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 focused on growth, which is driven by new contracts. This, in turn is driven by new sales contacts per week. Sales staff are paid on commission. The CEO wants to assure that quarterly objectives are met to grow the company. How do you maintain focus on quarterly objectives?
Advice from the CEOs:
Track and publish progress against weekly, monthly, quarterly metric objectives and key drivers.
Post charts around the office to maintain staff focus on objectives.
Put up whiteboards that show individual metrics as well as daily “top 3” focus items.
Identify key market sectors where focus will pay off for the company.
It’s OK to take a generalist approach as the company develops a new market sector. This helps to learn the dynamics of that sector.
As sector market penetration grows, develop functional or sector specialties.
Identify and focus on the gaps to company success.
Monitor and generate incentives to increase sales activity. The more fun that is involved in this, the faster the company will close the gaps.
Focus marketing on developing more prospects. Brainstorm creative marketing approaches that will generate prospects. Create a competition to develop the best new ideas with incentives or prizes to celebrate the most successful ideas.
If additional resources are required, currently beyond the company’s budget, investigate adding commission-driven contract resources with strong incentives for identifying new prospects and landing new clients.
A CEO is concerned that all her key personnel are over 50. This includes software
engineers who are experts in languages which remain at the foundation of many
customers’ databases, but which are no longer formally taught. How do you
replace aging talent?
from the CEOs:
at which areas potentially limit the company’s growth. Is it technology and software
expertise, or marketing and sales? Based on this assessment, rank the critical
positions to be filled and start hiring staff who can grow into the most
a cue from the Japanese. For years their aging workforce was predicted to limit
the country’s growth. Instead, they chose to retain employees through their 70s
and this has helped them to maintain both productivity and employment.
Baby Boomers are finding that they don’t have the savings to retire and are
working well past the historic retirement age.
Baby Boomers retired but found themselves bored after a productive career and have
returned to the labor pool.
factors may delay the company’s need to replace aging talent.
bigger question is what to do if a key player is lost. Focus on hiring back-ups
to key personnel and allow several years for them to come up to full speed. Current
employment trends suggest that numbers of experienced people are returning to
the labor pool. Look for a few good people to add to the team.
are the plans of the company’s key clients? Do they plan to stay with the
company’s products and expertise, or to sunset these and replace them with new
technology? Adjust operational objectives, as well as the exit strategy, to achieve
desired growth given customers’ timeframes.
Situation: The CEO of a product and service company has seen her company struggle for several years. While the overall market has turned around, her company has not. She is tired of barely staying afloat and not making the kind of money that she a decade ago. Is the glass half-full or half-empty?
Advice from the CEOs:
What keeps you from hitting the numbers? Creating a forecast, budget and objectives allows you to establish a reward system for meeting and exceeding objectives. Once there is an upside, then not hitting the numbers means that a manager misses the upside and the financial rewards that accompany this achievement. This is often consequence enough, particularly if others are hitting their numbers and getting performance bonuses.
The glass is half-full. The past few years have been difficult. Review what the company accomplished during an extended recession. Look at how the company fares versus local competitors. Review positive changes that have been made and take credit for these. This will provide energy to move forward.
Given the company’s successes, sit down with the management and show them what the company has accomplished. Celebrate. Use this opportunity to set goals for next year. A good place to start is to set a bottom line profitability objective before taxes.
To be a great manager requires more than just a revenue and profitability target. People rally around a vision and a culture that they aspire to and want to enjoy. The role of the leader is to create this vision and culture. Do this, and revenue and profitability will take care of themselves.
Two more thoughts on whether the glass is half full or half empty to check your bearings:
What is your passion? If you love what you’re doing, what else would you do?
If you were doing something else, would you be making more money or enjoying more success?
Situation: The CEO of a privately held company wants to share company success with employees. An option that she is exploring is phantom stock. The objective is to engage employees in company success. Does a phantom stock plan make sense?
Advice from the CEOs:
Why would you use phantom stock options instead of real stock?
Phantom stock options are popular in the tech sector. Phantom stock confers the right to receive cash at a future point in time, typically a share of the proceeds received upon the sale of a company.
The principal difference between phantom stock and real stock, is that real stock must be issued in exchange for cash, property or past services. There is also a tax consequence to the receipt of real shares. When shares are issued in exchange for past services the employee must recognize taxable income, just like wage compensation. Employees may be disappointed to learn that they may face taxable income based on the fair market value of their shares received without compensating cash to pay the tax.
Let’s assume that the objective is to increase employee engagement as they observe the value of the shares increasing with company success over time.
Under phantom stock programs the value of the company is pegged on a periodic basis, based on a pre-set formula developed by the company.
In some cases, employees can “sell” their phantom stock back to the company for the differential between the price when they were awarded the stock and the current pegged price.
The structure of the program is determined by management based on company objectives.
Employees frequently don’t have the cash to purchase real stock or options at a fair price given the value of the company. Using a phantom stock plan, a company can offer the rewards of stock ownerships without a purchase requirement or tax implications at the time of award. Employees can be apprised of the value of their phantom stock based on a periodic internal accounting exercise.
