Menlo Innovations is so flat it's practically two-dimensional. Employees hire together, fire together, and review one another's performance together. To lead such an organization, says Menlo's CEO and cofounder Richard Sheridan, is to share the delight of a team united by vision, untouched by fear. In this edited excerpt from his new book Chief Joy Officer: How Great Leaders Elevate Human Energy and Eliminate Fear (2018, Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House) Sheridan describes the mechanics of one of the most democratic companies on the planet.

Part of our business is teaching other people about the Menlo approach. We give tours and run seminars for thousands of people every year.

In 2008 we were asked to teach our approach to members of the IT team at Nationwide Financial in Columbus, Ohio. At one of our seminars, Cam W., an up-and-coming leader at Nationwide, asked a question we had never been asked before.

"Who do people report to at Menlo?" he asked.

I'd been teaching some version of this seminar for seven years, and this question had never come up. I wasn't quite sure how to answer it as we had no org chart and no formalized hierarchy. I told Cam to wait for a minute and I ran out of the classroom, quickly gathered five of our team members and lined them up at the front of the class. I then asked Cam to repeat his question.

"Okay, who do people report to here?" he asked once again. They thought hard, looking up at the ceiling with their heads tilted and fingers on their chins.

"Well, I guess the process," said one.

"In some cases, the project manager," said another.

"Well, I guess the customers and the users we are helping them support," speculated another.

And then, almost without hesitation and in unison, they crossed their arms with fingers pointed left and right to one another, to say "We report to each other."

At this point Cam was convinced they just didn't understand the question, so he broke it down for them.

"Let's say you want to hire someone. Who makes that decision?"

"We do," they replied, and briefly explained that in our Extreme Interviewing process all hiring decisions are made by the team.

"Yeah, but who does your performance reviews?"

"We do," they replied, and explained our Feedback Lunch process.

"Okay, okay, but who makes the firing decisions?"

"Well, we do, with loads of interactions with Rich and James. And if Rich and James feel the need to fire someone, they check in with us," they said.

I could fully understand and appreciate Cam's exasperation. It would be a natural to ask how all this could work without devolving into Lord of the Flies-style chaos.

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James and I didn't set out to create a nonhierarchical company. It wasn't even on our radar screen in the beginning. We were worried about survival, not titles, reporting relationships, and annual performance reviews.

Over the next years, Menlo grew quickly, and systems, as we had them, seemed to be working out fine. We didn't really question our org chart or our distinctions between bosses and leaders. It just didn't seem important. It wasn't until Cam asked that fateful question--"Who do people report to here?"--that James and I started to think about the lack of hierarchy in the organization.

What does a nonhierarchical system actually look like? Our version at Menlo breaks down as follows: We have 18 pay grades grouped into four categories (Associate, Consultant, Senior, and Principal). Each pay grade is distinct, and everyone on the team knows what it is and who at Menlo receives it. Most newcomers join at the Associate level, our lowest pay grade. Team members advance based on peer evaluation, which often takes the form of Feedback Lunches. If the team--not the whole team but a rational subset of peers, some of your own choosing--determines you are ready to advance, they will let you know and you will get a pay increase. Some people advance very quickly, others at a slower pace. It is all determined by your peers' assessment of your performance.

Bonuses are paid out based on profits and shared equally by all team members. We have not created any incentives for you to make yourself look good in comparison to your peers. Just the opposite: I will do better overall if we all do better.

This is not a perfect system. Menlo is not for everyone. And we do have standard attrition rates. We seldom lose someone we don't want to, but even that happens. The absence of a clear hierarchical growth strategy also affects our recruiting. Some need to see upward title mobility or they lose interest. Others, who hear about us and indicate interest, are clearly seeking to plug into what they believe is our existing hierarchy at a very high level.

What all recruits find is a system of advancement that is compelling and vastly different from any they have witnessed before. Some find it refreshing. To those candidates we become more attractive.

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Published on: Dec 4, 2018