Compensation, Motivation and Employee Involvement

Incentive Plans and Employee Profiles

2006-08-10T16:55:00.000-05:00

One of the key steps in the process of developing an incentive plan is to identify the current level of employee understanding and expectations. Normally this is done with an employee survey and, while there are several good commercial instruments available, many organizations customize their own.

If you want your employees to be engaged in the business, a good approach is to develop a “partner” profile. You can start by defining the critical attitudes, behaviors, skills, and understanding an employee needs in order to think and act like a business partner. These elements can then be used in a survey to identify how closely the employee population conforms to the "ideal" partner.

A company moving toward a partner oriented, high performance culture may want to sort the survey into essential business categories. For example, a survey may consist of Cultural, Business, and Finance categories. The questions in each category should focus on the types of attitudes, behaviors and understanding necessary for success in that category.

Questions under the Cultural category may deal with how well the employees understand the processes that enable them to participate and become involved, or how effective they think these processes are, or how actively they participate in these processes. Other questions may focus on issues such as: Is there a team mentality? To what degree is there group and individual problem solving? Is there open and accessible communications? To what extent does respect exist in the workplace? How empowered the employees perceive themselves to be. Is there trust that permits risk-taking? To what extent are all employees involved in the goal setting and decision making?

Under the Business category questions may explore how well the employees understand the business strategy and their role in achieving specific goals. How well do they understand the industry and the company's position in it? To what degree are they aware of the competitive pressures, economic influences, and other big picture issues?

Under the Financial category questions may probe how well the employees understand how the company makes a profit and generates cash. Do they understand how their contribution affects revenue and profit? How often do they receive financial information? To what degree do they understand it? Do they participate in the collection of this data? Do they participate in goal setting as it relates to the data? How much performance feedback do they receive? How often?

The survey results compare your employee population to the profile of a mature partnership culture. The differences are obvious and they highlight opportunities for development and education which, in turn, will affect performance and the outcomes of any incentive plan.

If you’re having trouble developing good content for your culture survey, contact us.

Work as an enjoyable flow activity

2006-08-07T14:49:00.000-05:00

"When a group, team or company has a common purpose and open channels of communication, when it provides gradually expanding opportunities for action (empowerment) in a setting of trust, then 'work' becomes an enjoyable flow activity.

Employees will focus their attention on the group or organization relationship and, to a certain extent, forget their individual selves for the sake of experiencing the enjoyment of belonging to a more complex system that joins separate consciousnesses in a unified goal."*

Making work more enjoyable has proven to increase profits, cash flow and asset value.
Are you investing in your human resource assets? Do you have a focused and dedicated workforce?
Is there an investment that can produce a better return?

*Excerpted (and slightly edited) from "Flow - The Psychology of Optimal Experience" by Mihaly Csikszentmihalyi, Harper Perennial press

Engaging Your Employee in the Business

2006-07-24T10:31:00.000-05:00

Want your employees to be completely involved in the success of your business?
Use the following information to create a work environment where involvement will flourish.

“Complete involvement is created when goals are clear and challenging, feedback is immediate and employees have the appropriate skills. The appropriate skills are essential because they allow the employee to take control of the activity.”*

“Flow isn’t limited to golf games and crossword puzzles. You can find flow at work if you have a job that interests and challenges you, and that gives you ample control over your daily assignments. Indeed, one recent study by two University of British Columbia researchers suggests that workers would be happy to forgo as much as a 20% raise if it meant a job with more variety or one that required more skill.**

So, if you want your employees to think and act like business partners rather than hired hands you’ll need to develop a strategy and tactics for providing them with the proper education, information and training. Done properly, training is longer an expense. It becomes an investment with an expected ROI.

