BERKONOMICS – Business insights from Dave Berkus

Archive for January, 2011

Recalling the Lateral Arabesque: Losing valuable employees

by on Jan.31, 2011, under Depending upon others, Surrounding yourself with talent

Funny how good messages come back in new forms after years of languishing out in the ether.  Dr. Laurence J. Peter in The Peter Principle: Why Things Always Go Wrong, wrote in the early 1960’s of the “lateral arabesque”, describing how companies promote incompetent employees sometimes by sending them to another department or division to get them out of the way of progress.

I use the term differently in a more poignant way to describe how companies rarely realize the true value of an employee until s/he jumps (the arabesque) to another company in a higher position, valued there financially and for skills which were taken for granted in the original company.

The twist (“double arabesque”) is that the original company management only then realizes what the person is worth, and makes advances to bring him or her back at an even higher salary and more inflated title.

The moral is that great employees are never as valuable as when they leave and land at a better position elsewhere.

I’ve lived this experience time and again, most recently with the chief architect of a product line who jumped to a competitor for more money and more recognition.  Remember that to most employees, the grass IS almost always greener… The original company was afraid to upset the structure of its salary compensation schema and could not (would not) take the chance to raise the person’s pay to be more than competitive early enough to show the love and trust deserved by the valuable player.

That’s the quandary. Mature companies have structure and ranges of salaries that are baked in so carefully as to not disturb the ecosystem.  How do you over-compensate the most valuable players?  Additional stock options?  Bonuses? Higher base pay? An increase in title?  More attention? Each of these is a good tool and should be considered before needed to reward and encourage the best players before they can imagine playing for another team.

The irony of it all is that the lost person’s replacement probably will be offered a starting salary higher – sometimes much higher – than the one paid to the departed player.  And – to regain the one departed, an even higher offer will have to be made.  Two jumps:  a double arabesque.  One initiated not just by the player but by the largess of management.

Have you star players in danger of performing the dreaded lateral arabesque?

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The FAIRNESS doctrine

by on Jan.24, 2011, under Depending upon others, Protecting the business

Reduce the emotion; reduce the threat of lawsuit.

You’ve certainly experienced the angry outburst from an associate or employee who has just learned of an event that the person took as “unfair”, no matter how rational the explanation by the decision maker.

Most emotional responses to decisions in business are generated not because the person making the response feels the decision was unwise, but rather unfair.

So I’ve created the “Fairness Doctrine” as a stated element in the cultural fabric of businesses in which I am involved.  Simply stated, a decision or action that affects an individual must be made with consideration as to the affected individual’s view of the fairness of that decision.  This doctrine is a variant of “do unto others….” but with a twist.  The recipient of the decision in this case usually has little opportunity to respond in kind (“…as you would have them do to you”).  It is this frustration coupled with the simple outcry of “That’s unfair” that can affect the culture of a company in ways never considered by the original decision-maker, usually a manager of the person or group effected.

People sue others and their companies usually because they feel emotionally that they have been treated unfairly, not just because they were affected financially.

[Email readers continue here...] Firing a person considered a key associate without any advance warnings or public revelation for the reason, such as the need to consolidate or downsize, is a good example of setting up such a groundswell of accusations of unfair treatment.  Public dressing down of an employee in front of associates is inhumane and often generates a negative response from all who witness or hear of the action.  Closing a highly effective department, shutting down a marginal company, canceling a promising project all are good examples of management setting up a visceral response of “unfair” among those affected.

I have often addressed the issue of maintaining the dignity of the individual in a business environment.  The two are linked: the fairness doctrine and treatment of an individual with dignity, no matter how distasteful the decision implemented.

So my advice is to take the time to establish the reasons for pending actions – if not in an emergency environment.  Speak privately to employees who are in danger of being fired, documenting the discussion to the employee’s file.  Open up to the general group with facts that might later effect them, even at the risk of losing one or more to a hunt for a new job.  Most employees and associates, treated with respect and dignity, will respond with understanding and lose the emotion that might have accompanied receiving the later news of a negative event.

In fact, many times over the years, I have seen whole companies rise to new levels of efficiency, creativity and sense of urgency when informed of the alternatives being considered by a board or management.

At the risk of losing talent not targeted, it is only fair to treat people as intelligent beings capable of understanding the dilemmas faced by management, and sometimes able to find solutions to problems not seen by those in control.

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The 18 month rule.

by on Jan.17, 2011, under Protecting the business, Surrounding yourself with talent

It can take 18 months from initial concern about a critical employee to getting a replacement up to speed.

This insight is not mine, although I have experienced it several times with key employees since becoming sensitive to the concept.  An old friend, Dick Tanaka, gets credit for this one.  He observed that the process we follow to be humane in our handling of underperforming employees, manage the risk of future lawsuit, finally then move to separate the employee, define the open position, recruit the candidate, train the new hire and count the new hire as up to speed in the job can take all of eighteen months.

