Situation: A CEO wants to build additional incentives into the company’s compensation plan. The objective is to add group incentives to the pay mix – to focus more attention on group performance rather than just company goals. How do you create an incentive-based compensation plan?
Advice from the CEOs:
The best policy is to be upfront, open, and transparent as the plan is presented.
Communication is the key to success, including the following bullet points:
Pay starts at a base which is 75th percentile – a generous base in our industry.
Group bonuses, which reflect the results of the group’s efforts, allow you allow to reach the 90th percentile or higher.
On top of this, profit sharing enables the addition of 10-20% of your base.
Altogether, management thinks that this is a generous package. The difference from the old system is that employees will be rewarded for making decisions which will benefit the group as well as the company – and you will be generously rewarded for this.
Once plans are communicated to employees 1-on-1, reinforce the message with a group presentation and open discussion at monthly company meetings.
Consider: significant changes in compensation may be best taken in small rather than large increments. Start with small incremental adjustments. If these are effective proceed to larger increments on a planned and open schedule. This is particularly true if the historic culture has been that we all win or lose together.
A downside of rewarding by team is that some will get rewarded for producing minimal results. Consider some percentage of discretionary payments to recognize and reward effort instead of pure parity within the team.
Consider longer-term results within the payment scheme – not just quarterly results.
People need to know that they are accountable. Let them know that a 75% base is reasonable but that the significant rewards will be for producing results above this level.
Situation: The CEO of a service company is concerned about lost income from uncaptured billing. He has identified the cause – failure to capture extra hours that haven’t been billed – but is struggling to get employees to monitor this more effectively. How do you implement a process change?
Advice from the CEOs:
The group presented two options for growth: bring in experienced outside people to develop additional systems to run the company, or a hybrid model using internal resources, augmented with outside expertise.
Bring in Experienced Outside Resources: Hire an experienced outsider with a track record in your industry to design and implement the needed systems.
Pros for this solution: the outsider will bring a fresh vision and new energy, plus the experience and know-how to make the desired changes.
Cons: impact on current business culture. This may generate resentment among employees who can no longer make decisions on the spot and may remove a path to management for existing staff. Possible negative impact on customers who receive larger bills due to change orders.
Hybrid Model: Outside person creates model and trains employees to implement it, then monitors the system and progress long-term. The key is to change expectations and behavior within the team.
Pros for this solution: more opportunity for current employee participation; involves employees in the design of the system, providing better buy-in to the solution.
Cons: as with any change, this won’t provide the full expected return. Just the fact that things are being changed impacts the efficiency of implementation. Unanticipated blocks and resistance may hinder progress – don’t be surprised by this, it is predictable.
Implement SOPs that facilitate rapid response to change orders – starting now and with whichever option is chosen.
Generate a pick list of all possible change orders with pre-calculated costs to guide employee choices and keep customers informed.
Whatever solution is chosen, be sure to communicate frequently and consistently with employees to facilitate the change.
Situation: A CEO is concerned that her #2 is being challenged by others in the company. An option is to hire a technical project manager; someone who carries the CEO’s authority and who can get things done. What are the obstacles to achieving this? How do you boost company morale?
Advice from the CEOs:
The technical project manager must have a non-threatening role – they shouldn’t challenge the technical skills of the developers. The role is to oversee schedules, progress, and to resolve barriers – both technical and personal. The job is to get things back into shape.
While the business involves highly technical software, operationally it is people centered, not software centered. People centered means a team that collaborates and supports one-another. The important questions are:
Where do the needed people skills come from?
How do the model and reality transition to a people centered business?
Look for someone who can nurture talent. People skills are more important for this role than technical skills, with the caveat that individual must be able to understand technical challenges.
An option is a 3rd party within company to straighten this out.
“COO” Responsible for Technical Direction – title is important because it conveys respect.
The CEO’s voice and ears.
Run weekly meetings and is the go-to person when the CEO us traveling.
The focus is to manage the primadonnas and keep them focused on their jobs instead of on interpersonal conflicts.
This role focuses inwardly on company vs. the CEO who focuses outward on the broader vision, key stakeholders, etc.
The bottom line – this is your company, your vision. Make it work. The task is teaching maturity – learning to give rather than worrying about making a name for themselves.
Have regular lunches with each of the developers and have frank conversations with them. What’s up and what’s wrong? Listen and let them air their concerns. Talk them through these concerns, but make sure that they understand that the CEO sets the direction both for the company and the boundaries of acceptable and unacceptable behavior within the company.
Situation: A US-based company is in the process of merging with a foreign company. The US company has multiple locations across the US, and there are cultural differences between these locations. The CEO has worked diligently to mitigate these differences. The foreign merger presents new challenges. How do you maintain company culture in a merger?
Advice from the CEOs:
Between some of the US locations, there has been a “we make money, but you spend money” perception. How did the company get past this?
The company adjusted metrics to demonstrate the contribution of each division to short and long-term profitability.
This information was communicated selectively to key opinion leaders within the company.
Use the lessons from this experience to plan post-merger communications and protocols that will contribute to team integration post-merger and improve the chances of merger success.
