Situation: A company hired an experienced individual to sell for them as a consultant. The individual initially asked to be paid on an hourly basis. Results have come with surprising speed. Now the consultant is asking for a commission on sales. How much should you pay a salesperson?
Advice from the CEOs:
Tailor the commission structure to company objectives. For example, if the objective is to reward new business development, and to retain the individual, try something like:
Offer 10% commission on Year 1 sales.
If both the customer and the consultant are still with the company in Year 3, the consultant gets a 5% bonus on Year 2 and 3 sales.
Repeat this for successive years.
If the interest is a long-term relationship, determine the nature of the sales services where the consultant excels.
What is the individual’s focus?
Have a highly qualified sales expert do a telephone interview of the consultant and offer their assessment of the individual’s talents.
One successful sales model includes one measure to retain the job, and another to calculate commissions:
Set a dollar quota for sales performance – if the individual does not hit at least 85% of quota, they lose their job.
However, calculate commissions based on the gross profit that their sales generate.
This properly balances the focus between revenue and gross profit generation. To succeed, the individual must pay attention to both measures.
If the individual wants a substantial commission, then don’t pay a substantial base. Instead pay a draw against commissions to allow them to support themselves between sales.
Pay on receipt of payment, not on receipt of orders.
Situation: A CEO has been analyzing the metrics that she uses to track her company’s performance. Historically she has used common metrics like sales, gross and net margin, profit and net operating income, budget plan vs. actual expenses, and sales forecast vs. actual sales. She is curious what other companies use to track performance. What are your key business metrics?
Advice from the CEOs:
The most important financial metric for many companies is actually cash flow – how much cash you have on hand and your cash flow forecast. Two metrics that can help you to better understand and boost cash flow are:
Receivables – aging rate
DSO – Days Sales Outstanding
Additional financial metrics include:
Variable versus fixed cost ratios
To augment understanding of profitability, track “good” profit – revenue from customers who are profitable, as opposed to revenue that is either break-even or unprofitable.
Sales metrics to measure future revenue include:
Order backlog – by month for X months out
From this, forecast beyond visible orders
Marketing metrics include:
Net promoter score – would the customer refer us to a friend or family member?
Client and referral client retention rate
Metrics for utilization of resources for a service provider include:
Total hours paid versus total hours billed
Business trend tracking. If business is seasonal, look for historic peak to peak times – this may be 3 months and may be 18 months. Determine this and make the rolling cycle equivalent to your business cycle.
Review your metrics regularly to reinforce their importance across the company
Situation: A company has a long-term employee who has been growing in responsibility as Customer Service Supervisor. The CEO is considering giving this employee the new title of Production Manager at the same time that the employee receives an annual wage increase. How do you optimize a promotion?
Advice from the CEOs:
Any promotion or increase in responsibility must be consistent with the strategic direction of the company. What are the company’s current and future needs and, based on past performance, can this individual satisfy those needs? If so, this may be a good match.
In addition, it is important to consider the needs and career path of the individual. Does the new position involve an increased time commitment, additional skills and training, or other important factors, and is the individual prepared for this increased commitment? Will a higher level of commitment be rewarded financially? The only way to answer these questions is to have a conversation with the individual.
If as the first two questions are considered there is any doubt, a longer-term transition may be appropriate. Meet with the Customer Service Supervisor and set a series of goals and objectives that will demonstrate their ability to assume the new role over a 6 month time frame. The concept here is that you must work at the level of the new job before you get it.
Before embarking on the above recommendations, draft a job description and list of responsibilities for the new Production Manager position, consistent with the company’s needs as it grows. This will involve input from employees who currently handle these responsibilities. Also look at the reporting structure as it currently exists and as it may change.
Situation: A CEO manages more than one company and is overcome by the complexity of the task. The biggest challenge is the oldest of the companies which is increasingly resistant to change. How do you overcome resistance to change?
Advice from the CEOs:
Regardless of the age or experience of any company, meeting on-going performance objectives is critical. The fact that strategic imperatives have led to the formation of spin-off entities does not change this. Managers and key personnel are expected to perform to reasonable expectations, whether in a family or non-family business.