That is a shock in so many ways. First, the costs for underperformance are both tangible and intangible, with lost revenues, lost opportunities, lost savings and loss of productivity from low employee morale difficult to estimate.  There are those in the recruiting industry that have attempted to do so, and depending upon the size of the company and the position replaced, seeming to settle upon astronomical lost costs that overwhelm most of our ability to understand.  All of us will admit that, looking back at a failed employee hire, the costs were well beyond the payroll cost for the individual.

Perhaps this is a good time to speak about senior managers that are well-entrenched in the organization but are underperformers because the organization has passed their ability or span of control.  We will explore this in detail in a future insight, but it is important to note the trauma of separating an old friend or close associate, or even a family member.  There are few good rules for conduct in these instances, other than honesty in pointing out the problems, and doing everything possible to preserve the individual’s dignity.

[Email readers continue here...] Early in the rapid growth phase of my computer software company, I hired an excellent, IBM-trained vice president of sales to further growth and begin our international expansion.  He did so with gusto, and for several years was directly responsible for our growth into a total of 29 countries, including establishment of six foreign subsidiaries.  Annual growth in revenues was between 50% and 100%, amazing and exhilarating.  But he had a habit of bellowing out at underperformers, bullying others to get his way, and doing so in ways that rubbed all other managers the wrong way as he dominated meetings, and made it difficult for others to contribute.  Surely a result more of his urban New York upbringing, I put up with these character traits as the cost for his amazing performance.  And you might guess that, as his superior, I did not experience any of the threats to my job or dignity that apparently all others did.

I received a call one day from one of my country managers, stating that he and all of my senior managers would be at a meeting room in a nearby hotel the next evening at 7.00 PM, and that the vice president of sales, presently in the air traveling to the very country where the manager was to meet him, was not to be present.  I was shocked and disoriented, a CEO with no idea of the urgency of the situation that was developing, since there had been no warning.  Fourteen people, including the country managers and all the vice presidents, were to be there.  I immediately called an industrial psychologist I knew, asking him to be at my side during the meeting to listen and interpret the mood of the meeting.  (I have an industrial psychology educational background, but could not count upon myself to be completely objective here, of course.)

We walked into the meeting at the appointed time.  Apparently the meeting had been going for some hours.  Everyone but the sales VP was present as anticipated.  As the psychologist and I listened to one after another of these, my most senior talent minus one, describe the assaults to their very souls, the affronts to their self-respect, the hobbling of their ability to perform, I was overwhelmed.  There had been comments from some of these individuals in the past, but never voiced as an orchestra, and never with evidence so overwhelming and irrefutable.  As the presentations of each concluded, my senior-most VP stood and stated calmly that if I would not remove the affronting individual, each and every one of the people present had agreed to resign.  Now that’s an act of desperation or defiance rare, perhaps unique.

I asked for a few minutes to confer with my associate.  You might guess that it took less than that.  As we returned to the room, I turned to the psychologist, the only third party in the room, and asked him to give the group his candid response to what he had heard.  As I recall, he stated quite clearly that in many instances he is hired to repair relationships at senior levels in companies with such problems, paying special attention to coaching and training the offender, sensitizing him or her to the traits probably not noticed in self.  But, he stated, as I recall, “This one is for the books.”  He had no advice other than to just do it and now.  Of course, I had come to the same conclusion, even though at least in the short term, sales growth would suffer.

The rest of this story, if I took the time to tell it, would deal with the humanity of this next step, and retention of the dignity of a superior performer in all ways but one in his management abilities and in dealing with contemporaries and subordinates.  I recalled him immediately back to corporate headquarters, and fired him after discussing the reasons with care, negotiating a reasonable separation package.  The culture of the company thrived, and I could feel a collective sigh of relief from people even far below the level of senior management.  And, although we have little contact after all these years, I have remained friends with this superior performer to this day.  He understood, acknowledged the personality trait that failed him as one that had haunted him in his past, and became part of the solution once he and I had all of the facts on the table.  It is a story that is extreme, relies upon one fatal character trait, but in other ways probably could match one or more of your own stories to tell or someday to experience.

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Contractors must really be independent!

by on Jan.09, 2011, under Protecting the business

How many of us have “hired” independent contractors over the years, a bit worried over the gray area between employee and contractor as defined by the IRS?  I’ve experienced the results of a wrong decision, and the IRS and state agencies are not forgiving in their pursuit of penalties, interest and most damaging, assessing a company with both the employer and employee taxes when reclassifying the person as an employee.

