“We’ve found that 40 per cent of executives hired at the senior level are pushed out, fail or quit within 18 months.”

Some industry observers who saw that quote used it to bash the firm.  For example, Staffing Advisor says “Astonishing.  He’s describing a 40% failure rate by one of the most trusted and reputable brands in the executive search business.  (If that statistic is true, I’m glad they didn’t build my house or service the breaks on my car.)”    

Staffing Advisor was being disingenuous because they know that Kelly is only admitting what other observers have known for years.  It is hard to find and integrate executives into a new company.  Failure rates are high and the reason is cultural fit, not skills.

Kelly is a young CEO who earned his recent promotion because of his successes building revenue in the Heidrick regions he managed.   He is using  this research as a basis for introducing new services and income streams to the company.  To continue quoting the Financial Times article: “The firm now offers companies everything from initial training and early feedback for their new recruits to regular assessments of current executives and succession planning and staff development programs.”   The article then quotes a killer analogy.  “Mr. Kelly likens the services to the work of an organ transplant team, which not only locate and attaches the new heart or liver but also follows up with the patient to make sure the transplant is not rejected.  Such “leadership and advisory services” now account for 10 per cent of Heidrick’s revenue.  Mr. Kelly hopes to push that number to 40 per cent over the next five years….”

I am sure these new services will be attractive to the Fortune 1000 firms who are most apt to use the services of Heidrick & Struggles and the other big brand search firms.  This is the CYA mentality immortalized in the phrase, “You can’t go wrong with IBM!”

If Heidrick and the other big search firms had the courage to take a deeper look, they might take a Deming approach and consider the failure rate as having something to do with their processes and business model and tackle the question: What can we do to improve our processes?

At Fulcrum, we have recognized the problems in the big-company search model for years.  We improved our processes several years ago and we provide a 100% satisfaction guarantee.  We are happy to see that a giant like Heidrick and Struggles is beginning to get it, and is offering (for an additional fee) many of the services we already provide as part of our stand search package.  

If you go to Heidrick’s website, you will see the array of services they offer and learn about the many experts who provide them.  On the other hand, if you go to the Fulcrum web site, you will see a simple promise:  a guarantee that we will get it right.  Let the clients decide which firm gets it right.

As this goes on we get angrier and  feel more hopeless.  We wonder how and why the parties could have done what they did, why we can’t fix it faster, and last, who exactly is responsible. 

Assigning responsibility is tricky. Certainly BP underestimated risks and cut corners and deserves its current prominence for malfeasance.  But, the responsibility is  broader.  The  oil industry wasn’t prepared and this isn’t the first leaking rig.  The government structure for regulation was in place, but the people who did the regulating didn’t act in the public interest.  Despite the warning signs, our appetite for petroleum fuels remains unabated.  The consequence seems to be riskier and riskier drilling.  Should we hold successive administrations responsible for insufficiently dealing with this potential crisis?  

Besides bail out, the solutions that are now being proposed address responsibility and punishment.   The mechanisms are increased penalties and better regulation.  Given the current malaise in Washington, the Congressional debate on how exactly what to enact will go on for years and will end with the public having little confidence in the final result.

Last week the news also brought the story of a Tylenol recall because bottles manufactured in Mexico gave off an offensive, and to some, sickening odor.   Before BP took them off the top half of the page, Toyota also showed offensive irresponsibility.  The problems caused by the Greek governments irresponsible  stewardship of the country’s economy have also impacted us all.  The sources of threat are everywhere!   If you believe that global warming is in progress, that ups your level of concern about the fate of our earth.

Our ability to cope hasn’t kept up with our ability to  manage global interdependency.   National governments are now dealing with issues of international impact with agreement between nations almost impossible because of diverging interests.

Dealing with these issues will require systems thinking on an international scale with a corresponding  recognition of the problems and a will to deal with them.  The track record isn’t good so this is highly unlikely.  I can only anticipate a long series of unanticipated disasters.   These issues don’t have a single culprit or even a root cause.  The problem is that we can’t manage a diverse system.   Fortunately a company is a smaller entity than the world economy and some are managed very well.    

Executive recruiting is more problematic than the search industry wants to publicize.   Just to get you oriented, recent surveys have shown that 40% of newly hired CEOs don’t last 18 months.  For more metrics that show how dismal executive retention rates are, click here.  