* Flow – The psychology of Optimal Experience, Mihaly Csikszentmihalyi.
** Money Magazine – Can Money buy Happiness, August 2006

Reward Systems Create Complete Involvement

2006-07-18T10:52:00.000-05:00

In his book "Flow - The Psychology of Optimal Experience," Mihaly Csikszentmihalyi observes that complete involvement occurs when 4 elements are present:
1.) Rules that require learning
2.) Goals that are challenging and clear
3.) Feedback that is timely
4.) The appropriate skills to perform well

Well designed reward systems, that contain these 4 elements, help participants achieve a well-ordered state of mind that is highly enjoyable. As Maslow observed in his Hierarchy of Needs; people seek to actualize their potential...and reward systems provide the means to do so.

Meaningful Work: Element #3, Feedback, provides the opportunity for coaching and to develop skills that allow participants to address new and more difficult challenges.

If highly engaged employees are missing from your workplace perhaps you should look to the design of your reward systems.

New American Workplace

2006-07-13T15:47:00.000-05:00

Excerpt from the book: The New American Workplace (Palgrave Macmillian) by James O'Toole and Edward E. Lawler III.

Executive Summary

"According to O'Toole and Lawler, as local retailers disappear from Main Street and old-line manufacturing companies downsize, they are being replaced by three emerging types of organizations:
1.) low-cost operators (like Wal-Mart),
2.) global competitor corporations (like Microsoft)
3.) high-involvement companies (like WL Gore).

These differ radically in terms of their business models, labor productivity and working conditions."

"Low-cost operators hire retirees, young workers and students, less-educated workers with few options, immigrants with limited English-language skills and those who are unable or unwilling to take jobs requiring more responsibility. Employees in these organizations are paid close to the minimum wage, receive few, if any, benefits, have no job security and are given only the amount of training needed to do jobs that have been designed to be simple and easy to learn."

"Global competitor organizations are enormous in terms of both size and geographic reach but they offer little stability for employees. Despite this, these organizations are often considered the "glamour companies" of the age, and employees in them enjoy the highest pay found in corporations anywhere in the world. Many are hired on a contractual basis, creating relationships that are more transactional than loyalty-based. "

"High-involvement companies can be found in many, if not most, industries and offer workers challenging and enriched jobs, a say in the management of their own tasks and a commitment to low turnover and few layoffs. They promote mainly from within, offering clearly defined career paths and extensive training and development opportunities. They are relatively egalitarian workplaces with few distinctions between managers and workers, both of whom typically share in stock ownership and profits. "

Our Comments
In our opinion, high involvement creates the most value.
Some of the best companies nurture high involvement by developing a culture of partnership.
1.) They use management practices that educate, enable, empower and engage their employees.
2.) They manage employee expectations by clearly communicating their roles, rights, responsibilities and rewards.
3.) They are dedicated to fulfilling customer expectations of commitment, cost, care and culture.

Empowerment: Part II

2006-06-26T14:05:00.000-05:00

A Five Step Strategy for Empowerment
Empowerment requires an implementation strategy. The following 5 steps have proven successful in creating a culture of empowered employees, focused on improving the value of the business.

1. Clearly Define the Outcome
In terms of Empowerment, clearly define what the organization wants, and why.
· What: “We want employees to have the ability (skills and expertise) and authority (permission) to make decisions and take action within clearly defined job parameters with the intention of achieving the company’s objectives and to understand & accept responsibility for the outcomes of those decisions and actions.”
· Why: Insert your mission statement here. The purpose of empowering the workforce is to enable it to better fulfill the mission of your company.

Time for Introspection
Take a moment to answer the following questions:
Why do you want empowered employees? How important is it to you? What value will it bring? Be specific
What type of empowerment do you want for your company? Be specific.
Do you have a mission statement? If not, you must develop one.

2. Provide Management with the Skills
It is essential to help all levels of management develop the ability to allocate responsibility and release control. This requires education, training and may require individual coaching.

Time for Introspection
Take a moment to answer the following questions:
Which managers in your company will support empowerment?
Which managers will resist it?
How will you overcome resistance? How will you show your support for the empowerment process? Make a list and be specific.

3. Develop Your Employees
Empowerment, on an individual level, is accepting responsibility and acting accordingly. To develop an empowered workforce it is necessary to grow people’s capacity to assume more responsibility. This requires education and training that develops key skills.

