Situation: A technology company has established a leadership position in their niche. Nevertheless, they struggle with individual performance and buy-in to company performance. The CEO asks whether increasing ownership through stock incentives in a non-public company is an effective incentive for employees. How do you strengthen internal incentives and ownership?
Advice from the CEOs:
In the past, employees voiced a strong predilection for share ownership as recompense for the personal risk and sweat that they have put into the company.
It may be advisable to revisit this, particularly given the increased risk that comes with share ownership as a result of regulatory changes of the last 10 years.
As a substitute for share ownership, they may be open to some proxy that will provide them with value and the opportunity to have their opinions heard in the case of a buy-out.
Another company looked at this closely at the time of formation. They decided that proper recognition for contribution did not equal ownership. Ownership also entails personal liability and risk, which many don’t realize and, once they understand the implications of owners’ liability, don’t want. As an alternative they adopted a liberal profit-sharing structure that has met with employee enthusiasm.
Think about this discussion in terms of incentives:
Short Term – Annual-type incentives
Make sure that incentives align with desired behaviors so that individuals’ contributions contribute to business plan objectives and the next step for the company.
Long Term – consider the trade-offs
Broadly distributed share ownership not only complicates future flexibility but may also complicate a buy-out or merger opportunity. Consider the implications of a situation where most shares are in the hands of past rather than current employees.
Strategic Partners wishing to invest may be reticent to work with a company with broadly distributed ownership.
ESOPs, while frequently referenced, tend to eat their children. They have several complications:
They are governed by ERISA, so you cannot discriminate. All must be able to participate.
Ownership is prescribed – with a maximum of 10% per employee. Will a future CEO candidate be happy with 10% when the admin assistant gets 3%? In this way ESOPs can impair succession and recruitment plans.
Annual valuations can be expensive.
Phantom or Synthetic Equity Programs
A company can tailor these to meet changing objectives.
Valuations are cheap and valuation metrics are easy to monitor.
To work through the options, sit and talk with the employees, and listen. Ask what concerns them. Don’t try to come up with a solution until their concerns are understood. There is an array of options available.
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.
Situation: A small tech company’s Board of Directors is made up primarily of founders and advisors. The CEO wants to know how other companies structure their Boards. Concerns include increasing accountability of management, obtaining an objective view of company operations so to counteract group-think, and accessing opportunities for strategic alignment. How do you structure a small company Board?
Advice from the CEOs:
In a small company, the fewer the number of board members and owners, the better. There are two considerations: control of the destiny of the company and complexity of the transaction in case of an investment or buy-out opportunity.
It is important to differentiate major from minor shareholders, including incentive-based owners.
What are the advantages of a Board of Directors?
Sounding Board – a group that can help management evaluate product and market opportunities.
Accountability – Board meetings provide an opportunity to assure that leadership and management are focusing on the best opportunities for the company.
Exit – knowledge of the industry, ties and introductions to potential acquirers.
Given new Federal regulations, the proper role of a Board has changed. Key responsibilities of Boards include:
Oversight of Corporate Governance.
Fiduciary Responsibility – to the shareholders.
Work with local or regional experts on Board role and structure. Experts can provide introductions to potential Board members that fit the company’s needs.
Good Board members will want Directors and Officers Insurance coverage.
Consider developing an Advisory Board, to compliment a stronger Boards of Directors.
Look at the key talents that the company is missing internally.
Ask friends, business partners and associates who they know who can add these talents.
Before kicking off a formal Advisory Board, start with informal discussions. Consider a facilitated dinner to share ideas.
One company has eight outside advisors who each receive 1/8 of a percent of the shares of the company for three years of service. The share offer required for service may be a function of the eventual forecasted exit value of the company.
Special thanks to the late Bill Rusher for his insight and contribution to this discussion.
Situation: The CEO of a professional service company is reaching retirement age. The plan for years has been for a key field manager to take on this role; however, neither the CEO, the founder nor most employees feel that this individual is up to the job. What can be done to either better prepare the key manager for the new role, or to demonstrate that this is unfeasible? How do you transition to new leadership?
Advice from the CEOs:
For the long-term benefit of the company, it is important to create a situation that will either prepare the field manager to succeed or provide the Company with a back-up plan for ongoing leadership.
If the CEO and founder are concerned about this individual’s ability to succeed, then coordinate a plan with the founder and then meet with the key manager.
Let the key manager know that the owners plan to sell the company in 3 years.
This can be an internal sale – the CEO and founder sell their shares to the key manager – or the owners will look for an outside buyer to buy out all current owners.