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: Top managers of a company are all very experienced. All want to drive the company – but each in their own way. Overall objectives are not significantly different but the path forward varies considerably among the managers. Is this situation common? Should the CEO be doing things differently? How do you create management alignment?
Advice from the CEOs:
Strong differences among strong leaders are common. This is not necessarily a cause for concern or a problem. Rather, it means that you have a lot of options to help address opportunities or solve issues.
When you hire bright, talented people with good ideas, there will always be differences of opinion. This is healthy. You need this, particularly when sailing uncharted waters.
As CEO, sometimes you need a strong critic on your team to moderate your inclinations. Just because you are CEO doesn’t mean that you always have the answer. Rather, allowing the answer to come from the team strengthens the team as well as commitment to execution.
How do you leverage the strengths of this team to create the best future for your company?
First, assure that the broad roadmap is clear and that everyone agrees on this.
When addressing a choice, opportunity or challenge lay out the situation in broad terms. Allow all of the managers their say, and facilitate the discussion to identify commonalities and differences. Confirm the commonalities, and dig into the differences to understand the perspectives of each. Digging into differences can identify roadblocks as well as alternative options. Keep the discussion open instead of trying to drive toward a single, quick solution.
Summarize the options presented. If there are multiple alternatives, do a ranking exercise to see if one rises to the top. Be sure to credit the managers for their ideas and creative input.
In each situation there is a final decision maker. All must respect that after you’ve listened there will be a decision and that decision will be executed. Allow them to execute and focus on results.
Situation: A company anticipates closing a Round 3 financing this year. The CEO has an idea of the range of management team ownership that is likely at this round. He seeks advice from others with experience. What can the team do to assure that their ownership is at the upper end of the range? How much should management own post-financing?
Advice from the CEOs:
The numbers change depending upon both company valuation and the funding environment. Currently, Silicon Valley venture capital firms are becoming more cautious and risk averse. This is because many companies that have received financing over the last 2-3 years have underperformed. Many have yet to even produce and release a product. In this environment, the chances for maintaining a larger share of ownership for management are not as good as in headier times.
Seek two outside counsel to generate two independent opinions on a fair management option pool, and to assist in negotiations. These will likely be boutique firms.
Approach the situation as an executive option pool objective. Determine what needs to be in place to attract new executives, as well as to replace existing executives should they leave or be unable to serve.
When discussing this with your board and investors, phrase the challenge in win-win terms. The objective is to lock-in key personnel and assure that key positions will be filled to meet company objectives. This is the best way to assure future financial success.
Key members of the executive team may want to seek independent advice, apart from the company or executive team.
Situation: A company has a key employee who is a high performer; however the company has not developed a good accountability structure to direct this person. The CEO wants to add additional accountability to cover everyone, both current employees and new people as they are hired. The system should be fair and apply to all. How do you hold high performers accountable?
Advice from the CEOs:
High performing employees are essential assets to a company. They thrive on meeting and exceeding expectations. However they need to recognize and accept accountability for the inevitable mistakes or misjudgments that will occur.
Lay out the challenge, and ask your high performing employee, and this individual’s manager, to help design the system for monitoring accountability around results.
Within position descriptions, include not only the role and expectations within the description, but also expected progressions for development. These should be objective, measurable and based on specific skills or capabilities within the development progression. Gather input from current employees as you create position descriptions, so that they reflect the experience of employees rather than idealized generalities.
Set your expectations for new employees appropriately. Expect perhaps 60% of optimal performance early on. As new employees gain understanding of the company and their roles, coach and expect them to increase their performance over time. Provide training to assist their development.
James Fischer, in Navigating the Growth Curve, argues that expectations, for the CEO, management and employees, change as a company grows from start-up to a large firm. If a company is small, it doesn’t want the same structure or processes required to operate a 250 person company. Too much structure stifles creativity and growth if applied to small, nimble companies. Institute a level of structure appropriate to the size and stage of the company.
Situation: Two key managers of a company are too busy with day-to-day activities to focus their planned 40% of time on growth. The company has hired personnel to relieve some pressure on them, and a new ASP (Application Service Provider) is improving customer out-reach. How can the CEO take pressure off these managers so that they have time to grow the business? How do you focus managers on growth?
Advice from the CEOs:
Small companies grow through their early stages with everyone wearing many hats and doing everything. The company is now larger than this and it has to stop. Managers need to focus their responsibilities where you need them to focus and stop doing less important tasks.
Have you gone over key responsibilities and expectations for the two managers? Do they have clear objectives and deliverables? If not, focus on this.
Brainstorm with them how they could free-up time to focus on growth.
Do this in a meeting. Your plan is 10% growth. Ask for their ideas on how to grow the business, and develop a plan to put their ideas into action. What help or resources do they need to meet this plan?
Three heads better than one to ask core questions – let them come up with the answers.
Design processes to address needs and responsibilities.
Rank implementation of options in terms of impact to the company and financial results.
Given the ranking, implement programs sequentially – most relevant and easiest first.
Taking orders by phone is clerical. This should not be a manager’s prime focus.
Have a clerical person answer the phone, and train them over time.
Limit the manager’s direct involvement in phone orders to critical situations.