Some key skills and the training necessary to develop them are provided in the following list.
· Critical thinking skills
- Goal Setting
- Problem Solving
- Decision Making
- Risk Analysis
· Performance analysis & feedback skills
- Real-time data collected locally
- Analyzed locally
- Real-time data acted upon locally
1) Action Planning Skills
· Coaching Skills
- Relationship skills
· Influencing Skills

People are empowered if they have the capacity to be a compelling force on the actions of others for the betterment of the organization. Some tactics that will help your employees develop the capacity to produce effects on the outcome by influencing others are listed below.

Understand the line-of-sight of other individuals or groups
Cross-function ScoreCard alignment discussions

Group dialogue to understand the shared destiny. Connect career, professional or financial aspirations with the aspirations of the organization.
1) Incentive pay system
2) Performance evaluation system
3) Personal development plans
Develop a knowledge, skills and abilities matrix
4) Merit increase system
5) Career path/promotion levels/growth opportunities

Time for Introspection
Take a moment to answer the following questions:
From the information you just read, make a list of tactics that currently exist for the:
- Leadership group
- Middle managers
- Front line managers and supervisor
- General workforce
Now make a list of the tactics that need to be developed for each group.
How do you plan do develop these tactics? Be specific and prioritize the list.

4. Develop a Common Understanding
Empowerment is only effective when everyone has a common understanding of the concept, the performance objectives and their part in the effort. Empowerment relies on a well defined set of Values that are subscribed to by all.

Beliefs and values create a sense of identity and clear expectations. They become the moral criteria by which decisions are made and prioritized. It is essential that the members of the group hold similar values. To nurture the proper values, we must develop a common mind-set around shared responsibility.
· Empowerment requires the personal value of Self-Responsibility! It requires self-choice; the belief that one can change if one chooses to change. It requires one to accept responsibility for one’s actions, feelings and beliefs and understand that they are the foundation of one’s behavior. It requires the desire and ability to determine and direct one’s actions and thoughts.
- Tactic: Conduct an Understanding Our Values workshop to encourage and develop understanding and personal acceptance and commitment.

Develop and communicate a unifying explanation of what your business is about. This “purpose” gives everyone direction and a way to evaluate the quality of their decisions.
· Develop line-of-sight to the purpose, vision, mission, incentive ScoreCard objectives, and values as the basis of decision making.
- Tactic: Conduct an Understanding Our Mission workshop. Mission-based decision making develops a common focus on mutually serving a clearly identified purpose.
- Tactic: Conduct an Understanding Our Customer workshop that develops an understanding of and relationship to your customers’ needs and expectations.

Reality Check: Not every employee will respond well to empowerment. Be prepared to address this issue.
· Accomplishments are a foundation of empowerment. As such it is important to recognize progress and identify role models. We can begin to empower the workforce through activities such as:
- Identify and celebrate Role Models. Develop a method for employees to see and share success stories/examples
- Celebrate accomplishments
- Document examples of empowerment
- Recognition programs and demonstrations of appreciation for contribution.

Time for Introspection
Take a moment to answer the following questions:
What values does your company currently support? Do your employees understand them? How are they emphasized in the workplace?
What values should be added?
Does your company have a unifying focus? What is the vision of what you want it to be? Do the employees understand it?
What do you currently do to show recognition for participation and contribution?
What could you do?

5. Establish Accountability
Empowerment without accountability is a recipe for chaos. Accountability is that aspect of responsibility where results and outcomes are discussed. Accountability is a form of trust and trusting people empowers them.

