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: 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: A company faces three options to generate growth. The CEO wants to pursue a path that keeps employees happy and rewards them for their efforts on behalf of the company. What are the trade-offs between the options and the potential impact on employees? How do you generate growth?
Advice from the CEOs:
There are three options to generate growth – continuing organic growth, accelerating growth through a merger, or by being acquired. These options are not mutually exclusive. The company may pursue more than one.
Organic growth can be accelerated by hiring an individual who’s focus will be company growth. The offer may include a minor equity position that is non-dilutive to current employee-owners, with vesting two or more years out.
It is important that top staff and key employees are comfortable with the person before finalizing any offer.
The message to current owners: “This person will drive this business with X expectations for results. The ownership position is contingent on delivery of anticipated results. Is this works as we anticipate, it is a win for all owners.”
Have a buy-back agreement as part of the employment contract should the individual leave. This should guarantee the company the right to repurchase any shares at an agreed price in the case of a separation.
The CEO has been approached by another company interested in a merger.
Is the value of this option increased or decreased by hiring the person described above?
Should the merger option still make sense, calculate a merger split that makes sense to current owners and see whether the merger partner will accept this. If not, find an excuse to drop or defer the merger discussion.
The CEO has also been approached by a potential acquirer. This could expand the market position of the combined companies, provide additional opportunity for current employees, and a cash payoff for current owners.
Talk to the other owners. Does this option meet personal financial and professional targets? What about personal needs to stay involved in business?
Once these discussions are completed, tell the potential acquirer what you want and need from the deal. They may agree!
Situation: A company offers a service that can potentially boost clients’ revenues by 50% or more. However, the CEO has found it difficult to communicate this value proposition to potential clients. While some clients understand and have bought the company’s service, too many others have not. How do you communicate your value proposition?
Advice from the CEOs:
Not everybody will buy any service, no matter what advantages it offers. Here are steps to take:
Make a list of clients that you have closed, and those that you have not.
Identify whether there is a difference in the profile of the clients that you’ve closed and those that you didn’t.
From the commonalities among those clients that have accepted your value proposition, create an ideal customer profile.
Use this profile to pre-qualify potential new clients and assure that they meet this profile before investing in sales efforts.
By focusing sales efforts on those clients that you are most likely to close, you will improve your close rate and also reduce your sales cost to revenue ratio.
As you cultivate a new prospect, identify those individuals within the client company who can block your sale. Make these individuals heroes for supporting your offering. Offer them appealing learning retreats. Offer augmentations that appeal to the unique needs of the client. Raise your prices to fund these augmentations, but more than cover these costs with boosted revenues to the client.
Focus on the key WIIFM – “What’s in it for me” – that will appeal to key purchase influencers. Enlist these people as your evangelists within the client.
Emphasize not just financial benefits, but quality of life benefits that will accrue to clients through your service. Back this with a guarantee that you feel comfortable making.
Situation: A company has lost the team spirit that they had when the company formed. The CEO has struggled to revitalize this spirit but encounters resistance from some employees. What techniques have you found effective in building or rebuilding a strong team culture and improving team performance?
Advice from the CEOs:
If an individual is resistant to team meetings, work with them one-on-one. Listen to their concerns about meetings and ask questions to focus them on a higher level of concern – individual and team performance and the need to build effective teams to enhance this performance.
If an organization has divided into functional silos, form multidisciplinary teams around initiatives to build inter-team synergy.
Choice of leader is critical in team formation. The best teams have the most effective leaders.
Crisp, clean communication is important. Document verbal commitments in writing.
Select team membership with an eye to team compatibility. Avoid putting individuals with a history of conflict on the same team, particularly if this is a management team.
Engineering product teams – where individuals work independently on distinct aspects of a larger project – may be more tolerant of past conflict as long as team activities do not require collaboration among individuals with a history of conflict.
Look for common value systems and common focus when assembling teams. This helps to build the team as a strong unit.
Recommended Reading: The Five Dysfunctions of a Team – Patrick Lencioni.