior”

The key words in this definition are “consistent” and “behavior”, and I’ve latched onto both of them in building culture at Unified.

I’ve come to think of the consistency required in building company culture as a form of compound interest every company can leverage from its earliest days. Compound interest is a powerful growth mechanism that has consistency over time at its heart. Specifically, compound interest rewards consistent behavior over time with exponential results. Take this example:

compound interest rewards consistent behavior over time with exponential results

$750 per month deposited each month for 30 years into a vehicle that has a 3.5% interest rate will return close to half a million dollars at the end of that 30 year period with 44%, almost half, of the final balance delivered as interest. After another 10 years at this rate the final balance will be $800k, almost double the previous 30 year total in one third the time.

Here is the value for anyone who has a hand in company building: the compounding approach to value creation can be applied to culture. The underlying principle is the same. The key to success is identifying the key behaviors that lead to your desired results and perform them consistently over time.

Combining the two observations above, if we generalize compound interest to mean the exponential returns provided by consistent behavior over time and understand culture as the by product of consistent behavior we can really start connecting the dots and understand how to use the power of compounding to build a great company culture. Let’s drill down into consistent behaviors, what does that mean in terms of a company? The most straightforward way I’ve found to describe it is: a company’s good habits and its bad habits, what a company rewards and what it discourages. And, just like your habits or your reputation, even if you don’t put work into your company culture, you’ll have one anyway. It just may not be the one you want.

the power of compounding to build a great company culture

The alternative is to be highly intentional about your company culture. Around 2013 Unified moved into its second office where we filled up a small portion of the desks. Until then many of our hires were through our network and at the time I was running a team that would explode from 4 to 40 in two years. Staring at the rows of soon to be filled desks, I knew I could no longer count on trust established over years of personal relationships or osmosis to communicate my expectations for how the coming wave of new hires would work together as we built Unified. To meet this challenge head on I documented, in black and white, my expectations for the first time and rolled it out to my current team and new hires who joined my team. The goal was to document the most generalized behaviors we wanted all employees, regardless of function, to apply to their daily work. The key take away I learned was to focus on the most important behaviors and communicate them over and over and over. And, communicate about why you’re communicating this much about these behaviors. I didn’t worry about sounding like a broken record. If it takes seeing a TV commercial 6 times to convince someone to buy a different brand of toothpaste, imagine what it takes for someone to internalize a new habit in their work environment.

Photo by Adam Przewoski on Unsplash
Photo by Adam Przewoski on Unsplash

In their book Scaling Up Excellence: Getting to More Without Settling for Less, Huggy Rao and Bob Sutton describe two dimensions of organizational communication: the air war and ground war. The air war is what most people are familiar with when it comes to rolling out corporate initiatives. This is the top down communication that comes from leadership, and while this is often derided as hollow and corporatist, it is still important and, when done well, it is effective. The air war is necessary for impacting change and establishing an emotional connection to the desired habits, but it is not sufficient. The ground level is where the war is won. Whereas your air war tactics will leverage strategic timing that may only happen once a year or quarter, the ground war needs to have weekly or even daily touches by leaders throughout an organization. This takes commitment and discipline. Some days the ground level teams will feel inspired and other days they’ll feel like they’re going through the motions, but you will be thankful for having developed strong  habits when they start perpetuating themselves over time.

To close, here are tactics to avoid making the same mistakes I made when striving to build the right habits at Unified. First, focus on the most important behaviors that will impact the organization and only those. As a filter for what those behaviors are, think about how long your company will need that behavior to thrive. The behavior should have an impact you will measure over years and be sustainable by your organization, not just you. Second, when you get off track building a new behavior, which you will, be compassionate with yourself and your team. If we’re thinking about impact measured in years, then slipping off track for a month or two is no reason to be discouraged or toss it aside. And lastly, schedule milestone meetings in advance to make sure your target behaviors are still delivering returns against strategic priorities. If they aren’t, be ready to abandon them, because bad habits produce exponential returns as well, they’re just exponentially negative.

The above post is an abbreviated version of a presentation titled “The Power of Compound Interest in Company Building”. The associated slides can be found here.

Join the newsletter to receive the
latest updates in your inbox.

Want to learn more about Unified? Learn More