“As we help to raise our employees’ self-esteem, we also increase their personal power. When we encourage them to be confident, self-reliant, self-directed, and responsible individuals, we are giving them power.”
Louise HartThere are several proven tactics that can be used to develop accountability.
· Define and clearly communicate expectations for all roles.
- Examples are: purpose of the role, customers served by that role (internal and external), the deliverables provided to those customers. This list is often developed during the design stage when developing an incentive ScoreCard™
- These expectations and role descriptions should be incorporated into Individual position descriptions
· Develop and communicate department statements
- Develop statements of purpose, mission, and service level agreements for each department.
· Responsibility charting
- Identify a list of responsibilities for each role within the department as it applies to the department and company mission statements.
- Create Action Plans to increase individual responsibility
· Authority matrix: a robust Empowerment tool
- Define the decision-making authority for each position.
1) Over what? When? Under what circumstances?
- Develop criteria for expanding this authority
- Build skills and experience to expand the authority
- Authorize the authority and expand the matrix
· Develop processes that enables employees to practice and apply their empowerment
- Participate in important decisions
- Cross-functional interaction and influence
- Self-directed work teams

Time for Introspection
Take a moment to answer the following questions:
Do your employees clearly understand what is expected of them?
How do you measure performance on a company, department, team and individual level? Be specific.
Do you have a list of Value Drivers for your company?
How often do you discuss the performance of these value drivers with your employees?

Summary
Empowerment is part of a culture of partnership where each employee thinks and acts like a business partner.

In this workplace culture you invite employees to participate in a high-involvement, high-performance environment. In order to engage them it is essential to provide the appropriate rewards.

Take a moment to answer the following question:
What rewards will employees receive for embracing this change to Empowerment? What’s in it for them?

Got a problem you would like to see included in the Problem Solver Series™?
Send it to: tjmccoy@tjmccoy.com Put: Attention Problem Solver in the subject line

Empowerment: Page 1

2006-06-15T12:19:00.000-05:00

Page 1

The purpose of this document is to:
1. Provide understanding about the concept of Empowerment
2. Present a model you can use to develop Empowerment in your company.

The Benefit
This document will enable you to:
1. Understand Empowerment
2. Encourage Empowerment
3. Benefit from Empowerment
”By surrendering control to the employees you gain control over the business.”

The Situation
Empowerment is one of the most difficult and essential elements to developing a high-involvement, high-performance workforce. It is difficult because it requires allocating responsibility by releasing some portion of control to your employees. It is essential because it is a proven method for engaging your workforce in the business. By surrendering control to the employees you gain control over the business.

The Definition
A good definition of empowerment is the authority and the ability to take independant action, within well defined parameters, which will actively influence the outcome.
A group cannot be empowered. Empowerment takes place on an individual level. It is relative. Empowerment depends on the situation and the “ability” of the individual. A wise manager does not empower an employee until the employee has shown that he/she understands the effects of his/her actions on the success of the company and has demonstrated the ability to perform appropriately.

Get the Systems in Place
The process of empowering the workforce requires systems that provide information and which encourage understanding, learning and practice.

Time for Introspection
You will get the most value out of this booklet if you take a few moments to internalize the information by answering the following questions.
Empowerment requires information, understanding, learning and practice.
Q1: On a scale of 1 to 10 with 1 being the lowest, how well do the majority of your employees understand the company’s strategy? The business plan? Their role in helping achieve success? Q2: What information would improve your employees “line-of-sight” to the company’s goals? Be specific in your list.

Look for page 2 in the near future.

Culture or Engagement?

2006-06-12T15:52:00.000-05:00

There seems to be a variety of opinions as to what makes up a company "culture." Here is my opinion and I welcome your comments.

Definition
A company’s culture is the social environment in which work takes place.
It is determined by the aspirations, ideals and behaviors toward which the group strives.

Under this definition there can be a large variety of culture types. One type that I find most effective in achieving the business objectives is the culture of "Partnership."

A Partnership culture is a social environment where employees:
1. Understand what the organization must do to be successful
2. Understand his/her role in achieving financial and operational objectives
3. Focus on issues that affect profit, cash and customer satisfaction
4. Show initiative; Participate in goal setting, problem solving, decision making and self-directed action
5. Celebrate success and share rewards.

