Preface: I’ve worked at 3 large companies in my 14 year career as a software developer, and I am an avid reader of business and financial news. What I’ve come to realize is that all large companies are fundamentally the same in terms of how they’re organized. That is not a particularly novel revelation, but I haven’t really come across any literature on the internet that does a good job of explaining how large companies operate. So here goes my attempt. This is going to be part 1 of a series of articles on the subject, but they won’t be published sequentially. I intend to revisit this topic a few times, since first attempting to write this created a much larger article than originally intended.
American capitalism, love it or hate it, is exceptional in its ability to create immense amounts of wealth. How that wealth is distributed and reaped is a topic of great political interest in this day and age, but it’s undeniable that unfathomable sums of money are being created.
Out of the 20 most valuable companies in the world (as of this month), 16 are US based. Of the 4 non-American companies, 1 is the Saudi national oil company ARAMCO, 1 is a Danish pharmaceutical company whose main source of profit is selling semaglutides (under the brand names Ozempic and Wegovy) to fat Americans in the extremely lucrative US pharmaceutical market, 1 is the world’s most advanced semiconductor foundry based in Taiwan, and 1 is a French luxury goods conglomerate.
Suffice it to say, we dominate the moneymaking business like no other country. And the way we do it is through private enterprise. These companies are all extremely similar in how they’re organized and in how they operate. How that works and why it works should be a topic of great interest, but it’s something that people are only subconsciously aware of.
The Corporate Trinity
The easiest way to understand why anything is the way it is is to understand the incentives that exist for any given actor within the system you’re trying to analyze. Within a company, there are three types of actors: owners, managers, and workers. These three actors have incentives that are ultimately at odds with one another. So in order to understand how large companies and organizations work, we have to understand the incentives that govern these three types.
But in order to make sense of the incentives, we first have to agree that each actor has one primary objective: to maximize benefit with as little effort as possible. This is universally true for the owners, the managers, and the workers. But because each actor is in a different position within the company, the incentives that exist for each to service their objective of maximizing benefit while minimizing cost is different.
The Worker
Let’s start by talking about the worker. This is the role that the vast majority of us are most familiar with. The role itself is relatively simple: the worker is an employee whose responsibilities are to do something that is in close proximity to how the company makes money. If the company is a restaurant, a worker would be a cook or a waiter. If the company is a software company, it’d be a software developer, business analyst, or QA tester.
So how does the worker maximize their objective of maximizing benefit while doing as little work as possible? This is highly dependent on the individual in question. Maximizing benefit is a very personal question. Some only care about making as much money as possible. Some value their work-life balance. Some are just there for the ride, picking up opportunities as they arise but not really going out of their way in service of any specific goal.
But despite all of these various individual preferences, nobody is going to turn down a raise for the same amount of work. Nobody is going to a new company to do the exact same job for lower pay. Nobody is going to be happy to work consistently more hours for the exact same pay. There is an implicit assumption that we are not going to go above and beyond out unless we think there’s a benefit to it, whether that’s in the form of a raise, a promotion, or positive exposure to important people (which increases the chance of future raises and promotions).
Let’s say you’re one of the most talented and hardest working worker at the company. It’s gotten to the point where your productivity is ten times what the average worker at your company achieves. Your manager loves you. You’re constantly brought up as an exemplar and always win awards for being the best employee. But when it comes down to cold, hard numbers, are you being paid ten times what the average worker makes? That never happens.
As a worker, past a certain point there is a significant diminishing return to working harder. The reason why will soon become apparent. My own personal work philosophy is to do the bare minimum required to be considered good at my job. That increases my chance of getting raises and promotions and minimizes the risk that I’ll get laid off if the company performs poorly. But the goal is not to work myself to the bone to be considered the best, because the effort to reward ratio is extremely poor.
The Owners
Every employee at a company ultimately works for the benefit of the owners. These owners, whether it’s the millions of shareholders of a publicly traded company or the spoiled rich failson who inherited the family business from his industrious but absent father, have the same objective as the worker. Maximize benefit and minimize effort. But because their position is vastly different, the way they go about achieving that objective is completely different.
Think about what the average person wants to do in retirement. They want to do only the things that bring them joy, which in the vast majority of instances does not include working, and to collect a nice fat check after having amassed a nest egg during their working years. In order to to build that nest egg, they have to invest their wages into building assets that generate income with very little effort. This is mainly done by buying stock in publicly traded companies.
In a publicly traded company, the owners are most interested in seeing a high return on investment. This happens by appointing people to a board that oversees the company and hires the chief executive of the company, who then takes on ultimate responsible for maximizing financial benefit of the shareholders. Appoint the right CEO, and the shareholders’ job is just to sit back and collect fat dividend checks.
The Managers
The CEO, however, is just one dude. And publicly traded companies worth hundreds of billions of dollars have hundreds of thousands of employees. Because it would be impossible for one person to effectively manage every worker employee, there are layers upon layers of management. In each layer, the manager on that level reports to the manager above them and has either managers or workers below them. It usually looks like this: Owners (board) → CEO → executive vice presidents → vice presidents → directors → managers → workers
While the CEO is ultimately responsible for the entire company’s bottom line, it generally makes sense to divide the company into various, independent divisions that effectively have their own CEOs. These mini-CEOs are known as executive vice presidents, and they have control over the P&L (profit and loss) of the business unit that they head up. This is an incredibly important concept that most people aren’t aware of, so pay attention to this next section.
