This post was written Nelson Jordan at Closer and edited by Tyler Whittle at Floodgate. Both Nelson and Tyler are DAO Master Guides at DAO Masters. They both worked on compensation for Season 1. Images sourced by Christopher Carfi.

Let’s talk about salaries

Salaries are predictable; they allow companies to calculate cash flow and employees to understand what they’ll be taking home at the end of the month.

But what if you don’t have employees?

What if you’re not able to predict how many hours people will work, or even what work they’ll do?

Well, that’s the challenge we face in DAO Masters, a decentralized community dedicated to helping the next million people find, contribute to, and run DAOs.

That’s why we decided to run a little experiment, opting to use Coordinape, a tool that empowers DAO contributors to decide how their peers should be compensated, for our first season.

Let’s take a look at how Coordinape works and any repercussions this method of compensation can have on a DAO.

Before we get on to that, though, let’s remind ourselves of several compensation options open to DAOs.

Alternative Compensation Methods for DAOs

• Bounties: a fixed amount of cryptocurrency or tokens paid for completing a specific task. DAOs usually request that contributors nominate themselves before completing these, though some DAOs have bounties that any member can complete without needing to ask (such as ForeFront’s ‘Link Curation’ bounty, which currently pays 8 FF tokens per link.)
• Fixed Compensation: similar to a salary, but is normally paid entirely in cryptocurrency and comes without benefits like healthcare. To use another example from ForeFront, in October they passed this Snapshot vote which meant they would pay several full-time and part-time contributors in a mix of USDC and FF tokens.
• Coordinated Compensation: where the above options assign compensation value before activities begin, this approach relies on the community deciding each member’s compensation by way of a collective, coordinated process that happens after work has been completed.

We chose the third option for Season 1, and a tool called Coordinape to allow our contributors to decide how much they got paid.

We did this, at least in part, because it allowed us to get up and running without scoping out every task and agreeing on every aspect of compensation, which would have delayed our start date,

Now, Coordinated Compensation might sound radical to some:

‘Wait, you let your employees decide how much they take home?! That’ll never work!’

But at DAO Masters, we don’t have employees.

We have a community of highly-skilled and trusted contributors who are aligned through their ownership of the $DAOMSTR token.

The token grants decision-making power over, and effectively ownership in, DAO Masters itself. This structure is similar to the way startups offer early employees option grants. However, unlike a start-up, each DAO member also gets to vote with their tokens in our key decisions.

This alignment means they’re incentivised to act in the community’s interest, because what’s good for the community is so closely tied to what’s good for the individual.

So how does Coordinape actually work?

Here’s a run-down of how to use Coordinape in your DAO (you can also read our review here):

1. Choose your available budget. We chose 15 ETH for our first season.
2. Pick dates for the next season or project to begin and end.
3. Decide who will be considered a ‘contributor’ for that season, and add their wallet addresses to Coordinape.
4. Choose whether you want one big ‘Giving Circle’ or lots of smaller Circles (more on this later.)
5. Decide whether you want everyone to have the same voting power.
6. Ask your contributors to allocate their tokens proportional to the value they think others brought to your DAO.
7. At the end of the season, Coordinape will show how many tokens each person has received. These are then averaged out as a percentage of the available budget.
8. Pay people based on Coordinape’s contributor breakdown.

Here’s what this looks like from the perspective of an individual contributor:

• Sophie receives 50 GIVE tokens from the community for her contributions.
• At the end of the season, her GIVE tokens are automatically converted to GET tokens.
• The total allocation across the whole DAO is 1,000 GET tokens.
• The DAO’s seasonal budget is 25,000 USDC.
• Sophie’s 50 GET Tokens are 5% of the available 1,000 GET tokens, so she is sent 5% of the DAO’s total budget (5% of 25,000 USDC = 1,250 USDC.)

So once the voting period has ended, the DAO sends Sophie 1,250 USDC for her contributions during that season.