When you are an owner who sees that a hiring mistake has been made, you are seeing an oil leak on a smaller scale as the business makes bad decisions, looses market credibility, experiences drops in profits and morale, and begins to lose its best people.   The cause can be summarized by this phrase: people get hired based on their resumes and get fired because of their personalities and their failure to provide leadership in the right way in an organization with a specific culture.  

A non-systems oriented search will list the skills and experience that the resume of the new executive should contain.  On the other hand, a systems perspective would consider the culture of the organization, its strategic plan, the role a new executive can play in implementing it and the obstacles the new executive would have to overcome to be effective.  The specification would go beyond the resume and consider personality, character and ability to fit into the culture while simultaneously being a change agent. 

The systems view would then go broader still: It would consider that the organization and its current leadership need to collaborate for success and therefore will have as much or more responsibility for achieving the organizations goals as the new executive.  That  is  follow up and integration is included as an important step for success.  Both the organization and the new executive need feedback to ensure they stay on track to achieve the larger goals of the organization. 

Conclusion

The time for limited, non-systems thinking has past.  Those who are engaged in executive search can continue to make the mistake of seeing the responsibility for success as only being in the hands of the person hired (e.g. if that person doesn’t work out, we hired the wrong person) and begin to take a broader systems look at what the organization wants to achieve and the responsibility of the whole for achieving it.

Scope of Knowledge and Wisdom to Select the Right Problem

Most advisors have been well trained as specialists in their disciplines.  The good ones are on top of their profession and supply the contracted product and service with precision and at the state of the art.  However there is also parochialism that comes with their training.  What if they provide an excellent solution to a problem their client asked them to solve that was really the wrong problem for the client to expend resources on?  That wastes resources.  Worse, what happens if the advisor knows that this isn’t an essential issue but provides a solution in any case?  Is that ethical?

Like a well trained advisor, an entrepreneur who has developed his or her business has been trained by success and has habitual ways of responding to business situations.

Most of the time, the good advisor will be solving the right problem and most of the time the owner’s solution to a problem will be the right one.  It is at the margins where interesting situations occur.  These margins occur at those moments that call for “out of the box” thinking.  In those cases,  wisdom involves stepping back and identifying the right problem as a precursor to solving it.  The Great Advisor can stand back and identify critical issues.

An owner should look for an advisor who challenges him or her to find the right problems to solve.   Advisors who meet that criteria might be ones who have run businesses or who belong to multi-discipline groups such as I have mentioned previously, Exit Planning Exchange or The Family Firm Institute.    This exposure to other disciplines and ways of thinking helps train them to step back from the problem a client presents and help identify a deeper or more fundamental problem.  This directs resource to solving problems that will benefit the business. 

 As good as this broad knowledge is, it not enough for Greatness.  I think a second characteristic is needed for a person to qualify as Great Advisors. 

Respect for and Acceptance of the Client

 Because of the broad experience in dozens or even hundreds of companies a good advisor brings to any one client, that person will often see opportunities for improvement.  It is very common for advisors to be frustrated because their client doesn’t get it!   Why is he or she resisting good recommendation?    

I am going to make my point by asking you to drawn on your own experience.  Let’s say you have a problem bothering you and you talk to a few people about it.  The first person doesn’t have the patience to let you “get it all out” and gives advice on how to solve the problem.  How annoyed and frustrated are you?   The second listens and asks a lot of questions.  After awhile you solve the problem yourself (eureka) or are more open to discussing alternative solutions.  Does that feel better to you, and are you more likely to go with the decision made in that situation? 

 The Great Advisor takes the time to explore, understand, and respect the psychological and cultural context and then works within that framework to get done what the person or system is capable of doing.   The Great Advisor has developed skills as an active listener and has learned to understand and explore before jumping to action.  

Trust 

You will notice that a Great Advisor doesn’t always get great results.   However, the Great Advisor does build relationships and acts in a trustworthy manner.   They understand that they can be influential but in the end, the decision is with the client and that the client has the right to do “the wrong thing”.   At the end of the day, The Great Advisor has the satisfaction of knowing that he or she worked in the client’s best interest, has not been self serving, has done no harm and hopefully has helped the client make progress.  The Great Advisor stands ready to provide greater value when the client is ready to take a broader view.  