Yes, that’s right. The company must pay the employee’s portion of the taxes (and penalties on these) as well as paying those they would have paid if the person were an employee.

And the IRS has raised the bar on its test as to whether an independent contractor is not in reality an employee.   So it is important – no really urgent – that we review some of the twenty – yes twenty – tests the IRS now uses to determine if a person is an independent contractor.

1.  Contract for service:  An independent contractor should work under a written contract with the company, defining the end result expected, time to achieve, lump sum or unit cost, ownership of intellectual property created and more.

2.  Direction: The contractor directs itself, rather than being managed as an employee.   And just as important, a contractor does not supervise any of the company’s employees directly.  This is tricky when a contracted CFO assumes a position of directing an accounting department.  Usually, in acceptable cases such as this, the contracted executive comes from a recognized agency with a history of paying its own employee taxes, health insurance and other benefits.   Without this protection, a contracted executive is suspect, even if working with more than one company at a time.

[Email readers continue here...] 3.  Integration: A contractor provides services which are not an integral part of the core business of the employer.  This one is tricky.  Is a contracted CFO an employee because the CFO job is integral?   How about a contractor CEO?   The person must pass all the other tests when one of them such as this crossed into the very gray zone.

4.  Individual on the job: A contractor may hire a substitute without the company’s permission – although the company should then be able to terminate the contract with the contractor if the substitute is not acceptable.

5.  Term:  A contractor is hired for a specific project, usually tied to a time term. An undefined period of time favors the ruling as employee.

6.  Reporting: Here is a surprise. The IRS wants to test that a contractor is NOT required to submit regular reports.  Yet, most of us would want to have such documentation of progress other than an invoice.

7.  Tools and materials: The contractor must supply his or her own tools.  This is tricky when a contractor sits at your desk using your computer and your phone system all day.

8.  Physical facility: The contractor must have its own “home office” even if in a bedroom, from which primary work is performed.

9.  Works for more than one company:  If such a person works only for a single company for any period of time, that person will probably be determined to be an employee.  A contractor must make services available to the general public.

10.  Termination: A contractor works under a contract – which means that an independent contractor cannot be “fired” as long as results are satisfactory as defined within the contract of service.

There are more tests, but these are the ones most often used by the IRS.  States add a few of their own; so beware.   Pay contractors using account payable systems, not payroll services.  Pay only upon receipt of invoices, not with regularly triggered checks or transfers of uniform amounts without invoice documents to back up the payments.

Many small or early stage company CEO’s look for opportunities to cut cash drains, knowing that payroll is usually the greatest cash drain of all. The temptation to reduce that by fourteen percent or more by classifying a gray area employee as a contractor is very high.  And that includes self-payments to a founder.

Founders working for a company are employees if they take regular payments, subscribe to company benefits, attend regular company meetings or fail any of the tests above.  The temptation to just draw cash and call it a loan, or document a year’s withdrawals with a 1099 is great, but highly risky.

There is nothing worse than a large tax bill and threats of a government agency seizing a cash account when a company cannot or does not respond with proper documentation or payment.  And even a single year’s worth of transgressions, when added into a single tax bill with penalties and interest, can appear daunting to small and young companies.

Like payment of payroll taxes by incremental impound each pay period as opposed to waiting until the last minute and making manual tax payments, it is a proper discipline of management to “take the hit” incrementally to protect the business from a catastrophic failure to pay a governmental agency any form of tax when and as due.   Need we emphasize the personal liability of management AND the board of directors attached to tax payments?

Good management takes discipline and enough knowledge to prevent these possibly crippling errors in judgment that stem from decisions made to avoid or put off tax payments when accrued or due.

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Employee first, company last, states the law.

by on Jan.03, 2011, under Protecting the business

Almost all laws dealing with employment are designed to protect the employee, not the company. Minimum wage laws, workplace safety, independent contractor tests, minimum hours required for benefits, worker compensation insurance requirements and more are examples of such laws.  Notice that every poster that is required to be displayed in a company public area (usually the lunch room) is posted for the benefit of the employee to inform him or her of rights granted by law.  To most entrepreneurs, this often leads to an event whose resolution by a governmental agency or even a court seems unfair and illogical.  Issues that seem clearly based upon ineptitude morph into age or gender-related epic battles that most always end poorly.

So my advice is simple.  Recognize the realities of the times, and do all possible to protect the company by documenting behavioral or skill related problems to the employee file.  Hold regular reviews for all your employees right to the top. (The chairman reviews the CEO, and if there is no separate chairperson, then the CEO should ask an outside board member to do so.)   Encourage reviewers to be accurate, not just polite, in documenting areas of concern.

This is not to counter the advice of my earlier insight, “Fire fast, not last”, since every CEO should shoot for “A” class employees and not tolerate under-performers over time.

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