Focus on the common vision and interdependency of the teams. This accommodates differences in culture and encourages teams to appreciate each other’s contribution. Use the same technique during the merger.
Have lunch with CEOs of other companies that have been bought by foreign firms. Learn how they adapted to the new reality. Ask what worked or didn’t work. Seek specific details of solutions that were developed that could be applicable to the planned merger.
Become better educated on business culture in the country of the company with which you will merge. Seek experts who can give seminars to company employees on what to expect and how to work most effectively with workers and executives of the foreign company.
Situation: The CEO of a specialty component company wants to standardize documentation of company procedures covering sales, production and ISO documentation. This will take time and effort, and employees are concerned about accountability for poor results. How do you incentivize employees to document SOPs?
Advice from the CEOs:
Are employees are being asked for accountability without being empowered or rewarded for performance? Currently, there is nothing about employee performance that is directly tied to:
Dollars in raise, or
Share of the bonus pool.
Everything is determined at the CEO’s discretion.
Why would anyone want more accountability if they feel that they have little control over their jobs or future at the company?
To increase accountability and drive, employees must be given control over the factors tied to retention, pay and bonuses.
To create an effective system for employees to document standardized SOPs they need:
Incentives that are under their control to achieve the objective – creating standardized SOPs.
Objectives that are achievable with clearly stated rewards for performance.
Performance evaluations tied to clearly stated objectives, discussed with and agreed to by each employee, which drive raises, bonuses and rewards.
The messaging about these changes must be delivered with energy and passion. Employees must feel excited by this opportunity.
Understand that this may cost 10-15% in increased overhead but will boost the value of the company way beyond the cost.
Employees need to know the vision for the company and must be empowered to achieve the results to fulfill this vision.
The why behind the desire for standardized SOPs is just as important as the incentives created to achieve them.
The why must be clear, simple, and must be understood by the employees for everything to work.
To further motivate the team, involve them in designing the incentive program.
Ask what they want. Maybe it’s something as simple as a fun day with the team.
If they aren’t asked, the danger is that they will not respond to the incentive offered. Money is not the only, and in many cases is not the most effective incentive.
Situation: The CEO of a service company continually finds the company short of cash. They have just hired a new accountant, but it will take time for this individual to understand the financial situation and to generate recommendations to improve cash flow. How do you keep a company afloat short-term?
Advice from the CEOs:
Point #1: This isn’t just a question of controlling costs; the company needs to build the infrastructure to succeed.
If there isn’t someone on the team in a position of authority, who the CEO can trust completely, hire this person. The CEO can’t control all risks.
While the company has shrunk over the last two years, it is still a substantial company and needs professional management. To grow effectively, professionals are required in key leadership positions. If necessary, hire experienced outside talent
Look for teachable moments as challenges arrive. The CEO, instead of solving a problem, should work with employees and mentor them through discovering and implementing solutions.
How to communicate this to current staff?
Put the story together. Be able to make a clear statement to them, including the current situation and future possibilities for which the company must prepare.
Generate charts and metrics to support key points.
Use senior staff as the mouthpieces to present the story to the rest of the organization. Once they are onboard, have them help craft the message. Don’t underestimate the CEO’s authority. This is business, not a popularity contest.
Let others make mistakes – it is part of the learning process – no matter how critical the situation.
Point #2 – Return to the company’s roots.
The faster everyone accepts that a focused approach is the only way to survive, the faster the company will turn around. Reestablishing company presence in key markets with a new model that speaks to their desires makes a lot of sense.
Be very clear as to what flat-rate service pricing covers. Include this in the signed customer agreement. Don’t allow costs to creep up or it will kill the profitability of flat rate jobs.
Create an infrastructure nimble enough to adapt as market conditions change. Identify what really works and focus on this.
A company has been approached by a larger company that is interested in
purchasing it. The purchaser wants to fill a niche that they don’t currently serve,
but which is important to their growth. The CEO is concerned about what will happen
to employees following sale of the company. How do you respond to a purchase
from the CEOs:
Questions for Preliminary Stage Research:
What valuation is the tipping point for an attractive offer by the buyer?
Determine the nature of the purchaser’s interest in the company and how it fits into their broader strategic picture. If their plan will dramatically change the market the company’s current market value may go down later relative to doing a deal with them today.
If the acquirer has a history of buying other companies, look at who they’ve recently bought, what they paid, and what kind of impact they had on the staff and culture of the companies purchased.
Check out the purchaser’s P/E ratio. If it is in the range the company’s desired multiple on EBITDA, a good deal is possible.
Temper the company’s response and approach to get the most from this experience.
Currently, assumptions about the acquirer make the offer appear unappealing. Ask questions to validate or challenge these assumptions.
Be open-minded so that the purchaser reveals more about themselves and the market than they would if they sensed a lack of interest in an acquisition.
How does the company protect itself during the inquiry and due diligence process?
Keep staff numbers and individuals, and customer lists close to the chest.
Have an LOI and ask for a breakaway clause before sharing significant information.