The books I recommend are Dirty Rotten Strategies: How We Trick Ourselves and Others into Solving the Wrong Problems, Precisely by Ian I. Mitroff and Abraham Silvers, and Helping: How to Offer, Give, and Receive Help, by Edgar H. Schien.

Let’s look at the structure of a typical case.  The case starts with the history that resulted in the company’s origins and place in its market.  Generally the cases present a company that is a going concern and has, at its core, a foundation for a good future.  However, there are problems.  It almost always is declining profits.  Underlying and contributing to this are problems with funding, sales, marketing, customer service, and operations.  There will also be further underlying concerns about family dynamics, the quality of owner leadership, and the quality of the management team.   

The advisors who discuss these problems offer different perspectives:

• Those who are accounting oriented, analyze the content and nature of financial data to get to the issues that seem to most affect the bottom line.
• The M&A specialists talk about what has to improve to make it more attractive for buyers and fetch a higher price.
• The business and turnaround consultants focus on the strategies they implement to turn the company around.
• The lawyers offer up the legal tools to draw up buy sell terms and related succession plans, but usually need to hold off until other issues are resolved. 
• Estate planners outline strategies to preserve and grow wealth.
• The money manages optimize security and investment income.
• The organizational development people will see problems with leadership and will propose programs or coaching to improve planning and communications to better link human resources together to better achieve the mission of the company.
• Insurance people think of how to provide a financial safety net for the owners.
• I, as a recruiter, see opportunities to strengthen the company by introducing new talent. 

We come out of these discussions with two conclusions:  

The first is that the situation is much too complex for any single discipline, and in an ideal world, several would collaborate to help the owners solve complex and interrelated problems. 

The second is a desire for, what I will call, the Holy Grail.  By this I mean each discipline knows it has an important role to play with a focused successful company.  What we all seek is company leadership that has an intelligent, well implanted business plan which leads to growth along with leadership who has an exit or transition plan to ensure the continuity of the business for the long haul. 

Result:  This can lead to the ultimate win-win.  The owner has the experience of meeting business and life goals and advisors have the satisfaction of providing valued support along the way. 

As advisors, our thinking about the company is not limited by its culture, and we know all companies go through cycles and leadership strengths in earlier stages can be weaknesses in later stages.  We understand there is strength in coming to grips with change and being open to new ways of thinking necessary for the company’s present reality.  We also know the owner who plans for the future dramatically increases the odds of achieving the highest quality result.     

Put another way, our client may benefit from a changed way of thinking but doesn’t see the need or resists taking the risks inherent in implementing change. 

The dilemma is tantalizingly simple:  

How hard (or perhaps, in what way) should a trusted advisor push the owner to take a broader perspective and engage the support of other advisors and coaches who will help incorporate new ways of thinking and a more planning oriented approach to the transition that is inevitable? 

The best advisors put their clients first and are consistent advocates for what is best for their clients and their clients businesses – but how can they do this if the client simply does not see the forest because of the trees?  What do you think?

I recently read The Prince and was taken with Machiavelli’s sensible and straightforward message.  He showed how applying an understanding of human nature would allow a ruler to increase power and territory.  The manipulation inherent in the concepts was based on strategies that increased the ruler’s power through providing influence and wealth to supporters. 

When he classified states in terms of how they were governed, it was clear to Machiavelli that democratic states were more lasting than despotic ones.  They found a way to balance extremes and give each class a piece of the action.  Sooner or later, he observed, a ruler in a monarchy would get caught up in himself and forget to govern for the common good.  This would alienate subjects, leading to revolution and vulnerability to ambitious rival regimes. 

Leadership requires wisdom and knowledge and no one individual has a monopoly on it.  As a result, Machiavelli understood how important it was for a Prince to have advisers who could help him stay grounded in reality.   Sustained power required that policies and decisions spread rewards and minimize discontent. 

He cautioned that the price of choosing advisors who were sycophants would sooner or later be high. Conversely, he documented that Princes who had the wisdom to use advisors with knowledge and skill and the backbone to be truthful had a better chance of survival and enhanced success.

These insights are as relevant today for a business owner as they were for a Prince in Machiavelli’s time.  (Read more.)

