Ben Horowitz walks through a CEO's dilemma: firing or demoting a well-liked executive who works hard but lacks the skills for the role. He uses a 1.5% equity example to show how the choice affects fairness, culture, and what the company signals about failure in highly paid positions.
Chapters
So first business example, you've got an executive and do you demote or do you fire him? And this comes from an actual conversation, an actual real life situation that I was working on with the CEO. And so the basic situation was this. He had a great executive or like an executive who just a great effort. Like he hired him, he was working harder than anybody else in the company, doing everything he was supposed to. Everybody liked him because he worked so hard and he was a general, smart person, but he was just in over his head, knowledge wise. He did not have the knowledge and the skills to basically do what the company needed him to do or really compete against the competition. So he couldn't actually keep him in the job. But he's a great guy. So the question is, well, should I fire this person or can I just move him into a lower role and bring in a person above him? And then that'd be real cool. So let's look at how you kind of make that decision. So you, in this case, this was the CEO. So you as a CEO. So one look, it's really hard if somebody comes to work every day at 6am and is working till 10pm and doing it harder than anybody in the company. It's really hard to just say, well, sorry, nice effort, but you don't get an A for an effort. You get an F because I fired you. Nobody wants to have that conversation. And then demotion is kind of neat because from a CEO's point of view, and he's like, look, we can keep him in the company. He works so hard. He's a great example of somebody who gives great effort. And then he's got a lot of friends in the company. And from a cultural standpoint, it's a win win because he gets to stay. And then I can bring in somebody, I can solve my problem, but I don't have to create another problem. And then if you think about it from the executive's perspective and what they would think, it's like, well, I don't want to be demoted, but I really don't want to be fired. Because if I get fired, that's a way harder, more complicated thing to explain to my next employer than I got demoted. Getting demoted is like, well, I didn't really get demoted, I got a new job, smaller title. And then the last thing is it enables theoretically, well, the company. We value all our employees. We brought you in, we made a commitment to you as an employee and we value everybody. And it will enable you to keep growing with the company. And this was kind of the initial conversation I had with the CEO. And I said, well, wait a minute, I said, let me ask you this. What's the equity package that this exec has? He goes, well, what do you mean? I was like, well, I'd like to see director level compensation. Has he got a vice president level compensation? Does he have 0.5, does he have 0.4% or what? And that kind of gave the CEO pause. He's like, well, he does have a point and a half. And I was like, okay, so you're an engineer in your company. How do you feel about somebody who used to be the head of sales who got brought in with a point and a half? Now, mind you, you're an engineer. What do your engineers get? Like they get 0.1%, 0.2%. What are they getting at this point? So how are they going to feel about somebody who's not the head of sales with 1.5% of the company? And he was like, oh. And I was like, yeah, oh, because how fair is that? So are you going to take the equity away? Are you up for doing that? Are you up for going back and taking back his compensation? And how productive do you think he'll be if you take away his compensation? And then secondly, will people give him the same respect now that you've demoted him? Because they knew him as this and now he's this? And so I knew you when you were head of sales. Now you're the regional manager and you're telling me what the to do. You're telling me I need to make that call. Like, seems to me you got demoted. Who are you to talk to me? I'm the up and comer. I'm going to be the next VP of sales at the next company. So all these things come into play. And so when you look at it at the end, you may think you're dealing with one person. You may think that this is a demotion or a firing of one person. What does it mean according to that one person? But what you're really doing is you're saying, look, what does it mean to fail on the job, particularly the highest paid, highest compensated job in the company from an equity standpoint? And then like, what's required to maintain your equity? Like, is it good enough to put in an effort or do you have to get a result? And in different situations at different levels, these answers will come out differently. And if this had been a person not that was an executive brought in from the outside, but was somebody who you maybe promoted past where they should have been and didn't ever get that equity. Like, maybe you make a different decision, but you've got to understand what it's going to mean to everybody, not just the person you're talking to.