See how the key manager responds.
If the key manager expresses an interest in buying the CEO’s and founder’s shares, then require this individual to make the same level of financial commitment that the CEO and founder have made.
Another CEO experienced a comparable situation with an individual who was both underperforming and a significant shareholder.
This CEO created a very public vision of what he expected this individual to achieve – in positive terms. The CEO also put an outside hire in a similar role to create a performance comparison. The result was a significant increase in performance by the inside individual and a successful transition to additional responsibility.
If the key manager is to be put on a track that leads to the CEO role there will be two challenges: assuring that this individual can acquire the skills to succeed and assuring that the individual can demonstrate successful leadership within the Company. To meet these challenges, take the following steps:
Make a public announcement of the plan to transfer the mantle of leadership to the key manager;
Raise the bar of expectations for the key manager to demonstrate his or her leadership capacity;
Define a full program of training to provide the key manager with the skills to lead the Company;
Ideally, allow the key manager to prove his or her mettle through a highly visible responsibility – like growing a key market segment – so that he or she gains the respect of the others.
Require the same level of financial commitment that the CEO and founder currently bear, so that everyone knows that the key manager has “skin in the game.”
Put the key manager on the same compensation program as the CEO and founder, as this will become his or her compensation program on becoming CEO.
Situation: The CEO of a family-owned business finds it difficult to hold family-member managers accountable. They are responsible for significant portions of the business; however, family dynamics make it hard to supervise them. How do you communicate that their responsibilities affect both the business and the family? How to you manage family in a business?
Advice from the CEOs:
The first issue: Why have they not been asked for accountability to date? If you don’t ask for accountability, then don’t expect them to take this on by themselves.
Assign one family member responsibility for developing the marketing and sales strategy for the company.
Change the compensation from salary to salary plus commission. Over a 6-month period, reduce the base salary to half of what this individual currently earns and tie the rest to success increasing sales.
Assign this person responsibility for analyzing the markets that you serve. Are there areas that the company has not tapped into yet? What can you do to make your web site up more effective at driving sales? How can you use exclusivity on select products to your advantage?
When was the last time that the principals of the business met to figure out what to do?
Set the stage: we have split the business into two divisions and have separated the financials. This gives us more flexibility as we develop the business.
Show them the trends of each business.
Show them that if the current trend continues the business will be unsustainable in X years.
Facilitate a discussion that will start to generate solutions.
If the others do not respond:
Tell them that you appreciate their attendance at today’s meeting.
Tell them that you will meet in another two days as a team. Until then you expect them to think things over and to come ready to share their ideas.
Do not hold the meeting in your office or conference room. Secure an off-site neutral location with a white board.
If you are uncomfortable facilitating this meeting hire an outside facilitator. Ask for the input of the others in selecting a facilitator and follow their recommendation. If you work with a facilitator, start with your own dilemmas to set the tone.
Situation: A small company’s business is increasing and they need to build a sales organization. To date all sales have been conducted by the founder CEO and a single employee salesperson. Should they build inside or outside sales first? Are there trigger points at which one or both should be increased? How do you develop a sales organization?
Advice from the CEOs:
Right now you have first mover advantage in your market space. You have a unique offering and no existing competition. The immediate objective is to maximize early market share. Borrow if necessary to ramp sales. There is no trigger point.
Hire an outside salesperson now. You want an individual who is knowledgeable about your market and who has a large set of contacts. Make at least 50% of this individual’s compensation variable (commissions) to start and escalate the percentage of variable compensation as sales grow. Hire at current market rates.
Supplement your existing marketing with an investment in social media marketing and SEO (search engine optimization). Don’t try to do this yourself on the cheap – hire a pro. Invest in Pay-Per-Click to push your visibility.
To sell this plan to your existing salesperson and the rest of the team, it’s time for a Come to Jesus talk.
Make a strong business case for your program.
The trade-off is either invest now to rapidly build sales or become insignificant.
Once you’ve made your pitch and received consent, let the plan work before you ask for more.
Situation: A company’s accountants advise them to make distributions for tax purposes. Simultaneously, the company’s future is based on technology and staying ahead of the competition. This requires ongoing investment. Do you focus on taxes or investment?
Advice from the CEOs:
The focus of the answer is distributions and company morale, not tax planning. Think about the impact on the team. Are there considerable differentials in compensation within the company? If so, this may be impacting morale.
Differentiate bonuses from variable compensation. Make bonuses special. This starts at the top. The attitude should be that if someone works hard, they will be compensated. Once bonuses become assumed, they are just regarded as part of the overall compensation package.