The business owner whose advisors are cronies or dependent vendors and employees without the background and insight to provide needed advice or who have been trained not to offer it will lose out in the end.  If you are an owner, it might meet certain human needs to have your judgment reinforced by yes men.  (We will review the tale of the Emperor’s New Clothes on the right hand side bar.)  However, it isn’t good business practice.   Here are ways you can evaluate your advisors and your ability to benefit from good advice: 

1. Does the advisor have experience and success in an area where you need help and where you are seeking guidance?  (This could be in domains as distinct as general management, whether to invest in new plant or technologies, or financial management.)  You should seek people with the resume to provide guidance and bolster your strengths. 
2. When you ask for advice, are your views reinforced or are you challenged (respectfully) to see things in a new way, think out of the box, examine prejudices, or question past policies? 
3. If you take the risk of following advice and doing something that is out of your comfort zone, does following the advice lead to hoped for improvements? 
4. If yes, you are probably on the right track and have a valuable advisor and should followed his/her advice literally and in sprit. Treasure that person and your collaboration. 
5. If no, there is a problem.  Then you need the wisdom to find out if the problem was the advice or the way you implemented it or something else.  Whether the problem was with you or the advisor, the business will be preserved and enhanced if you show the courage to deal with reality. 

Machiavelli remains pertinent today because human nature remains the same.  We can get caught up in our technological world and forget the universal principles that tend to repeat themselves through recorded history.   One universal principle is that self insight and the ability to learn and change behavior remains problematic.  People are complicated.

At Fulcrum, we take the common sense view that success is not achieved the day an executive is hired, it is achieved over time.  We define success as hiring an executive who helps a company achieve its objectives and the company becoming stronger after the executive is hired.

It is easy to blame performance failure on a new executive when it is clear that objectives were not achieved and the person and situation did not match as well as hoped.  A more honest view looks at the executive and the organization to diagnose the causes of failure.

At Fulcrum, we believe that the owner and new executive must collaborate and plan for success.   We list the six keys to successful executive hiring below. 

1. Prepare Yourself for Change

One of the saddest failed executive hiring I witnessed was by an owner who hated running his company, and was unsuccessful selling it because his asking price was too high.  Rather than improve his business to increase its value, the owner decided to hire an executive to run the company for him.  Unfortunately, since the owner did not understand the need to build value, he set out to hire an executive with the contrary objectives of: 1) having significant talent and 2) behaving like a clone by operating the business the same way he did. 

A proactive person was hired and every idea for change was knocked down.  The relationship lasted six months.   It was a disaster for both the company and new executive.

The truth is there are opportunities for change in any organization.  Sometimes the important opportunities will be in sales and marketing: what is sold, how it is sold and to whom.  Other times change will be in capitalization, improving internal operations or building a strong management team.   

The hiring owner or CEO should understand that hiring a seasoned, proactive executive implies change.  During the hiring process, the owner needs to understand: 1) what the executive candidate will seek to change, and 2) buy into how the company might be different as a result.  If not, the relationship starts off with a basis for conflict and failure in place. 

2. Gain Commitment of Management Team Early On

Too often, an owner or CEO decides to hire and then postpones getting the balance of the management team involved in the process.  Whether this is due to lack of management skill or impatience to get the job done, this is a crucial mistake for two reasons.  First, the wisdom of the team is not utilized to define needs and objectives, the skills to achieve them, or evaluate executive candidates.  Second, the team loses an opportunity to gain a consensus on the problems that the candidate will seek to solve, and a commitment to any of the programs the candidate will seek to initiate.   A lack of consensus forces the new executive to work in an environment in which the balance of the organization does not understand their mandate, or the role they need to play in achieving the company’s objectives.

It is essential for owners to channel the insights of their management team and key employees when initiating the hiring process and engaging them in the selection process.

3. Commit to Each Other’s Goals

Both the hiring executive and the new executive bet an important part of their future on the success of their new working relationship.   Often, the hiring executive focuses on their own goals, without understanding that the goals of the new executive will drive their own actions and/or satisfaction with results.  

Both parties need to understand what the other wants to accomplish, and be committed to achieving mutual success.  This implies a literal contract and a psychological contract with fair and proper terms built on a foundation of mutual respect.

1. Lack of large recruiting budgets to find top talent;
2. Lack of brand name recognition and prestige to woo top talent; and
3. Lack of competitive compensation and benefits packages to hire top talent.

