Compensation Systems: Giving and Getting
June 15, 2005
Case categories include: Human Resources Leadership
By Robert Sher
All CEO’s know that if everyone on the team were a motivated, top performer, the bottom line would improve. In Rick Sutherland’s case, he found a way to increase his bottom line fourfold by lighting a fire under his team --- and they loved it.
It was at a CEO peer group meeting in 1986 that fellow member Norm Goldfarb (founder of Calgene) handed over the newspaper article. Rick Sutherland read it, and it got him thinking. Rick, President of Wheel Works, had multiple retail locations just like the example in the article, and several of those stores always lagged behind the rest.
Rick had been successful since his start in 1976, and had grown to 7 stores. But he didn’t feel like most of his store managers ran their store as though they owned it, and that was what the article illustrated. It so happened that the article highlighted Pete Harmon, the first KFC franchisee, whose worst store outperformed the best performing company owned store, and Pete Harmon lived locally.
It took NINE calls.
Rick called Pete and left a message requesting a meeting every three days for a month. To his surprise, on the 9th call, they put him through, and because of Rick’s persistence, a lunch meeting was set. He listened carefully, as every CEO should.
Mr. Harmon said his formula was simple:
1. Keep track of the numbers that matter.
2. Share the information with your managers and employees.
3. Give them half the profit.
Rick had tried many compensation plans in the past, but none as simple or ambitious as this. He went for it. He targeted his program at the store managers, with a low base pay and the rest tied to profits. Education and measurement were bolstered, so every manager really understood what drove profits, and what the best practices were in all areas of store management. Successful managers started getting serious bonus checks.
The Managers were on Fire.
After 18 months, many managers were exceeding six figure incomes. One manager earned over $250,000 in 1996. With typical industry manager salaries at approximately $40-60k, Rick’s managers coveted their jobs, and worked with passion to keep them, and to push their incomes, and the profitability of their store upwards.
By 1998, Wheel Works rated #3 nationwide in sales revenues per store, and had the highest average profit margins. His PBT went from 2% to 12%. Even after giving away half the profits in bonuses (including the imbedded base salaries), Wheel Works was left with 8% PBT, more than four times what he started with.
No wonder Larry Morgan chased him down and bought Wheel Works in 1999. Rick remained as president for two more years, using the same formula, and grew from 23 stores up to 45, with similar stellar results. Rick’s new business is ClickAway Computers, with two locations already. He’s applying the same formula, giving half away, and the results are starting to show.
Fancy compensation plans aren’t often necessary or useful. It’s about putting out the cheese – lots of it, if your team performs really well. When a lot is at stake for each team member – when the success of the business becomes personal for them – that’s when the performance really begins.
Training and Education
But in addition to creating incentives, they have to gain the knowledge to perform well. That means sharing the big picture, teaching them how to understand it, and making them entrepreneurs. This is a significant time commitment. Rick held monthly managers meetings, 1 on 1 training sessions, and worked hard to focus them on the fundamentals of their task: Running the day to day operations of a retail outlet. He trained them to leverage the system corporate headquarters put in place, which stressed maximizing the interaction with every customer. They didn’t have to dream up new strategies – just execute really well.
Many entrepreneurs confuse actual ownership with incentives, and are far too quick to give away equity in the hopes of getting high performance. Diluting your equity has big implications. Creating a simple incentive plan that shares in the wealth is often less risky and has a more direct and understandable relationship between performance and reward.
This kind of incentive plan requires an underlying attitude on the part of ownership about sharing the wealth and faith in the power of the team. I’m not saying that a business should give all the profits back to the workers. I’m fully capitalistic! But Rick gave away 50% of the profits and got FOUR TIMES more profit himself! Rick realized that to grow beyond a relatively small scale, a business must have and retain a strong, passionate, high quality team beyond the founders of the business. The stronger the team, the better the growth and profits will be. And you can’t have a strong team without many of them caring about the firm like you do---like the CEO.
A few caveats. Nothing will fix having the wrong person on board. If you’ve got the wrong person, you’ll still need to fire them. I’m also not advocating unconditional bonuses. It must be very clear about what is required of each person. In Rick’s case, the manager of the store was tied to that store’s performance, an easy system. Many businesses do not have such an easy way of tying a department’s performance to results. Rick’s system did include “fines” against the manager’s bonus for big mistakes, and did allocate G&A against each store’s performance.
Profit is NOT cash, and be sure to create a system where you give bonuses only if you have the cash. Make allowances for other uses of cash like inventory, fixed assets, debt repayment and receivables, and make sure your team understands cash flow.
I’m sure there are several ways to quadruple your bottom line while growing dramatically, but they’re not easy to find. Rick Sutherland found one worthy of note: Pay your team heavily for performance, train them well, believe in them, and enjoy the results.
• Getting your management team to think like an owner is critical. One way to do it is to give them a big share in the profits.
• With the incentive plan, the team must be trained how to understand the impact of each of their decisions on the bottom line.
• Be sure you have the liquidity to pay out their share of profits in cash.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Company and Case Facts:
Company: ClickAway Systems
Person: Rick Sutherland, CEO
Alliance Member since: 2000
TEC Member since: 1982
Business Founded: 2001
Annual Sales Volume: $2.5 million (Forecast for 2005)
Growth Rate: 250% (2004-2005)
Head Count: 20
Product: Computers & Networking Sales, Installation and Service
Typical Customer: Home users and Small Business
Written: June, 2005
Address: ClickAway Systems, 457 E. McGlincy Lane Campbell, Ca. 95008
Web Site: www.clickawaycomputer.com