Sounds simple enough, right?

Well, there are a lot of considerations that go into these decisions, and as we saw in DAO Masters, making the wrong decision or overlooking it altogether can have big consequences (more on that below)…

So here are the biggest questions you’ll need to ask yourself before you use Coordinape to pay your DAO’s contributors:

1. Who should be added to Coordinape?
2. One Giving Circle or several?
3. How many GIVE tokens should we start with?
4. How should tokens be allocated?
5. How do contributors know who has done what?
6. Does Coordinape promote cronyism?
7. Can DAOs pay contributors using Coordinape?

So, let’s take a look at each one:

1. Who should be added to Coordinape?

We added everyone that considered themselves a contributor to our first season.

At last count, we had 1,400 people on our server. So, how many people did we add into Coordinape?

Just 21.

All were self-nominated individuals who had taken action or added meaningful value to our conversations and thinking.

Still, that’s only 1.5% of our wider community.

From what we’ve observed, DAOs seem to operate on an exaggerated version of the 80/20 rule, where the majority of the work is done by a small percentage of contributors.

Which leads us nicely to our next consideration:

2. Should you use one Giving Circle or several?

The main factor in our decision to use a single Giving Circle, rather than smaller teams or pods, was size.

Dunbar’s number (the theory that most humans struggle to maintain relationships with more than 150 individuals at once) came into play here.

Coordinape relies on contributors knowing what others have done. With a group of 21 contributors, we felt confident that those who had done the work would be able to recognise the work of others.

With bigger groups, this method runs the risk of breaking down.

When group size increases, a single Giving Circle could devolve into a popularity contest or be influenced by familiarity bias. Contributors may allocate tokens because they recognise certain users from Discord, not because of their output.

Remember, for most contributors, DAO work is a part-time thing. There may be a large disparity between the number of hours each contributor gives, so you shouldn’t expect them to keep on top of what everyone is doing.

As a side note, adding a new contributor to Coordinape takes a few minutes per person. As your team grows, you should factor in additional management time.

Source: Coordinape

2a. How will Circle sizes affect DAOs?

One way the number and size of the Giving Circles you choose affects the nature of your DAO is the type of work that is completed (h/t to Tyler Whittle for his thinking here.)

A single Giving Circle (or several larger Circles) is more likely to lead to a more emergent organization, where contributors feel free to create their own projects and tasks, trusting that the community will see them as valuable and reward them once complete. This option is more likely to generate surprising insights and lead to valuable projects that DAOs may be reluctant to fund in advance.

But, as well as the issues outlined above, this method has the downside of restricting participation to those who can afford to work on something without knowing whether they will be compensated for it.

As Smaller Circles require set budgets for projects or even individual tasks, using this method reduces the likelihood of contributors completing work that is outside the tight scope outlined at the beginning of the season. This means that they may miss out on valuable projects that form organically and can’t be scoped out or budgeted for in advance.

However, because of this tight focus, Smaller Circles are more likely to lead to a culture of shipping and getting stuff done. It also removes a great deal of uncertainty around compensation for contributors who can’t afford to work for free, trusting they will be recognised and rewarded by a large group.

It’s likely that we’ll move to smaller Giving Circles for DAO Masters as our numbers have grown significantly.

But this leads to a new question…

2b. Should you divide the budget equally between your Giving Circles or give them different amounts?

As smaller Giving Circles are likely to be based around certain teams or projects, the amount of budget DAOs allocate to each one may be perceived as a judgement on how much they value their work.

So how should DAOs choose how much budget to give each Giving Circle? Should it be by the number of contributors, the volume of their output, or by the perceived importance of their work?

DAO members should ask themselves questions like:

• Should a team that’s smaller but achieving the same as a larger team get the same budget?
• Is the value that your Dev team brings more or less than your Content team?
• Should you give a team that has your best contributors more than those that aren’t operating at the same level?