That said, I’m about to contradict myself and argue that these hiring challenges are no longer hurdles. This exact point in time — the early years of the 21st century — offers the greatest opportunity in modern business history for private companies to find, hire, and retain top talent. In fact, I’d wager that as a result of a dramatic and fundamental shift in the world of work, private companies are in an increasingly powerful position to attract top talent. Two phenomena are bearing out this prediction.

First, members of Generations X and Y are seeking alternative employment to large, publicly traded corporations because they are suspicious of corporate America: Not only did they grow up in a world rife with corporate scandals, but many of them experienced first-hand how their baby-boomer parents were scorched by big corporations – they’ve either seen their parents suffer the financial and psychological blows of being laid off, or watched their parents practically work themselves into their graves to obtain the corner office. In this regard, the younger generations are redefining work and what it means to them. Instead of adopting the work ethic of their parents, they are seeking a quality of life and work/life balance that go beyond monetary compensation, fancy-sounding corporate titles, and climbing the corporate ladder.

Second, in an ironic twist, many baby boomers who have been successful in corporate America are growing tired of the corporate rat race. Since many of them want to continue working, they’re turning to the private sector as a place where they can add value and have a more profound and an immediate impact on a company’s bottom line. For many baby boomers, being a big fish in the small pond of a private company is more appealing and satisfying by mid-career; they no longer have to prove to themselves that they’ve made it.

My predictions are already being supported by a recent survey conducted by Burson-Marsteller, a leading public relations firm. The survey, 2005 CEO Capital™, reveals that “64 percent of workers from around the world say that a poor work/life balance is their top reason for not wanting to become a chief executive or other corporate bigwig.” Lesley Gaines-Ross, chief knowledge and research officer at Burson-Marsteller, further commented that “recent college graduates looking for jobs say that balancing work and home is important to them and work/life balance in general is a big issue that might give [them] pause before taking advantage of an opportunity.”

As a hiring consultant to privately owned companies, this survey is music to my ears and may be the most exciting time in my career because, as I’ve said before, the opportunities for private companies to grow by hiring top talent have never been greater than they are now. Thus, I’m motivated more than ever by the challenge of helping business owners “get the right people on the bus,” so they can take advantage of this shift in attitude and mindset.

It’s one thing, however, to arrive at this decision, it’s quite another to have the will and courage to execute what will inevitably become one of the most profound decisions in the history of the family’s business. For this reason, it is critical that the family executives take the time to understand the implications and ramifications of making this decision. Below are important issues that should be addressed before the family business owners set the hiring process in motion.

Put Business Matters Before Family Relations

Unlike other types of businesses, a family business is a complex, dual system that consists of two distinct and often contradictory parts: the family and the business. Thus, before a family business owner can set out to hire, he or she must come to terms with the fact that a new hire will fundamentally change both the family and business dynamics.

In effect, the decision to hire outside the family suggests that the business owner has already made a conscious decision to not only separate business goals from family relations, but also to put the goals of the business first and foremost. In other words, with this decision, the overarching goal to maintain family harmony or at least family order has shifted to promoting the business, knowing the risk of disrupting or altering the family dynamics. At this point, some family stakeholders may object and try to thwart the hiring process. One way of dealing with a family crisis is to bring in a family business therapist who has experience dealing with just this type of situation and who is able to provide useful third-party perspective to avoid long-term family dysfunction while still meeting the business needs.

Step Back and Reassess the Situation Before Proceeding

Not rushing into the hiring process is the first rule of thumb. While hiring mistakes are costly for any business in terms of time and resources spent, a bad hire in a family-owned business comes with an emotional cost, and it takes doubly the time for a family-owned business to regroup and begin the process again. Thus, time and care should be taken upfront to analyze the business operations, the business objectives, and goals to ascertain what skills, experience, and expertise are needed to bring the family business to the next level.

Come Face-to-Face with Your Blind Spots

Also at this stage, it’s important that the family business owners be aware that they may have professional and personal blind spots that they must address in order to understand the kind of executive capabilities that will be required to move the family business forward. For example, while the family business owners may know the mechanics of their trade, they may not have a good understanding of how to run a business, especially a business that is on the cusp of change. Even though the business has been operating in a certain way for a period of time and has achieved a certain level of success, the operations may need to be re-examined and overhauled to make way for the new talent who will be brought in to implement new processes and systems.

Obviously, the best and probably the only way to come to terms with one’s blind spots is through the help of an outside expert who can work with you to determine how the new hire will compensate for your shortcomings.