Example Statement for a Partnership Culture
“Our social environment is one where employees view themselves as business partners. In this environment, everyone shares the same values of teamwork, mutual respect for others, open and honest communications, and integrity. As business partners we are engaged in the business. We are passionate about our purpose and focused on our business objectives. We strive for the highest levels of performance. We recognize that we have a shared destiny. We realize our personal success is linked to the success of the company. As a result, we value individual contribution and celebrate achievement.”

Employee Engagement: A Case Study

2006-06-01T11:24:00.000-05:00

Engaging employees in the business is one of today’s biggest business issues.

In a business environment where employees have a significant impact on profitability and competitive position, companies are struggling to connect with their people.

The Federal Home Loan Bank in Topeka (FHLB Topeka) found a way to do just that. They increased the degree to which their employees are engaged in the business by developing a culture of partnership in conjunction with an all-employee incentive pay plan.

Over a period of 18 months, the Bank implemented a process guided by a culture development model (E4 Partnership model.) The results tell the story:
1. 2004 Net Income improved by 26.4 ROI = 12.5:1
2. 2005 Net Income improved by 13.0% ROI = 6.6:1
3.The culture development initiatives improved the work life and job security of over 150 employees.

Culture Survey Results: 2004 vs 2005

Educate
Learning Organization
2004 = 66.5
2005 = 79.4
Roles
2004 = 64.8
2005 = 73.8
Business Understanding
2004 = 71.32005 = 77.0

Enable
Systems/Processes
2004 = 61.6
2005 = 72.9
Work Environment
2004 = 58.2
2005 = 73.1
Participation
2004 = 56.5
2005 = 72.0

Empower
Authority
2004 = 55.4
2005 = 71.6
Customer Satisfaction
2004 = 80.2
2005 = 85.2
Results Orientation
2004 = 69.3
2005 = 77.7

Engage
Rewards
2004 = 59.0
2005 = 72.7
Employee Satisfaction
2004 = 59.7
2005 = 72.0
Goals & Objectives
2004 = 70.6
2005 = 76.7

Overall Score
2004 = 64.4
2005 = 75.4

To learn more about their experience, the model and the implementation process contact:
Thomas McCoy, Managing Member
T.J. McCoy & Associates, LLC
816-333-1261
www.tjmccoy@tjmccoy.com
www.tjmccoy.com

Boomers with Businesses...Developing an Exit Strategy

2006-05-30T17:37:00.000-05:00

A manufacturing client in the Midwest, with revenues in excess of $5 million, asked for assistance in developing an exit strategy with a target date of 2011. The first generation owner had a son and daughter, both in the business. The owner was aware of the statistics that showed 1-in-3 private companies succeed through the second generation and 1-in-10 succeed through the third generation. He did not want to jeopardize his retirement based on an earnout agreement, so he hired us to assist him in developing an exit strategy favorable to all family members.

Candid discussions with the owner, the owner’s financial planner and a survey of potential buyers provided the information used to develop the plan. The strategy consisted of three elements:
1. Ensure the company has a leadership team that will continue to perform after transfer of ownership.
2. Develop a potential source of financing without engaging in a stock deal, earnout agreement or extended payments.
3. Capture sweat equity value on an annual basis rather than relying on it to be there on the date of sale.

How We Did It
There are a limited number of ways to separate the owner from the business; The owner can sell it, transfer it to the next generation, turn it into an ESOP, or take it public.

ESOPs work but are complex and expensive and taking it public was not an option. The owner wanted tactics that would provide the flexibility to either sell outright or transfer to the children. This flexibility required a strong and focused management team and a loyal and dedicated workforce.

To develop a strong and focused management team we customized a deferred incentive compensation plan for them. We used a design called LeaderShare®, specifically designed for closely held companies. Working with the owner and financial advisor, we developed a 5 year revenue and profit plan. This became the company vision for profitable growth. A deferred wealth building mechanism was established that rewarded the participants for performance toward the plan. The annual targets were adjustable to cope with the unforeseen changes but the ten year objective was considered realistic by all involved. It was the first time the management team had considered what the company might look like in the long term and everyone found it an exciting experience.

