Here’s a case study for yourself:
Recently I was asked to review an offer letter for a senior director of business development. The CEO was concerned that he was offering far too much in the form of incentive compensation, with bonuses that could greatly exceed the base salary if all the bonus items were achieved.
The critical question…
I asked the CEO to imagine what the company would look like if all those bonus-expensive
items were completely achieved in one year. Upon reflection, he stated that revenues could double the following year, and that the company’s reputation among larger customers would be so greatly enhanced that the company could become the leader in its niche. My obvious retort: “Then why not offer this candidate the moon if he can achieve this?” The offer was sent and the CEO was much happier, dreaming of the possibilities, not the incremental cost.
Have you experienced this in your business?
I love to point out that my top several salespeople were making more than anyone else in the company, including their boss. These outstanding achievers worked for salaries below those of their engineering peers and had to put it all on the line every day to earn their keep, let alone excel.
How to align your goals with those of your managers.
[Email readers, continue here…] The best way to encourage alignment between your managers and the company’s goals is to create a bonus plan for each, with its payments made based upon the key performance indicators established for them and for their areas of responsibility, all in turn based upon the tactics and strategies contained in the company’s strategic plan.
Exceeding expectations…
It is amazing how few company CEOs grasp the concept that executives and managers should be compensated not just for doing their named job, but for exceeding expectations while advancing the corporate goals. To align everyone in the organization in exactly the same direction is a task, one that is a powerful driver for growth. People should be compensated well for such outstanding contributions.
What is the general rule for such a bonus plan?
Provide no more than five key performance indicators derived from the strategic plan and fitted to the specific job of the manager. Set time-based goals for each. Provide bonus opportunities that add to approximately 50% of the base salary if all are achieved within the year. Meet and measure progress truthfully each quarter. Perhaps pay a portion of the bonus upon completion of these meetings. Do not make the usual mistake of ignoring or passing on the progress of any of these items by just paying a part of the bonus at yearend because no-one carefully reviewed progress, or because circumstances changed, and the bonus item could not be completed as written.
Incentives are powerful tools when used well and reviewed often. They are a major part of a good manager’s work and should be treated as such by the CEO and all senior managers.
How to give away too much too soon:
specifically calls for an appraisal of the value of the corporation’s stock current to within a year of any grants of options, although there is an exclusion for early-stage businesses in which expert members of the organization or board may make such an appraisal if they qualify according to the exemption. But after the enactment of the Dodd-Frank legislation over a decade ago, there are few if any insiders willing to step forward to provide this expert service from within.
Options typically are earned over time, which we call vesting. If a grant of 10,000 shares is made on January First, typically there is a four-year vesting period in which the employee earns the right to exercise (buy) 1/48th of the shares each month. Many plans also call for a one year “cliff” in which an employee who is separated from the company before a year is unable to exercise even the shares which would have been vested at that point.
handled respectfully during the separation process) and most managers will agree that the move should have been made sooner. The former employee will often state that they were at least somewhat unhappy in the job, knowing that the fit was not as good as it should be. The manager will most often admit that they did not move aggressively, following best judgment in coaching the employee toward separation much earlier.
the hiring process that continues through the life of an employee’s tenure with the company. Bradford Smart captured this succinctly in his book, Topgrading. His thesis is that “A” players amount only to the top ten percent of the talent pool at any given time, and that your job is to find, recruit and retain only “A” players to make a successful business.
A successful hire is not just the responsibility of the recruiter and manager to whom the recruit will report. Many companies require that finalist candidates be interviewed by company contemporaries, good employees who fill similar level positions. Some even encourage interviews with those the candidate would manage. Agreement among the interviewers becomes an empowering experience for those conducting the interviews and agreeing to the decision to hire and paves the way for a quicker assimilation of the new employee into the organization whose cohorts are already prepared to receive and encourage the new hire.
over the years – that this stage typically occurs first at about twenty employees or $3 million in net revenues (or gross profit) for most any kind of company. In future weeks, we will dissect this $3 million-dollar phenomenon separately.
On a Friday evening, I got into my car and drove from my office in the Los Angeles area all the way from Los Angeles to Ensenada, Mexico, checking into a remote beach hotel. After arrival and checking in at the hotel on the beach, I found a large rock at the shoreline, climbed it, and sat there for hours contemplating my future. Hire for growth, or grow slowly and comfortably?
business was young, and I was a software developer building a young company based upon quality first. Asked to speak at software industry events, I found my voice and immediate audience understanding as I described variants of these problems to my audience. The insight became clearer as I was hired again and again to pick up the pieces of failed programming efforts by other software companies in this then young industry.
The same story could be constructed for any company selecting a limited number of test customers for a new product. Select too many, and pay too little attention to each. Commit all your core resources to solving the resulting problem, and new work stops. Time bankruptcy. Not a pretty sight, and completely avoidable.
cause simple problems, you are right.
It becomes obvious then that there must be a balance somewhere between rushed release and too much rigor in pre-release planning and testing. Perhaps that balance can be measured in estimating what a company could endure in lost overhead and hits to reputation before becoming crippled and unable to recover. With that measure based upon pure estimates, the balance point changes between companies, with the largest, most profitable companies able to suffer the most risk as to resources, and the smallest suffering by far the most when measuring reputation.
and money that is more complex than most managers think. Fixed overhead for salaries, rent, equipment leases and more make up the majority of the “burn rate” (monthly expenses) for most companies. Since this number is budgeted and pre-authorized, managers tend to focus upon other things such as sales, marketing and product development issues.
The financial pain of unplanned delays.
add new money to the company for the project. Not long after, the company was sold in a “fire sale” amounting to slightly less than the debt on the books. All investors, including the VC firm, lost everything. Do you remember a previous insight, that “the last money in has the first say”? That is what happened within the dynamic of the board, and the result is that the board was completely at the mercy of the “last money” VC to save the company in the end. Yes, there were other issues such as a protracted patent rights fight that drained cash, but the largest problem, inefficient use of R&D time burning fixed overhead, led to the demise of the company. Lots of good jobs were lost and many investors including me were left with the question. “Why did the company abandon a profitable market, even if it could not generate $100 million a year in revenues?”
If you must provide a free backup unit, personal on-site service for a month, your personal cell phone number for the customer CEO, or any number of unexpected offers of superior service and accountability to those first customers, do just that. Make your customer a partner in the process. Send flowers to the staff in the department using the product for the first time if appropriate. Call the customer CEO and thank him for helping launch a product so very important to your success.
