Situation: A CEO is concerned that there is insufficient fairness and accountability within her company. One manager is paid hourly and the CEO is thinking about shifting this person to salary plus bonus both to put them on par with other mangers and to create more accountability. How do you create accountability?
Advice from the CEOs:
What exactly are you trying to achieve? An operations manager is paid competitively at hourly rates, even compared to salaried employees. The issue is that this person has no responsibility for results as they relate to the P&L. Given this, the group consensus is that it is better to have this person on an incentive program that ties compensation to the performance results that you want.
One objective is that you want this employee to contribute more to planning, strategy or the company’s attempts to develop solutions to the challenges that they face. Have you spoken to the employee about your expectations? Does the employee realize that you want or value their input? Direct communication with the employee is important.
While the employee understands his responsibilities in the operations area, be sure that he is aware that he is also important to the profitability of the company, and managing operational expenses which are contributors to that profitability. Depending upon the individual’s background, he may need training about the links between expenses and the P&L.
Given these factors consider the following options:
Adjust the employee’s compensation by switching from hourly to salary. Make the base livable, but not comfortable, and tie the bonus (which will make the total compensation package comfortable) to the profitability of the business. This will have an immediate effect.
Clearly explain to the employee that you value his creativity and input. Give this person the freedom to contribute and make it clear that his contribution is expected. Early on encourage this and acknowledge contributions in meetings.
You may want to make this person a part owner of the business. This will have a long-term effect.
Situation: A company’s founders will be fully vested in their options by the end of the year. Also, the option pool for founders and employees has been exhausted. The CEO has spoken with the Board Chair and Compensation Committee about this in terms of fairness and incentives for future work to both founders and employees, while making it clear that the Founders are not unhappy. The Chair listened sympathetically and promised to get back to the CEO. Is there anything more that the CEO should do to negotiate new shares for founders and employees?
Advice from the CEOs:
Seek a letter of understanding from the Board that the founders and employees will have access to future stock incentives, and a timeline as to when this might occur – either in the near future or at the next financing round.
Wait a few weeks and have an informal follow-up conversation with the Chair about his current thinking. Ask whether he would like any further supporting information on the issue.
So far, your approach has been non-threatening. Keep it this way.
Maintain focus on fairness and your tone supportive of the best interests of the company.
Situation: A company just received an approved vendor renewal contract from their major customer. Upon review, they found language that potentially holds them liable to cover the customer’s legal costs of enforcing the agreement. If the company does not sign the contract, they potentially lose their major customer. How do you respond to an onerous contract clause?
Advice from the CEOs:
Corporate attorneys are paid to protect the corporation and purposely write vendor agreements to their favor. There are two issues here: whether they will negotiate this clause, and the likelihood of enforcement – which may be very small.
Double check your previous vendor contract and assure that this language want not present then. If the language is the same as in past agreements all you are doing in updating an expired agreement. Perhaps there is less of an issue than you anticipate.
If you find that this is new language, then call your primary contact in the customer company and ask about the new language. It may be something that their lawyers are trying to add to contracts but will forgo if called on the language. However, if your primary contact responds that this is new standard language in their contracts, you still have options.
Try pushing the issue to higher levels of the organization or through your advocates in the company and ask them them to modify the language.
Call your own company lawyer and ask how they advise you to respond. A letter from your lawyer to the customer’s lawyers may settle the issue.
Call other vendors of this customer and find out how they have responded to the new contract language. If several vendors call and complain about the fairness of the language, the customer may determine that the new language is not worth the hassle.
Situation: The Company struggles with differential pricing. They want to be fair to clients but feel that a one-price policy limits growth. What tiered pricing models work, and how are they rationalized?
Advice from the CEOs:
Differential pricing by client demand.
For high value services, you must have a compelling value proposition.
Research comparative premium pricing for similar value propositions and set prices accordingly.
For price sensitive clients, offer two alternatives:
Senior staff services at one price or associate services under supervision for a lower price. Let the client choose between price and quality.
Differential pricing by market risk.
Early stage clients want high service but may not be able to pay bills. This justifies a premium price, as you are not assured of collecting for services. The differential is a risk premium that covers non-payment risk.
Well-established clients are less risky, and support lower pricing due to a lower risk of non-payment and are assigned a lower risk premium.
Differential pricing for bundled vs. non- bundled services.
If a client purchases individual services, then there is a set cost for each service.
However, if a client wants to purchase a bundle of services, then it is reasonable to discount the bundle. You are not necessarily charging less for the bundle, because you have now received additional business at a lower acquisition cost. Your “discount” reflects the savings that you have enjoyed in reduced marketing and sales cost.
Key Words: Pricing, Pricing Models, Fairness, Value Proposition, Service Pricing, Market Risk, Bundled Services, Risk Premium