This tactic acted to retain and focus the leadership team. In keeping with the owner’s desire for flexibility, it provided the option of financing a management buyout. The option to overlay another LeaderShare® plan in years six through ten provided a strong retention mechanism for the management team should ownership transfer to the children. (The owner and children also participated in the plan, thus providing them with access to the value of the company as it accrued.)

Funding
The plan established a predictability of future earning and the financial planner used this projection to develop tactics for funding the deferred payout. He addressed the risk management element with term insurance on the owner and each plan participant. He developed an investment program that emphasized strong performance in a portfolio while maintaining low turnover. Because the portfolio was owned by the business, capital gains would be taxed at 20%, dividends at 8% and any interest payments would receive a low tax rate.

All that remained was to establish a process that would develop a loyal and dedicated workforce. To accomplish this we customized a cash incentive pay plan for them. We used a design called ScoreCard™, because of it’s ability to measure financial and operational performance on the front line level.

With funding, a leadership team and a dedicated workforce, the value and desirability of the company would be assured. Even if a buyer could not be found, the owner would have the flexibility of disengaging from the day-to-day business while continuing to receive a revenue stream.

Boomers With Businesses...And No Exit Strategy

2006-05-23T17:33:00.000-05:00

An exit strategy is an owner’s plan for cashing out of the business he/she worked so hard to develop. All too often the owner is too busy managing the business to develop and implement an exit strategy.

So what will the marketplace look like in 2012, when boomers start to sell their businesses and retire? The data indicates it will be a buyers market with an excess supply of businesses and a limited demand. Why? Because 80% of the companies in the U.S. are privately held and there are 87 million baby boomers who will reach retirement age in 10 years. That’s a lot of business owners wanting to retire. The market will be flooded and buyers will be able to pick and choose.

What will make a business attractive to the limited pool of potential buyers? The same two things that make it attractive today.
1. The buyer must want it; it must be desirable in terms of profit, cash flow, management team and workforce.
2. The buyer must be able to afford it; capital to finance the deal must be available. (Even in today’s rather evenly balanced market, lack of capital is the cause of a high number of failed transactions.)

Experience shows that most of these boomer business owners do not have an exit strategy in place. The unspoken expectation of an owner without an exit strategy is that the business has value and the value will be realized at the time of sale. Early in my career, a friend who was building a construction business told me “The nice thing about owning a business is not the paycheck but the fact that you are building wealth for your retirement.”

Yes, that is true, but ONLY IF YOU CAN SELL IT. Often there is a disappointing gap between what the owner thinks the company is worth (sweat equity value,) what the market says it is worth (market value,) and what the assets are worth (book value.) The time of sale is the worst possible time to seek the value in the business.

In order to avoid disappointment when it comes time to sell the company, smart business owners develop an exit strategy that includes tactics for tapping the value of the company over time, and making themselves obsolete, i.e. building an organization that will perform well without them.

Such a strategy requires time to mature and come to fruition, somewhere on the order of 4 to 6 years. That means boomer business owners need to implement an exit strategy today!

Stay tuned for information on how to develop an exit strategy.

Changing Face of Exec. Pay: Case History

2006-05-11T10:14:00.000-05:00

Performance Performance Unit plans are gaining traction in industries ranging from manufacturing to service and from dot.com to retail. Boards and stockholders like this plan because it creates a dynamic tension between achieving short-term results and long-term outcomes. Participants are required to understand the business, maximize the ROI of available resources, think strategically and act tactically. Exceptional performance delivers exceptional wealth. Average performance may result in minimal deferred compensation, if any.

Owners of closely held companies like this plan because it is a low risk approach that enables them to compete for the best talent in the marketplace. And, it provides the foundation of an exit strategy.

A modified version of this plan was developed for a client in the manufacturing sector. The privately held company needed a top notch marketing executive to capture the marketplace growth potential. The owner’s exit strategy was to sell the company in seven years. To that end, he was committed to maximizing the value of the company in terms of EBITDA and market multiplier. The marketing executive was an essential element in this plan.