Understand That Executive Power Comes with the New Position

The decision to hire an outside executive must also come with the realization and an acceptance that the new position has to have a level of executive power that is unprecedented in the history of the family business. For this to happen, the business owners must be willing to relinquish the reins of authority to the new executive. Without this willingness, the case to hire an outside executive will be closed. What executive would be willing to come into an organization without the authority to make decisions that would effect change in the business operations? This is, by far, the most difficult decision that family-owned business members will have to face when making the decision to hire outside the family.

Accept That a New Executive Hire Will Change the Organizational and Personnel Dynamics

Family business owners must understand and accept that when a new executive is brought on board, the organizational structure, from day-to-day operations to personnel, will undergo fundamental changes. In particular, the business owners must realize that their existing relationships with their employees, including family and non-family employees, are not sacrosanct. The new executive will invariably form his or her opinion on how competent and effective the staff is and make adjustments accordingly, which will surely result in staff restructurings.

Making a successful executive hire in any business is a challenge under the best of circumstances. But for a family-owned business, the challenge is even greater: The hiring decision is compounded by the fact that the executive not only understand the business, but he or she must also mesh with the family dynamics. At the end of the day, what’s most required when making the decision to hire outside the family is the courage to do what is best for the business’s long-term success. It all begins and ends courage to act.

Many business owners believe in profit sharing because of their personal values and also because they believe that profit sharing motivates employee loyalty and performance.  This second conviction remains firm even though research shows that for incentive to impact behavior, there must be a clear link between the behavior and the reward.  Because most jobs are so far removed from a direct impact on profits, this condition is seldom met.

Employees are unhappy when they do not get profit sharing and are happy when the do.  Therefore, profit sharing can have a positive impact on employees’  feelings about their company–but it does not motivate performance.

The original purpose of Geiger’s profit sharing plan was to reward associate loyalty and compensate for lower pay during a period when the company was struggling for survival.  Third generation  President, Ray Geiger, promised to his new employees, “If you help us earn a profit, we will share it with you.”

That period of struggle has long been over, and Geiger is now one of the largest and most stable companies in the industry.

The Geiger Challenge

A few years ago I was hired by Geiger to conduct a systematic review of all compensation programs with the goal of ensuring equitable and competitive compensation, including incentives at all levels.

The mechanics of Geiger’s profit-sharing plan were typically straightforward.  After the end of the financial year, the company allocated a portion of profits to a profit-sharing pool, which was distributed to associates in the same ration as individual wages to total wages.  Management felt the associates didn’t understand the plan and were distrustful of the way is was administered.  They wanted to turn this around and get them to share some of management’s concern for profits.

Plan Design

The most dramatic change in the new palm was to base the program on company and business unit earnings targets that were clearly stated at the start of the year.  This meant that instead of having to wait until year-end to learn about their shares, associates were given a score-card to keep track of company results and their own share of profits.

At the start of the year, each associate is presented the financial targets for the company overall and for his or her division and department.  Each associate’s incentive is linked primarily to the department performance, but at the same time it was decided that everyone should have no less than 25 percent of the incentive linked to the results of the company as a whole.  Geiger hoped everyone would fee part of the total Geiger “family boundaries.

Due to budget constraints, hourly associates were targeted to earn a meaningful but modes 2.5 percent of annual compensation if targets were achieved–and proportionately more if the targets were exceeded.  Some selected manager had higher earnings targets consistent with increased impact on overall results.

The plan had a minimum threshold for overall company profitability below which no payments would be made to anyone. Employees were told how their payment would increase, decrease, or fail to be paid depending on actual results.

Questions and Concerns

In the process of designing this program, management had numerous concerns and questions about the plan design. Here are some.

• Keeping It Understandable. It is very easy to overcomplicate a plan so that employees don’t ..understand how it works. If they don’t understand the plan, motivating value is lost. Indeed, lack of ..understanding may even result in a negative effect if people feel something is being put over on them. ..This suspicion existed with the previous plan.

• Non-Financial Performance Measures. The company had quality metrics for its Departments. They ..could be part of the scorecard. Theoretically, it would be preferable to base bonuses on some ..combination of profits and other metrics. However, this would be too difficult administratively. It was ..decided to continue to provide feedback on the quality measures but base the profit sharing payoff only ..on profit targets and results. The question remained: Were profit targets (which were more removed ..than team quality targets) be enough to drive performance?