Smaller geographical units can help retain a small company atmosphere and drive. As a company grows, similar results can be achieved with Tiger Team projects.
If the organizational structure enables this, foster friendly competition metrics between offices – and publish the results.
One company distributes performance data to top staff – with color-color coded red/yellow/green metrics based on performance. All red and yellow numbers require an explanation. The company has seen a significant reduction in red and yellow metrics since they started this.
At company meetings – publicize and recognize top 10 performers in various areas. Recognition boosts morale.
Company events boost teamwork and morale. These may include company barbeques, in-house cooking shows created and run by staff, and quarterly outings – bocce ball, tubing, sailing on the Bay.
Growth is accompanied by change. When a company starts it’s a mission. After 15 years it’s a job. This is a function of growth, and it takes ongoing creativity to keep individual employees excited about their job and role.
Situation: A company is rapidly ramping sales of standard products. However, the rep network that sells the company’s products has had more difficulty selling higher dollar / higher margin custom products. How do you sell both standard and custom products?
Advice from the CEOs:
Make the custom products look more like spec products with adaptability. Create a grid that allows the customer to easily spec the specific product that they need and quickly determine the price of the product. This price can be overestimated at first blush, or scaled depending on the number of units wanted. Consider using a laptop or PDA spreadsheet.
Consider the combination specialist / generalist approach that companies have used successfully for highly technical sales. Put a significantly higher commission on the higher price / margin custom product, and have your own “specialist” reps do joint calls with the distributor reps who have relationships with the customer. With the incentive of higher commissions, a percentage of the distributor reps will take the initiative to learn from your inside reps how to sell the custom product to boost their sales and commission income.
For your distributor reps, separate and optimize lead generation and deal closing from a compensation standpoint to encourage both.
Reps with consultative sales experience, for example selling intangibles such as insurance, may be the best candidates to sell your custom offering.
Offer quarterly training of your reps and distributors to encourage them to sell the custom products.
Consider telemarketing. Support your telemarketers with a well-prepared script to assist them in qualifying prospects and setting appointments for your own reps.
Situation: A company sells specialized components to a large manufacturer. The manufacturer is building a new product and, for this product, is requiring that all suppliers be approved suppliers. The company sells other products to this manufacturer and is in process of becoming an approved supplier, but the manufacturer wants to start using the company’s components for their new product now. As a work-around, they have asked the company to teach someone else their IP until they are approved. Would you share your IP with another company? How important is it to protect your IP?
Advice from the CEOs:
This is a creative request from a large company to a smaller supplier. Absent a legal requirement that suppliers must be approved – not the case here – they are simply trying a bureaucratic ploy to get you to release your IP. Your component is necessary to them and they can’t get an equivalent component from anyone else. If they want your component for their new product, and want to release the new product on their internal timeline, insist on a waiver for the new policy until you have become an approved supplier.
Stand on principal. This is your IP and it is proprietary. If another supplier, a potential competitor, has the IP to do what you do, you don’t need to train them. If they need your IP to make the components you need to protect it.
Ask the manufacturer to put you on the fast track to approval supplier status. This is faster than teaching someone else your process.
Escalate this within the customer company until you find an audience.
Bottom Line – don’t give away your secret sauce. This request is unreasonable. Unless, of course, the other company is willing to give you satisfactory compensation for your IP.
Situation: A company has a new set of employees coming up to speed, but this is happening slowly. The work environment is semi-skilled, with learning curves for new office employees and apprentices. How do you get new employees up to speed?
Advice from the CEOs:
Provide a competitive level of compensation to journeymen and higher level office employees. Make these levels of skill to which office employees and apprentices aspire.
Develop a mentor program. Provide chits (company currency) to both the mentor and the mentee for learning each new processes. Make awarding these chits a big deal. For example, the mentor and mentee collect their chits from the CEO who then takes them down to the treasurer to collect on the chits.
As appropriate, create a team learning environment. Game theory has demonstrated that both basic and more advanced skills can be successfully taught in a team game environment where there is both competition and rewards for attainment.
Set up a system where successful training is demonstrated bench performance.
Establish Operator 1, 2 and 3 levels to qualify for graduated levels of jobs or responsibilities. This creates a career track and an incentive to go for the next level. Celebrate employees as they move from level to level.
Company celebrations are important. Celebrate birthdays, tenure anniversaries, skill level attainment, career track attainment, and so on at monthly meetings or events.
Hire slow/fire fast. Give new employees a fair shake, but if their mentor doesn’t see promise in them, let them go.