How To Have ‘Skin In The Game’ In Business

Vasudevan Swaminathan, Founder and CEO of Zuci Systems.

I recently happened to read Nassim Nicholas Taleb’s book Skin in the Game. The idea of having “skin in the game” refers to a personal stake or investment in the outcomes of one’s decisions and actions. As an entrepreneur myself, I was completely able to connect with the idea of “skin in the game,” and I want to share some thoughts around it, taking examples from the world of business.

The ‘Doers’

The author refers to those who have skin in the game as “Doers.” Doers are individuals who are directly affected by the outcomes of their actions. In a business context, this could be a company founder who invests their savings, an employee who receives performance-based incentives, or an entrepreneur who risks their reputation on a new venture. Let’s look at a few of the advantages that can come with this level of having skin in the game.

• Protecting Client Interests

Protecting your client’s interests by having skin in the game means that you, as a service provider or advisor, have a personal stake or investment in the outcomes or success of the services you provide to your clients. This approach can help build trust and align your interests with your client’s, ensuring that you are genuinely committed to their well-being. For instance, Ray Dalio, the founder of one of the world’s largest hedge funds, created the “All-Weather Portfolio” in the mid-1990’s, where he invested his and his family’s own wealth. A great example of “skin in the game.”

• Accountability And Decision-Making

The concept of skin in the game challenges the prevailing culture in many organizations where decision-makers, often in high-level management positions, are insulated from the consequences of their choices. I am sure many of us think that should not be the case. If leaders and executives have personal stakes in the success and failure of the company, they are more likely to make prudent, thoughtful and ethical choices.

• Incentives For Ethical Business Practices

Having skin in the game can also be a powerful incentive for ethical behavior in business. If a CEO’s personal wealth is tied to the company’s stock performance, they are more likely to prioritize the long-term health of the organization over short-term gains that could damage the company’s reputation. This can lead to a stronger ethical framework within the company, as individuals understand that unethical decisions could have serious personal consequences.

Consider Paul Polman, the former CEO of Unilever, who initiated the Sustainable Living Plan, a commitment to reduce the company’s environmental footprint and improve the lives of people worldwide. His personal investments were aligned with Unilever’s ethical objectives.

• Long-Term Thinking And Innovation

Taleb argues that “skin in the game” encourages long-term thinking and innovation. When business leaders are invested in the success of their companies over time, they are more likely to focus on strategies and decisions that have lasting benefits. This can lead to the development of innovative products, sustainable business practices and a culture that values quality over quick profits.

• Building Resilient Organizations

In a business context, having skin in the game can also make an organization more resilient. When decision-makers experience the consequences of their actions, they are better prepared to adapt and learn from failures. This, in turn, can lead to a more agile and adaptable business.

For example, Richard Branson has built the Virgin Group into a diverse conglomerate with ventures in music, airlines, telecommunications and space travel. His willingness to take risks and enter new markets has contributed to Virgin’s long-term resilience.

Steps For Implementation

While the concept of skin in the game may seem straightforward, implementing it can be challenging. Many corporate structures and compensation models disconnect decision-makers from the direct consequences of their choices. However, there are steps you can take to ensure you and your team have skin in the game.

First, reevaluate your organization’s decision-making processes to align them with the principles of accountability. I recommend setting clear expectations, involving team members in the process of making decisions, and requiring transparant communication of decisions and the reasons behind them to the rest of the organization.

Second, reevaluate incentives in light of your organization’s strategic objectives, and ensure that your compensation structure motivates behaviors and outcomes that contribute to long-term success. For example, consider tying variable pay components to key performance indicators (KPIs) or project milestones. This creates a direct link between individual or team performance and financial rewards. I also recommend evaluating the risk-reward balance within your organization’s incentive structure. This can help you ensure that employees are appropriately rewarded for taking calculated risks that contribute to the organization’s growth.

In conclusion, the concept of “skin in the game” offers a powerful framework for fostering accountability, ethical behavior, innovation and resilience within a company. I challenge every leader to become a Doer and challenge the status quo of decision-making by having a personal stake in the outcomes.

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