The challenge was to develop a pay package that would attract someone at the top of their game to a small Midwestern city, for a private company that would be sold in the near future.

The solution was to offer a pay package that matched the business opportunity. A combination of base and incentive pay was set at the 85th percentile of the market. The deferred incentive compensation element was designed to reward the increase in asset value. By using a modified Performance Unit design it was possible to share the increase in value without changing the company’s capital structure.

In this design, units are earned annually and represent a right against ownership (RAO™). Unlike traditional performance units, RAOs are not cash equivalents. Instead, they represent a percent of the market value. The design encourages the leadership team to improve net profit, reduce debt and polish up the company’s market appeal to increase the value modifier at time of sale.

Compensation is an evolving discipline. Stock options have shown us there is no free lunch when it comes to pay. Compensation is a cost. But it is also an investment and we are now at the point where compensation professionals are beginning to emphasize pay systems that reward Return on Investment.

The Changing Face of Executive Pay: Performance Unit Plans

2006-05-05T09:13:00.000-05:00

Your company had to restate its earnings (downward) for the past several years. Your senior management received incentive pay based on those earnings. Will you be able to recover that incentive pay? If so, how? If not, how will you explain it to the board and stockholders?

Your company’s deferred compensation plan allows participants to select the type and timing of deferments and payments. They make an inappropriate selection and, due to a recently enacted law, trigger a taxable event for themselves.

Boards are being held legally accountable for the corporate actions and, as a result, are keen to put a stop to option abuse, re-pricing and the unpleasant effect that overhang and dilution have on the reported company value.

Executive compensation is under siege and compensation professionals are being pressed hard to respond.

Taxes: On October 11, 2004, Congress passed the American Jobs Creation Act (JOBS). JOBS added Code 409A to the IRS code. 409A changes the tax rules affecting nonqualified deferred compensation. The changes restrict flexibility, place limits on timing, limit security techniques and limit distribution options. Code 409A will require those with deferred compensation plans to amend most arrangements and terminate some. This code reduces the flexibility of deferred compensation plans. Failure to comply with the code will automatically trigger a taxable event, in come cases for all of the participants in the plan!

Stock options: New reporting rules took effect in June, 2005. They require stock options to be reported as an expense on a company’s financial statements. This, along with the problems of “under water” option values, re-pricing, and high profile abuses have made boards much more conservative in the use of options. America’s largest companies are waving the white flag. The February 28 issue of BusinessWeek reports that nearly two thirds of America’s 200 largest companies have cut back their use of options. Also being discontinued are the use of mega-grants worth more than $10 million and ‘evergreen’ provisions that replace options as they are exercised.

Deferred compensation is an essential part of a pay package designed to attract, retain and motivate the leadership team. Many companies are taking this opportunity to refocus their executive compensation philosophy and include a component that emphasizes internal value.

While not entirely eliminating stock options, these companies are adopting Performance Unit Plans that provide executives with stability to their pay portfolios while ensuring the company receives the agreed-upon ROI.

A Performance Unit Plan is a form of non-qualified, deferred, incentive pay that avoids the problems associated with stock options and is Code 409A friendly. These plans focus on controllable business outcomes and, as such, are effective at attracting, retaining and motivating executives who want a share of the increase in value they create.

With a Performance Unit Plan, performance is guaranteed to build personal wealth. Participants who can’t perform or who are uncomfortable with focused accountability will deselect themselves and go looking for greener (easier) pastures...exactly the results we want in a good retention mechanism.

The objective of a properly designed Performance Unit Plan is to increase asset value by generating profitable growth. It’s linked to internal measures and rewards good performance no matter how the stock market performs.