Resistance to change may be a symptom of more fundamental issues. Is the older business receiving adequate attention from upper management? Are they receiving sufficient funding and resources to complete their objectives? Do they have the latitude to make decisions necessary to achieve their objectives? If the answer to any of these questions is no, then address this first.
Presuming that the answers to the questions mentioned above are positive let the key personnel in this company know that they remain a critical business entity. Telling them this 1-on-1 is not enough. They need to hear this in public forums within the company. They need to be clear on the opportunity that the company enjoys, and what this means both for the company and for them as employees.
You cannot over-communicate the vision, mission and opportunity. They already know that you are juggling multiple balls and need ongoing assurance that they remain important.
Make sure that you have a right person handling day to day matters in the core company and in each of the other entities so that as they grow that they can support themselves.
Situation: A company has hired interns in the past and wants to upgrade their intern program to attract more interns from top schools. How do you attract interns from top schools?
Advice from the CEOs:
Top schools want to build lasting relationships with the companies to whom they send interns. In addition, the ability of top schools to attract top students increasingly relies on the placement rate of the school, so this can be a win-win proposition for both company and school. Take the time to cultivate this relationship and let the school’s representatives know your intentions. Get to know the top professors in programs from which you wish to recruit interns.
Provide a high quality internship experience. Treat interns as though they were normal employees during internships. Give them a job, objectives and tell them that you will evaluate you as though they were FTEs. They will feel more like members of the team and will have a higher quality internship experience. They will likely tell their placement office and other students about their experience. Interns should understand that if all goes well, the company MAY have a job for them; no job is guaranteed.
If you want more applicants from top schools then view your internship program as an investment. Look at it as a recruiting tool, not as an expense.
Pay for interns may not be same as FTEs – frequently interns are paid less, and don’t get the same benefits as FTEs. Before you make an offer or hire, call the school from which the potential intern comes and check out the candidate’s representations as to expected salary, etc.
Hire more than one intern and compare their performance against each other.
The CEO of a technology company has hired many engineer interns. Many of these were subsequently hired as employees. Overall their success has been good, but not fantastic. Similar to a new employee, it takes time for an intern to get up to speed.
Situation: A company is frequently short of cash at payroll time. It has good revenue and profitability, but timing of receipts can make it difficult to meet payroll. Are the CEO and CFO doing something wrong, and what changes should they look at to better manage cash flow needs? What are best ways to boost cash flow?
All financing begins with your cash flow pattern! Your ability to manage cash flow is the foundation of credit worthiness. It is both a reflection of past performance and specific future performance expectations.
What can you do to optimize your situation?
First – put your own house in order!
Review your business model and the aspects of the business model that are causing cash flow challenges. Based on what you find, fine-tune your business model and its cash flow capacity. If receipts are the challenge, work with your customers to focus on timely payments.
Understand your financing needs in their full context. What short-term financing options are available? Will your bank offer you better terms on your line of credit to keep your business.
Stop, think and analyze before you act.
Framing: View the problem in its full context!
Alternatives: Consider all relevant choices!
Trade-offs: Get more than you are giving up!
It is important to fine tune your business model, not just in slack times when you have the time, but also in good times so that you are well-prepared for the next slack period.
When times are flush, set aside funds to invest in analysis of your business model.
Special thanks and in memory of Eric Helfert, PhD for his advice in this discussion.
Situation: A small company has no formal human resources, pay scale or performance review systems. The CEO wants to create a structure to address these gaps, as well as to encourage employee feedback. How do you build an HR function for a company with under 20 employees?
Advice from the CEOs:
Many small companies outsource HR services. There are a number of firms who provide outsourced HR services, and through them much of the HR activity can be conducted online. Examples include ADP, Administaff, Express Employment Professionals and PayChex.
These systems cover all of the mechanics of HR, and help to assure that the company is in step with changing regulatory requirements.
There are also a host of individual consultants who put together HR systems for smaller companies. These are most easily found using locally-focused Internet searches.
Employees in small companies are used to wearing many functional hats. Hire or assign a manager to create an HR system and implement it once it is set-up. This person will be in charge of the personnel review schedule, changes to regulations and contact with outside HR resources.
One company’s HR Manager has a one hour conversation with the company’s lawyers once a year to make sure that the company is up to speed on any regulatory changes.
