Hmmmmmmm ... now what's a title to fit me?
a champ like Tyson, a captain like Kirk,
no Employee of the Month 'cause yo, I do work
-- Big Daddy Kane, I Get The Job Done
Track: I Get Job Done
Album: It's a Big Daddy Thing
Label: Warner Bros.
Often when I meet with startups, the employees have no job titles. This makes sense, because everybody is just working to build the company. Roles needn't be clearly defined and, in fact, can't be, because everyone does a little bit of everything. In an environment like this there are no politics and nobody is jockeying for position or authority. It's rather nice. So why do all organizations eventually create job titles and what is the proper way to manage them?
Why do titles matter?
Two important factors drive all companies to eventually create job titles:
- Employees want them -- while you may plan to work at your company forever, at least some of your employees need to plan for life after your company. When your head of sales interviews for her next job, she won't want to say that despite the fact that she ran a global sales force with hundreds of employees, her title was "Dude."
- Eventually, people need to know who is whom -- As companies grow, everybody won't know everybody else. Importantly, employees won't know what each other do and whom they should work with to get their jobs done. Job titles provide an excellent shorthand for describing roles in the company. In addition, customers and business partners can also make use of this shorthand to figure out how to best work with your company.
Beyond these core reasons, employees will use titles to calibrate their value and compensation against their colleagues. If an employee with a title of Junior Engineer believes that she is a far better programmer than her counterpart with the title Senior Architect, this will indicate to her that she may be underpaid and undervalued. Because titles will be used to calculate relative value, they must be managed carefully.
The Dangers: The Peter Principle and The Law of Crappy People
The basics seem obvious, so why does almost every company eventually make serious mistakes regarding titles. If you have ever worked in a company, you have probably thought to yourself about some overly promoted executive: "How did he get to be a Vice President? I wouldn't let him manage a lemonade stand."
One challenge is the Peter Principle. Coined by Dr.Laurence J. Peter  andRaymond Hull  in their 1969 book, The Peter Principle holds that in a hierarchy, members are promoted so long as they work competently. Sooner or later they are promoted to a position at which they are no longer competent (their "level of incompetence"), and there they remain being unable to earn further promotions. As Andy Grove points out in his management classic High Output Management, the Peter Principle is unavoidable, because there is no way to know a priori at what level in the hierarchy a manager will be incompetent.
Another challenge is a phenomenon that I call The Law of Crappy People. The Law of Crappy People states:
For any title level in a large organization, the talent on that level will eventually converge to the crappiest person with the title.
The rationale behind the law is that the other employees in the company with lower titles will naturally benchmark themselves against the crappiest person at the next level. For example, if Jasper is the worst Vice President in the company, then all of the Directors will benchmark themselves against Jasper and demand promotions as soon as they reach Jasper's low level of competency.
As with the Peter Principle, the best that you can do is mitigate the Law of Crappy People and that mitigation will be critically important to the quality of your company.
The best way to mitigate both the Peter Principle and the Law of Crappy People is with a properly constructed and highly disciplined promotion process. Ideally, the promotion process should yield a result similar to the very best Karate Dojos. In top Dojos, in order to achieve the next level (e.g. being promoted from a brown belt to a black belt), you must defeat an opponent in combat at that level. This guarantees that a new black belt is never a worse fighter than the worst current black belt.
Frustratingly, there is no exact analog to a fistfight in business, so how can we preserve quality without actual combat?
To begin, start with an extremely crisp definition of not only the responsibilities at each level, but the skill required to perform the duties. When describing the skills, avoid the generic characterizations such as "must be competent at managing a P&L" or "must have excellent management skills." In fact, the best leveling tools get extremely specific and even name names: "should be a superstar recruiter--as good as Jenny Rogers."
Next, define a formal process for all promotions. One key requirement of the process should be that promotions will be leveled across groups. If you let a manager or a single chain of command determine promotions unilaterally, then it's possible that e.g. HR will have 5 Vice Presidents and Engineering will have 1. One way to level across groups is to hold a regular promotions counsel that reviews every significant promotion in the company. When a manager wishes to promote an employee, she will submit that employee for review with an explanation of why she believes her employee satisfies the skill criteria required for the level. The committee should then compare the employee to both the level's skill description and the skills of the other employees at that level to determine whether or not to approve the promotion. In addition to ensuring fairness and level quality, this process will serve to educate your entire management team on the skills and accomplishments of the employees being submitted for promotion.
Andreessen vs. Zuckerberg: How Big Should the Titles Be?
Should your company make Vice President the top title or should you have Chief Marketing Officers, Chief Revenue Officers, Chief People Officer's, and Chief Snack Officers? There are two schools of thought regarding this. One characterized by Marc Andreessen and the other by Mark Zuckerberg.
Andreessen argues that people ask for many things from a company: salary, bonus, stock options, span of control, and titles. Of those, title is by far the cheapest, so it makes sense to give the highest titles possible. The hierarchy should have Presidents, Chiefs, and Senior Executive Vice Presidents. If it makes people feel better, let them feel better. Titles cost nothing. Better yet, when competing for new employees with other companies, using Andreessen's method you can always outbid the competition in at least one dimension.
At Facebook, by contrast, Mark Zuckerberg purposely deploys titles that are significantly lower than the industry standard. Senior Vice President's at other companies must take title haircuts down to Directors or Managers at Facebook. Why does he do this? First, he guarantees that every new employee gets re-leveled as they enter his company. In this way, he avoids accidentally giving new employees higher titles and positions than better performing existing employees. This boosts morale and increases fairness. Secondly, it forces all the managers of Facebook to deeply understand and internalize Facebook's leveling system, which serves the company extremely well in their own promotion and compensation processes.
He also wants titles to be meaningful and reflect who has influence in the organization. As a company grows quickly, it's important to provide organizational clarity wherever possible, and that gets more difficult if there are 50 VPs and 10 Chiefs.
Next, he finds that business people often carry inflated titles vs. their engineering counterparts. While he recognizes that big titles help them out externally with getting meetings, he still wants to have an organization where the product people and engineers form the cultural core, so he strives to keep this in check as well.
Does Facebook ever miss out on a new hire due to its low titles? Yes, definitely. But one might argue that they miss out on precisely the employees that they don't want. In fact, both the hiring and on-boarding processes at Facebook have been carefully designed to encourage the right kind of employees to self-select themselves in and the wrong ones to select themselves out.
So which method is better, Andreessen's or Zuckerberg's? The answer is that it depends. Facebook has so many advantages in recruiting employees that being disciplined about absolute title levels does not significantly impair their ability to attract the very best talent. Your company might not have these advantages, so lofty titles may be a good tactic. In either scenario, you should still run a highly disciplined internal leveling and promotion process.
You might think that so much time spent on promotions and titles places too much importance and focus on silly formalisms. The opposite is actually true. Without a well-thought-out, disciplined process for titles and promotions, your employees will become obsessed with the resulting inequities. If you structure things properly, nobody other than you will spend much time thinking about titles other than Employee of the Month.
Reprinted from bhorowitz.com 
Ben Horowitz is the cofounder and General Partner (along with Marc Andreessen) of the venture capital firm Andreessen Horowitz based in Menlo Park. Follow him at @bhorowitz , or get updates on his venture capital firm @a16z .