Why the P&L Matters
Let’s say you work on a team of 6 workers and 1 manager at the corporate level. One day, somebody from your team gives their two weeks’ notice. When that happens, a question is implicitly asked: do we backfill that person’s position? That’s something most people are familiar with. But what they generally miss is the person who actually gets to make that decision.
The manager of that team certainly never gets to make that call. It would be exceptional even if the director of that manager (the manager’s manager) can pull the trigger on that. In almost every circumstance, the actual power to backfill the position would be held by the person in control of the P&L. In a large company, this person’s title is executive vice president (or EVP). What this means is that the executive is responsible for their organization’s profit and loss statement, which is also a budgetary matter.
So when the guy on your team announces he’s leaving the company, the person with the actual financial authority and power to backfill his position is actually 4 levels above him on the corporate ladder. Now, you can debate on whether effective hiring authority actually happens at the EVP level (this varies from company to company), or whether the SVP below the EVP has the authority to make the decision in accordance with guidance/policy established by the EVP, but the point is pretty clear: real hiring authority is held far above the immediate manager of the team.
But that authority doesn’t extend just to the decision to backfill. It extends to everything that requires a disbursement of money. So that means everything from net new hires, promotions, raises, cost of living adjustments, and travel expenses. This is an incredibly important dynamic that workers need to understand, because it impacts every facet of their job.
Most Raises Suck, Switch Jobs Instead
You’ve done a bang up job at work. Your manager is impressed. The director above him is also impressed. You command the respect of everyone on your team and the teams adjacent to yours. And now it’s the end of the fiscal year and your annual review is due. It’s a time for raises, promotions, and bonuses.
You walk into a room with your manager. She lavishes praise on you, says you’re an indispensable part of the team and that she couldn’t be more proud of you. Finally, you get to the numbers portion of the meeting. You’re getting an 8% raise. Maybe it hits you in the meeting or maybe it takes a few hours after, but you feel pretty disappointed. You busted your ass off. Everybody knows you’re a rockstar. 8%? What? That’s just 6% more than what Mike got, and everybody knows Mike’s fucking useless. How is it possible that you worked this hard just to get 6% more than what Mike got?
Just like how it’s impossible for the CEO to properly manage every worker, it’s impossible for every financial decision to actually be made by the EVP. A lot of that gets delegated to the SVP, who then delegates to the director, and then to the manager. But basically what happens is that every year, come review time, the EVP decides on a fixed pot of money that goes to the employees under them in the form of raises, promotions, and bonuses. Each SVP gets a portion of that pot to distribute how they see fit. Each SVP divides a portion of that portion to the vice presidents, directors, and managers until it finally gets to the workers themselves.
At each step of the way, each layer of management is going to fight for as much of the portion of that pot of money as they can get. This is where the politics of the company come into play, as each manager fights for their direct reports to the person they’re directly reporting to. As a manager, you’re generally judged on two things: how well you enable your team to do the thing that they’re supposed to do (and how well that’s communicated to other people within the company) and how well you fight for your team when it comes to acquiring a share of your company’s finite resources.
So even though you’re a rockstar on your team, there are rockstars on every team across the company. And there’s only so much money to go around. The pot of money is fixed, and even if your manager truly believes you deserve more, the decision to give you more money doesn’t belong to your manager, or her manager, or her manager’s vice president. It belongs to the EVP. And the EVP has no clue who you are. If a decision gets run up the chain to do a bigger than allotted raise, you would need to be a truly exceptional person, well known to a person who’s at least close to the EVP, in order to actually have a shot to getting that big ass raise. But honestly, if you want a significant bump in pay, it’s much easier to get that by switching jobs.
It Ain’t Easy Being a Manager
Frontline managers (the managers whose direct reports are workers rather than other managers) have a tough job. Their time is much more regimented than a regular worker because they have to attend many more meetings. They juggle a lot of responsibilities, because while we think of managers as having to manage their direct reports, they also have to manage upward to the people they report to.
All this management of people, in various roles and responsibilities, is draining. Think of how many hard conversations you’ve avoided having with your friends, significant others, and family members. Managers have to constantly have those hard conversations. If senior leadership institutes an unpopular policy, the manager has to communicate that down to their direct reports, and then deal with the bitching and complaining, and then report that up chain.
And if they have one or two direct reports that aren’t performing well? How do managers deal with that? That’s a series of hard conversations that they need to have, with unpredictable results. Some people don’t react well to criticism or poor feedback. Others will guilt trip, wheedle, complain, deflect, or do their damndest to make the entire process as unpleasant as possible.
Even the good workers can be a pain to manage if they let it get to their heads. Maybe they’re good, but not that good. And maybe they don’t like another teammate who’s also good at their jobs. Or they constantly try to buck authority because they think know better.
And what happens if the manager’s manager is unpleasant to deal with? What happens if the EVP is super demanding and wants unrealistic results? One of the things you’ll realize very quickly is that managers have very little agency. So much is out of their hands, and it feels like they’re constantly switching roles between being a therapist, parent, professional asshole, politician, salesperson, negotiator, and secretary.
Having the responsibility for metrics and results combined with a lack of direct agency over delivering them makes management a fundamentally different role from being a worker. Think long and carefully on whether you think you’d be a good fit for the role. It’s quite common for outstanding workers to become managers and after experiencing the role, quickly revert back to being a worker.
Show Me the Money
I’m closing in on 2500 words at this point, and this article has gotten a lot larger in scope and longer in length than I thought it would be. So let me close by saying this: each and every corporation is a complex system full of various actors and intrigues, but because they are similar in their common goal of profit maximization, once you’ve learned how one company works, you’ll learn how all of them work. Understanding how they work will help you learn how to make the most out of your own career.