• Making it Meaningful. The bridge between individual jobs and Department results is more direct than ..that between corporate results and individual jobs, but not as direct as desirable. The way to make the ..connection was with good communications and through wide spread problem-solving meetings. Could ..management pull this off?

• Size of Rewards. Were the target bonuses too small? The $775 shown in the example translated into ..about 1.3 weeks’ pay. Some employees even had smaller dollar targets, depending on annual wage. ..Was this amount large enough to make employees care about whether the company and their unit ..achieved its goals?
..Difficult Economic Times. The industry and company were going through difficult times. Because the ..economy was weak, client advertising budgets were down as were company revenues and profits. Did ..it make sense to launch a plan like this in a year when it was possible that there would be no profit ..sharing bonuses?

• The Unknowns. There were probably unanticipated consequences. What would they be? Would they ..be damaging?

Geiger management decided to implement the plan despite these concerns and evaluate results, making modifications as appropriate.

Results

The company’s experience in the second year of the plan shows the value of connecting the profit sharing plan and individual rewards to unit performance. Company revenue ended significantly below plan, yet profit exceeded targeted profits. As a result most employees received profit sharing payments that exceeded their original targeted amounts.

Why did this occur?
• Managers reported monthly (verbally and with graphs posted) to all employees how their units were ..performing compared to target. The CEO issued quarterly reports the overall company performance. ..Employees knew of the sales struggle and understood the need to focus on cost reduction

• Employees clearly understood that cost cutting was necessary if they were to get bonuses and put ..pressure on management to do so. Was the size of the potential reward large enough to motivate ..employees? The result indicates that potential bonuses were enough and additionally, that employees ..understood how the system worked for them.

• One large unit did not achieve bonuses the first year. What impact did that have on morale? The unit ..was particularly diligent about costs the second year, and successfully achieved bonuses. The first ..year was very disappointing for that unit. This disappointment seemed to focus the unit. When the unit ..made target and bonuses were paid the second year, there was a big celebration.

• The company had training programs for managers and employees on leading teams and motivating ..quality performance. This helped the process on involving employees in cost cutting and other ..improvement strategies and minimized resistance to implementation of the plans..

What were the unintended consequences?

The pressure on managers to achieve targeted goals came from above and below. In particular, the head of the largest division understood that the performance of her unit was critical to the company’s overall profits and, therefore, to whether the company reached the minimum threshold for any bonuses to be paid at all. She reports lost sleep over the challenges. The plan can hurt morale in units that get low bonuses because of unit performance. It is up to the unit leader to mobilize people.

Some scorecards had to be fine-tuned to better reflect circumstances in the unit. The biggest adjustment to the plan was in the sales organization. In the first year, bonuses were paid on profit as in other units. The results were as indicated above: costs were cut and profit targets were made. However, there was concern that this worked against building new business. Therefore, for the sales organization there was a major change. Now, half of the target is for building revenue and half for profits. This made the job of the sales executives more complicated but prevented the plan from motivating only cost cutting.

In any planning process, some executives will provide stretch targets while others will be conservative to both protect themselves and make bonuses more attainable. It is very important for a plan like this to provide a level playing field. Management must be diligent to prevent “sandbagging” and make goals uniformly realistic.

Conclusions

Everyone Understood The Link Between Profits and Their Personal Reward. This plan was dramatically successful in getting employees involved in the profitability of the business. It gave them a meaningful stake in the business’s success. Everyone at the same organizational level in the same unit had the same scorecard. Therefore, the plan provided group rather than individual incentives.

Hourly and Management In Same System. The plan proved meaningful to management and hourly employees and tied them together with a concern for company profits.

Beyond Entitlement To Earned Reward. Employees are still disappointed when there is no bonus. In this regard such a plan is no different from when profit sharing is seen as entitlement or a benefit. However, when bonuses are received they are seen as something earned and are celebrated. Structuring a plan in this way allows profit sharing to impact business results.

Employees Understood Rules and Wanted to Play. The success of this plan also reinforces research that indicates it is not the size or amount that counts. What counts most is making the ground rules clear and giving employees a means of making an impact on whether they receive a reward.

