A Big Test for DAOs: Honing New Compensation and Contribution Practices

As we usher in a new era of work via DAOs, many projects face a similar challenge of determining a scalable formula for compensating their contributors. What works when there are only five core contributors may not work as the community grows, and the best way to measure and reward contributions in one DAO may not be right for another.

Many DAOs currently benefit from the flexibility they are able to offer their contributors. In contrast to traditional companies, individuals can move fluidly between DAOs, often contributing to multiple DAOs at the same time. While this flexibility is appealing to many contributors and is one of the factors that has enabled DAOs to attract top talent, it often leaves contributors to navigate multiple compensation structures. To continue bringing in new contributors, DAOs will need to develop compensation mechanisms that work well with other DAOs.

While fluidity is appealing, some contributors feel most productive when they focus their efforts on a single DAO. As the DAO space begins to recognize the burnout that can stem from splitting focus across many projects, DAOs should create ways for contributors to make longer term commitments, and even encourage and incentivize such commitments as a way of retaining their talented contributors.

Where DAOs really shine relative to traditional companies is that they can support many contributor engagement models at once.

DAOs must ensure that compensation is commensurate with value created, and their non-hierarchical nature presents a challenge for measuring that value, especially across time as contributors learn and grow.

Some contributors flourish when they can flow between projects and contribute wherever they feel most inspired; others may flourish when they can dig into a single project without distraction. And still others want something in between. Where DAOs really shine relative to traditional companies is that they can support many contributor engagement models at once, allowing contributors to choose the one that’s right for them. Designing a compensation program that promotes contributor choice while remaining fair, transparent, and simple to administer, though, remains a challenge.

A Flexible Compensation Program

At DAOhaus, we have been grappling with these challenges for over a year. Based on our experience as contributors to our own DAO and on what we’ve observed within a number of DAOs using our platform, we’ve formulated a set of principles to create adaptable contributor compensation programs:

1. Contributors should have flexibility in how they engage with the DAO
2. Contributors should have flexibility in how they are compensated by the DAO
3. Contributor engagement and compensation models should be interoperable with that of other DAOs
4. Contributor value should be assessed in a bottoms-up fashion

With these principles in mind, we’ve also developed a template for a flexible contributor compensation program that breaks down compensation into three layers: base compensation, bonus compensation, and ownership.

Base Compensation

This layer presents the most opportunity to build in contributor flexibility, in terms of both engagement (Principle A) and compensation (Principle B).

For engagement flexibility, DAOs can create two tracks for contributors. One track would compensate contributors retroactively based on the value that they’ve created for the DAO. Commonly used mechanisms in this area include retroactive funding proposals — where contributors outline the value they’ve created in that period and make a commensurate funding request to the DAO or their working group, as well as bounties. This track creates maximum flexibility for contributors, but carries more uncertainty for both contributors and the DAO.

A second track would compensate contributors consistently across months based on a combination of their level of commitment to the DAO (measured in time, effort, priority, etc.) over a given period and the amount of value they expect to create over that period. Other members of the DAO (or the contributor’s working group) would be responsible for vetting a contributor’s proposal for commitment and value levels, just like they would for a retroactive funding proposal. This track gives both the DAO and contributors more certainty about compensation and contributions even when specific DAO activities are less certain.

DAOs must ensure that compensation is commensurate with value created, and their non-hierarchical nature presents a challenge for measuring that value.

Further, since commitment levels can be represented as percentages, as more DAOs adopt this approach contributors will increasingly be able to credibly represent their total bandwidth and commitment across multiple DAOs, helping promote compensation interoperability (Principle C).

For compensation flexibility, DAOs with diversified treasuries can let contributors select their desired mix of stablecoins and the DAO token for compensation. One contributor could elect to be compensated in a 90-10 mix of DAI-$token, for example, while another could select a 50-50 mix.

DAOs can also experiment with various mechanisms for retaining contributors over longer periods and creating long term incentive alignment. For example, vesting/locking DAO tokens, adding multipliers for longer commitment periods, and so on.

Bonus Compensation

Bonuses are allocated based on intersubjective evaluation: each contributor evaluates other contributors’ value created over the period by assigning points to each contributor they’ve worked with, and the aggregate results inform the distribution of bonuses. All contributors across both the retroactive and commitment tracks are eligible for bonuses and participate in the intersubjective evaluation exercise.

This layer serves two key functions: First, it is a method for rewarding contributors who go above and beyond, and like a typical bonus, those who create more value are rewarded with higher amounts. Unlike a typical bonus, that amount is determined by a contributor’s peers and co-contributors rather than a boss. Where possible, bonuses should be paid in the DAO’s token to create long term alignment with retroactive track contributors (whose base pay is typically primarily in stablecoins).

Second, the results of the evaluation can serve as a decentralized, bottom-up performance review for contributors on the commitment track. By comparing a contributor’s expected value for a given period (as measured by their share of the total base compensation amount) with their actual value created over the same period (as measured by their share of the intersubjective evaluation results), a DAO can assess whether a contributor is underperforming or overperforming.

The leading tool for intersubjective evaluation is Coordinape. DAOs can experiment with various policies for the mechanism, including for how many points each contributor should have to give out to others (impacting how much weight each contributor has in determining the results), how large the bonus pot should be relative to the base compensation pot, and so on.

Governance Power

Contributor ownership is what makes DAOs so much more powerful than traditional companies. To grow sustainably and continue to decentralize, it is critical that DAOs provide a clear path for contributors to earn governance power in the DAO. One of the best ways to distribute power and ownership is to include it as part of compensation.

The exact approach will vary by DAO. DAOs governed directly by token voting can accomplish this simply by paying contributors in the token as either base or bonus compensation. In contrast, DAOs with non-token governance mechanisms (such as Moloch DAOs) have more options for how to distribute ownership and governance power to contributors.

For example, these DAOs can compensate contributors in DAO tokens for both base and bonus, but restrict, via socially-enforced rules, contributors to receiving governance power for the bonus portion only.

The benefit here is twofold: first, contributors earn governance power in the DAO only in proportion to the value their peers determine that they created for the DAO, via intersubjective evaluation. Second, both tracks of contributors have equal opportunity to earn governance power.

Flexible Compensation is the Future of Work

In the future of work, workers are in charge. Collectively, they control what their organization is working on and how. Individually, they are autonomous; they control what they focus on, how they work, and who they work with. DAOs are the future of work because they make all of this possible:They are governed directly by their contributors and can create spaces for their contributors to engage on their terms.

To realize their promise, DAOs need to develop flexible contributor compensation programs as well as the capability to effectively evaluate contributions in a bottom-up fashion. The template described above is just one approach. And even within that template, there is plenty of room for DAOs to experiment, learn, and iterate. In fact, experimentation is critical to discovering what mechanisms work best for each DAO. No DAO is born fully formed; they must all evolve and adapt as they scale and conditions shift.

If DAOs are successful in implementing flexible compensation programs for contributors, I suspect that we will find out that there is much more talent and brilliance in the world than we can currently imagine. Companies today are terrible at finding talent and attracting/incentivizing talent to work on their business; it’s early, but DAOs are already demonstrating their superiority in this area

Even more importantly, with DAO contributors empowered to drive their own contributions, we may discover brand new things that are valuable to others and that many people are very talented at producing — some of these may not look like “work” at all! The future is murky, but DAOs make it increasingly brighter.

Spencer Graham, is a Core Contributor at DAOhaus.