Giving more budget to one team than another can cause resentment and leave contributors feeling undervalued.

Allocating an equal budget to these teams or projects leads to inefficiencies, which isn’t fair to the DAO or its contributors.

There are no right answers here, but a whole lot of wrong ones, and it’s better to address this than to ignore it and hope it solves itself.

There may be big differences in opinions on these issues, so DAO Leaders may have to make the final call in the event of a stalemate.

Whatever the DAO decides, make sure the reasoning is communicated to members with clarity and transparency to minimise ill will, and give them the opportunity to voice their concerns before implementing. Open a dialogue and listen to feedback.

3. How many GIVE tokens should we start with?

Coordinape gives admins the ability to choose how many GIVE tokens each contributor gets to allocate, with the default set at 100. This means that everyone gets 100 tokens to split amongst their Giving Circle.

If you wanted to give more voting power to your core contributors over more casual community members, you could choose to give the core team more tokens, and therefore a larger say in deciding compensation.

But this creates another consideration — how do you choose who gets more tokens?

Suddenly, instead of a simplified democratic mechanism for choosing contributor compensation, the power may flow back to the admins, if it’s not put to a community vote.

Allocating more tokens to some people also creates an interesting game-theory problem. By giving more tokens (and therefore, more voting power) to your core contributors rather than casual members, you actually reduce the total amount of compensation those core contributors can receive.

Take this simplified example using two people:

Situation A

Each contributor has 100 GIVE tokens to allocate. Contributor 1 gives Contributor 2 all their tokens, and vice versa. Both receive 100 tokens and get 50% of the budget (100 out of 200 tokens.)

Situation B

As Contributor 1 has been significantly more involved, the admin decides they should be rewarded with more voting power, so gives them 200 tokens, and gives Contributor 2 100 tokens.

Contributor 1 gives Contributor 2 all their tokens, and vice versa. Now Contributor 1 receives only 33% of the budget, rather than 50% in Situation A. They have been inadvertently penalised for having more tokens to allocate.

As with all governance and compensation decisions, second and third-order effects should be considered. Even then, DAOs are unlikely to get things right first-time, so they should leave themselves some flexibility to adjust as appropriate and set expectations within the community that they may need to change their approach.

4. How should tokens be allocated?

We were curious how our contributors chose to allocate their tokens, so we sent them an anonymous survey afterwards.

Here’s a summary:

• Some gave tokens solely to those they had worked with directly. Others wanted to make sure everyone received at least a small amount.
• Some started by using the average number of available tokens per person as a starting point and adding or removing tokens based on whether they thought each contributor had added more or less value than an average member.
• Some split contributors into three categories based on their output (small, medium or large.)
• Some gave all the unofficial team lead roles more, no matter whether they had worked with them directly or not.
• Some split the total budget into teams before allocating tokens to individual contributors

As a DAO, you can provide guidance to how people should allocate their tokens, or you can leave it up to them. Based on our experience, it’s best to give them a guiding hand, but ultimately leave your contributors to use the method that makes most sense to them.

FWIW, this is how Coordinape advises that their tool is used: don’t try and compensate everyone, just those you have directly seen providing value.

Keep in mind, though, that if contributors are using a mix of different methods to decide how they allocate tokens, there’s potential for this method of compensation to break down and lead to unbalanced results.

As long as you’re upfront with your contributors, your DAO doesn’t necessarily need to have worked out every detail of how to allocate tokens before you begin. A more realistic alternative is setting expectations as much as is feasible and letting issues come to the fore over several seasons through healthy dialogue and reflection on the process.

5. How do contributors know who has done what?

Coordinape allows contributors to add a profile bio which describes what they’ve been working on over the previous season. However, we chose to create our own Notion table to showcase this information, with columns for:

• Discord username
• Channels contributed to
• Tasks completed

This was an imperfect system and many people described their contributions in different ways.

For instance, how do you compare active channel participation and shaping important ideas to something more tangible like writing several articles?