Hire a Director of Operations and include HR in this individual’s responsibilities. This person can research options for discussion by the leadership team. Empower them to bring in resources that will meet the company’s needs.
Situation: A company is a C Corp with several owners. As it is the end of the year, there is an active debate on owners’ compensation. The CEO has looked at a number of options, but would like the advice of others in a similar situation before making a decision. What do you see as the pros and cons of various options for end of year owners’ compensation?
Advice from the CEOs:
In one company, profits are split among owners according to stock ownership. This is similar to a public corporation where dividends accrue according to stock ownership. The pro is that it is equitable; the con is that smaller owners who may have made significant contributions during the year don’t necessarily receive the recognition that they may believe they deserve.
Another CEO varies owners’ compensation according to company performance. In good years, there is the option to be generous through enhanced bonuses, etc. In slim years it is more important to conserve cash, and quite frankly company performance didn’t justify significant bonuses. The pro is that this offers the CEO more flexibility than the first option to recognize significant contributions; the con is that the recognition of some may seem arbitrary to others.
In response to the latter observation, a third CEO sees this as acting like a good father – sometimes you just have to declare your prerogative if employees squabble about your decisions or push too hard for unreasonable requests.
The CEO who originally asked the question followed with an additional question – how do you present your compensation decisions to owners or staff who may think that they deserve more than their stock position or company performance over the year allows?
This is a facts of life situation – once the final determination is made it is not negotiable.
Situation: A company’s employees are increasingly getting offers from other companies. They believe that they have a good team, a good work environment and offer a competitive pay and benefit package. However, they are concerned that the job market in Silicon Valley is heating up. How do you keep your employees on-board when they start receiving offers from others?
Advice from the CEOs:
Make sure that your wage and benefit scale continues to be competitive. The Silicon Valley Index, published by Assets Unlimited in Campbell, is the best local survey covering Silicon Valley and the San Francisco technology market.
Survey after survey finds that compensation is basically a hygiene factor – it has to be good enough so that needs are satisfied, but it isn’t one of the more important factors in retention. The Gallup Organization has determined that respect, challenging responsibilities, and personal recognition are much more important factors in employee retention. Be sure that you are actively involving your key personnel as leaders in formulating and updating your processes, and that there are plenty of opportunities for recognition and celebration for your staff.
If you are generating a profit, share this with the employees as an incentive. This may well be better spent in fun and team-building activities like a weekend in Tahoe for a team, or supporting their creative needs by sponsoring their efforts in engineering design competitions. Whatever is appropriate for your company, involve your employees in setting company performance goals and give them a voice in determining how achievement should be rewarded. Making them part of the process builds better long-term loyalty.
On the sales side, establish a reward incentive structure for bringing in new business for the company to prompt field personnel to develop and exercise their business development skills.
Whatever you and your team decide, be sure that your choices support your overall strategic plan.
Situation: A private company creates a liquidity event every 3-5 years: selling pieces of the company, product-based spin-offs, or potentially the whole company. Most frequently, engineering efforts spin off opportunities for new product-based companies. How do you measure company or business valuation with the objective of maximizing shareholder value and liquidity?
Advice from the CEOs:
Look at a model to create productized service offerings that are replicable and predictable. This can create a stream of spin-offs to generate ongoing liquidity events. Jack Stack’s company, Springfield Remanufacturing has done this very effectively over the past two decades. He describes his methods in The Great Game of Business.
Regarding selling the whole company, the most important measure is strong company performance in recent quarters. Focus on internal metrics as well as revenue and profitability performance. Put together a solid 3 to 4 quarters of profitability with an upward trend to increase appeal to potential acquirers. The current market requires both a longer history of profitable performance and more data points of performance than was required in the previous decades.
To compliment internal measures develop a relationship with a business broker who can help you assess the value of either product or company spin-offs. A broker can determine the current value of the opportunity as well as a timeline and critical actions to enhance opportunity value.
Consider a roll-up of your company and one or more of your business partners.
Look for similar or compatible financial structures and complimentary capabilities.
A roll-up can broaden your range of products and services. As a bigger entity you have more options, and can enhance your ability either to generate spin-offs or become a more interesting acquisition candidate.
The downside is the time that it takes to complete the roll-up if you feel you have a short window of opportunity.