Breakaway clause: if the two companies get into discussions and the potential acquirer decides to abandon the discussions, it will cost them $1M.
The potential acquirer may not agree to this, but it demonstrates that the company is serious both about the discussions and about preserving the confidentiality of its business information.
More Advanced Stage Questions and Research:
This looks like a strategic interest. If so:
Get assistance from an investment banker.
Look at what other alternatives may be available to the acquirer to assess the company’s potential value.
Any offer other than a high-multiple strategic valuation and offer should not be of interest to the company.
What restrictions will the acquirer put on the company?
For example, if there is an earn-out value, will they give the company the freedom to operate to maximize this value?
Be careful with employee communications and how employees are informed of an outside interest. This can be difficult during due diligence.
If the founder remains with the company post-sale this could help lock in the value of the exit and assure the employees’ future.
Make the most of this opportunity.
Are there ways that the company can become better and smarter working with the acquirer?
Is there a relationship short of acquisition than would benefit the company like a collaboration or partnership?
Can a relationship short of sale enhance the company’s market presence and help the company to achieve national status more quickly?
A young company that focuses on personalized solutions needs to generate near-term
revenue to meet expenses. There are also options for debt or equity financing,
but the terms for each will equally depend on near-term revenue potential. How
do you generate near-term revenue?
from the CEOs:
in terms of the referenceability of early customers. As a new company, the first five customers
define the company to future customers.
core values of the company will help clarify how to make early choices.
just go for the easiest closes.
a chart of potential customer prospects:
potential prospects into groups.
is the deal model and key value proposition for each group?
a video and communications package to demonstrate the company’s benefit to each
are trade-offs between the different deals that the company will pursue:
fast deals are most likely to meet immediate cash flow needs.
biggest deals may involve the creation of LLCs. These will involve both more
time and additional legal fees.
sure that early deals align with the company’s core brand.
outsourcing to speed the provision of services to early clients. Build this
cost into your billings. Assure that the funds from early deals flow to or
through the company. This will improve the financial story to additional
serving special interest groups. Their potential value is that they work for
their passion more than for money. If the company chooses to work with one or
more of these groups, assure that customer selection aligns with company values.
current focus for near-term monetization is on merchandizing. As an alternative,
consider charging a separate fee for the use of company IP. This may give clients
additional incentive to utilize company technology to monetize their
A company is in discussions with a competitor about a possible merger. The CEO seeks
advice both about how to proceed with these discussions, and how to communicate
the possible merger to staff. How do you merge with a competitor?
from the CEOs:
Until there is a signed binding legal contract everything must be business as usual.
Maintaining this attitude provides more leverage as the negotiation proceeds because the company is prepared for either situation.
If there is a differential in pricing between the company and the competitor, write short term contracts with customers that the company takes from the competitor. This creates the opportunity to revise the contracts and pricing if the merger is completed.
This issue begs the question – why do a deal now versus in 1-2 years? If current strategies are increasing the size of the company relative to the competitor, in another 1-2 years the company will be worth more compared to the competitor and will be in a position to complete a deal on more favorable terms.
At this point, most staff are unaware of the discussions. How is it best to proceed?
Consult an HR expert on when to start communicating, what to communicate and how to phrase the message.
The trigger to initiate top level staff communications will be the signing of a due diligence agreement.
The message to senior management: there is interest but no binding agreement, here’s the deal that’s being discussed. Then just listen to what they have to say.
Communications to staff create an important management challenge. Staff will be concerned about their futures and will want to have assurances that these are secure.
Situation: The Founding CEO of a professional services company has always been deeply involved as a service provider and rainmaker in addition to his role as CEO. As the company has grown he sees the need to spend more time as leader of the company instead of being a doer. What can be done to facilitate this transition, and what expectations need to be created? How do you transition from doer to leader?
Advice from the CEOs:
Another CEO removed himself from day to day business development activity by bringing in a new rainmaker. These were the adjustments made to facilitate the process.
During the first year he worked with the new individual in a team or partnership role.
Compensation was results-based. Discussion of equity consideration was deferred until the individual proved herself.
The CEO moved himself out of the individual contributor role except as needed to support the new rainmaker’s efforts.
All of this was accompanied with clear communication to clients: “this adjustment will provide better service to you; here’s my number if you need help.”
Rainmakers are a different personality type. To be most effective, they must be able to say “my team.” Allowing this will ease the transition and improve the relationship.
Create teams to deliver solutions that have traditionally been provided by the founder.
Identify skill sets behind the roles that are being delegated.
Build an organization that will fill these roles.
Participate in team meetings, but as an advisor rather than as principal decision-maker.
Adapt role and behavior in phases to ease the pressure of the change on both the CEO and the team.
How does the CEO manage his own expectations as well as those of the company as he makes this transition?
Delegation initially takes more time and effort than doing the work yourself. Be patient and let the investment pay off.
Larry E. Greiner of USC was an expert on the study of organizational crisis in growth. Per Greiner’s model, the company is currently at stage one – moving from principal and founder to initial delegator. It may be a useful to study this model.