Ongoing Involvement By Senior Management. Finally, and most important, Gene Geiger and his management team wanted this program to succeed. He and his management team believed in sharing success and in profit sharing. As a result they were willing to invest effort in the communications and the process of reacting to events and making changes when necessary to make the program succeed. Their reward was that the profit sharing plan helped them improve corporate performance.

How do you get from your current situation to a compensation program that is a truly fair and equitable ? 

Let’s start with the state of many small company pay structures. I typically see a structure that has evolved over the years based on two principles. The first is to keep payroll costs low. The second is based on expediency and involves paying what is demanded to keep staff happy.

The longer these “structures” evolve, the more they become internally inequitable and out of sync with the market. They create problems because they cannot be justified to staff and have a negative impact on the level of talent in the company.

Interestingly, once you start thinking about how to make it better, the steps flow one to another. The first step is to create a structure.

The structure is a progression of salaries with the midpoints ascending in relation to market value and value to the company. Each job has an associated range, demarked by a midpoint, minimum and a maximum. A compensation professional can help you develop and manage ranges. Once these ranges are defined, your options and strategies expand.  Here are seven ways a compensation structure will help you manage smarter

1. Structure helps you build for the future. In my experience, and to the surprise of most owners, when a structure is created most employees fall into the appropriate range. True, employees may be low in their ranges. However, management is not compelled to give anyone a raise. Having ranges creates an opportunity to think about what your employees can do to increase their value to the company. Increases can then be tied to performance and development targets.
2. The mid-point, not the maximum, is the target. If the structure is properly positioned in relation to the market, the mid-point tells what a fully qualified person should be paid. This means that smaller and slower raises are appropriate for those who haven’t developed target skills and faster and larger raises are given your top performers: those who have skills and have showed they can use them. Communications with individual employees about compensation isn’t limited to reactions to employees asking for more money. These conversations become about the how the employee can provide more value to the company in order to increase their compensation.
3. Being creative about the range between mid-point and maximum. Employees who are paid above the mid-point should be the top performers. It is likely that they are more valuable to you than to another employer because they know the culture, values, procedures, and personnel in your company. They should be paid for their value. At the same time the current employer should recoup gains for training them. These are the employees who can be challenged creatively. How can the organization make their raises and bonus rewards contingent on company performance and individual performance?
4. Change from profit sharing to incentives. Individual incentives must be part of a top-down goal-driven initiative. The CEO, owner or General Manager defines corporate objectives in very specific terms. The acronym is SMART (Specific, Measurable, Attainable, within Responsibility, and with Time Frames). SMART goals build in criteria that allow everyone to see whether they have been achieved. The corporate goals are then parsed between departments and within departments between people. In theory, everyone has goals. Bonuses are tied by a formula to corporate and individual results. Expensive? It doesn’t have to be. Research shows that the goal itself provides motivational incentive and that moderate rewards work as well as big ones. The important feature is that individuals have some control over the size of their rewards. That gives incentive programs the motivational value that profit sharing lacks.
5. Harness the power of groups. Should you have only individual goals, or do group goals work as well? The advantage of group goals is they can bring group social pressures as well as economic incentives into play. Once again, research says that having them is more important than their size. Brainpower and creativity is more important than cash in making these work.
6. Communications about company performance becomes meaningful. Performance goals encourage communication about the performance of the company and give employees a reason to care. At least three meetings are mandatory: (1) a meeting at the start of the year to share corporate goals and the ground rules of the incentive program; (2) a mid-year review to discuss results and encourage performance; and (3) an end of year summary, congratulating staff for good work or reviewing what was learned, so there will be greater rewards for all next year.
7. Performance management and reviews can become a way of life. What is the purpose of a performance review in a performance oriented culture? One purpose is to look back and evaluate what was done the previous year. The fact that you have created performance goals and development goals makes this a more productive exercise. The creative part is that you can look forward and begin dialogue on how to do better next year.

Is this a program that can be put off, or should you be working to rationalize your compensation program, starting today? You have to ask yourself, as the small business owner, what is the danger of not putting a solid compensation plan in place, and allowing the current situation to continue?

If you believe in the value of money, you should ask is you are getting as much as you could from your payroll expenses. If the answer is no, it is time to start making the changes that will help you get more value from your investment in people.

Either way, you must believe in the value of people. It is your human capital that will grow your business, develop loyal customers, and contribute to your increased profitability.