This will come down to an individual’s preferences, but it’s important to address. Several of our members mentioned that they didn’t know what method they should use to decide how they should allocate their tokens.

The most frequent piece of feedback was that our members weren’t sure whether they were just supposed to reward the people they had worked with, or whether they should also reward those they saw adding value in other parts of our DAO.

We did cover this before voting began using a written doc and a video, but enough people gave us that feedback that we know we need to improve our process for next time.

6. Does Coordinape promote cronyism?

If DAOs don’t give proper consideration to their use of Coordinape, we can see this becoming a problem.

A poor Coordinape setup could mean contributors are incentivised to reward their friends and the most active Discord users, not those who actually provided meaningful value.

There are also risks that people game the system by becoming more active in the days before the vote. However, if you limit tokens to those who are most involved, there’s a large chance that this will be spotted by your core contributors.

Whether smaller Giving Circles increase or reduce cronyism remains to be seen. One line of reasoning is that by creating smaller Giving Circles, the potential impact of bad actors will be reduced, as they’ll be easier to recognise in smaller groups and they can only impact the Circles they’re a part of.

However, the counter to this is that in a single larger circle, while it’s easier for bad actors to hide in a crowd, allocating all of one’s tokens to a single individual in return for them doing the same, is a much smaller % of the total budget than if they did the same in a DAO made up of multiple Giving Circles.

In effect, the harm is spread thinner across a larger Giving Circle, rather than affecting fewer individuals to a greater degree if the same happened in a DAO with multiple Giving Circles.

We’d advise that the leadership team within the DAO do a quick spot check after each vote, to reduce the likelihood of bad behaviour.

Like every decision in DAOs, there are trade-offs. What works well for one DAO, might work terribly for another.

So, with that in mind…should the community’s decision be final?

This is a decision to be made on a case-by-case basis by each individual DAO. Some will choose to live by the ‘code is law’ ethos; others will choose a more nuanced, but more complex, approach.

At DAO Masters, we instituted an Appeals Process, whereby anyone who was unhappy with how many GIVE tokens they had been allocated could state why.

One member chose this option for themselves and also raised an appeal on another’s behalf.

We discussed this appeal within DAO Masters and put a revised compensation plan to a Snapshot vote, which passed.

7. Can DAOs pay contributors using Coordinape?

Currently Coordinape is a voting tool to decide compensation, not a payment tool. (Here’s a bit of alpha for you, the team may or may not be working on this right now!)

If you haven’t experienced it yet, paying contributors can actually get quite complex.

Because of high gas fees, we didn’t want to process each transaction individually, as gas fees would have eaten away at our contributors’ payments, particularly those receiving smaller amounts.

After much investigation, we decided the best way was to move Season 1’s total compensation budget of 15 ETH from our Gnosis Safe to Metamask and from there to Disperse, which we used to send out compensation in one batch to save on fees.

Please keep in mind this is not a recommendation for your DAO to use the same method we did. As always, DYOR.

8. Would we use Coordinape again?

Although there were a lot of considerations involved in this process, Coordinape is a useful tool for DAOs who are looking to decide their own compensation democratically, rather than using alternative methods like bounties.

Like all Web3 tools, it comes with its flaws, especially because the playbooks for this new era of collaboration are still being written. Overall, though, we at DAO Masters have found it a useful addition to our arsenal.

We created a Compensation Group for Season 2 of DAO Masters who weighed up all of the options and recommended we use Coordinape again. We held a vote on Snapshot and the proposal passed easily.

But will Coordinape work for us as we grow and face additional challenges? That remains to be seen.

We’ll be sharing updates on compensation and other DAO issues on our Twitter, so make sure to follow for updates.

If you have any questions about compensation, DAO tools, or anything related to DAOs, please take a look at the DAO Masters Consulting service, or reach out to @nelsontjordan, who will put you in touch with the relevant team at DAO Masters.