Performance Units are earned for short-term results and appreciate in value as the value of the company increases. Executives must achieve both short and long-term objectives to maximize their rewards. The appreciation element uses a simple valuation process based on improvement in the ability to create profit. Here’s an overview of the components:
Performance unit: Cash equivalent certificates, earned annually, and based on performance toward annual objectives. These units vest over time.
Increase value: A target increase in the company’s ability to generate profit is established at the beginning of the plan period. Each participant knows, in advance, the wealth they will receive if the company performs at target. Attainment of this target results in the payout of a predefined amount to each participant. (If we reach ‘X’, you receive Y’.)
Appreciation: A well designed Performance Unit plan is not an all-or-nothing plan. During the plan period, performance units have the potential to appreciate as profitable growth moves toward target. The amount of appreciation is a function of the executive team’s ability to successfully anticipate and plan for future business opportunities while maximizing the current return on available resources.

Stay Tuned for a Case History.

Employees as Business Partners

2006-05-03T14:05:00.000-05:00

“We do it because it makes more money.” Bob Frye, CEO, Cin-Made.

I often ask employees “What is the purpose of a business?” Normally, very few answer “A business is a money making machine.” Partners and owners, on the other hand, rarely miss this answer. How then, can a business owner develop the same level of understanding among employees?

Research indicates owners/partners have four key distinctions that set them apart from traditional employees. They are Educated, Enabled, Empowered, and Engaged. Because of this, they are confident in their assessment of situations and their ability to solve problems. This allows them to improve the operation through their own initiatives. To have all employees perform in this manner it is necessary to develop their capabilities in these four key areas.

Education: Line-of-Sight and a Personal Action List
In the business of making money, progress (or lack of it) is kept score using an income statement and balance sheet. Owners/partners understand how to read these scorecards and understand what circumstances created the numbers. Educating all employees to understand these documents can be achieved during a half day workshop that addresses the issues of revenue, expense, profit and cash.
It’s much more difficult to help them understand how their daily activities impact these numbers. I find this “line-of-sight” easiest to develop in small work groups, where employees identify the line items they contribute to and define the operational measures (productivity, quality, scrap, attendance, etc.) that affect those line items. Part of this education is an understanding of the work flow process. With this education everyone understands how an improved process contributes to profitability.
The final step in this education is for each employee to internalize their understanding by creating a list of personal actions that will improve the numbers.

Enable
Educating employees without providing them with the tools to take action is wasted effort. In order to turn knowledge into results, employees must have access to business information on a timely basis. One proven approach is weekly team or department meetings where the appropriate measures are shared and discussed.
Organizational systems, such as self-directed work groups, problem solving teams and suggestion programs enable employees to participate and contribute. Training in problem solving, decision making, process analysis and interpersonal skills enable employees to use their operational measures to ensure the processes work well and to improve their personal performance.

Empower
For employees to act like partners they need the authority to take action. Perhaps the biggest difficulty an owner has is to release the authority to take action without unleashing anarchy and chaos. One successful approach to developing this empowerment is to release authority to act based on demonstrated performance. This authority is situational in nature and extends only to the degree an employee has demonstrated competency. The process is: 1.) identify an area of improvement, 2.) share knowledge, 3.) provide clear direction, 4.) observe performance, 5.) review results and learn from experience, 6.) release situational authority to take action based on demonstrated competence.

Engage
In order to engage the employees in the business to the same degree that owners or partners are engaged, everyone must be provided with a reason to be interested, to participate and to improve the situation. Because this partnership process personalizes work, it becomes more meaningful and, in doing so, increases employee satisfaction and self-worth. However, the most successful organizations provide everyone with a reason to be interested in the profits. They use incentive pay systems, with rewards linked to results, to share the gains of improvement with those who help make them, thus developing a sense of common destiny and a true partnership with all employees.

The Secret of Success: Managing Expectations
Success in creating a business partnership with employees depends on the strength of leadership. Leadership must set the expectation that “We are going to become a measurement driven company.” They must set the expectations that each employee will be educated in the key measures of the company and the specific numbers of their department and that each employee will be expected to track and understand the numbers that are important to them. They must set a timeline of expectations (“this will take five years”) and a plan of action (“we will do it step-by-step, in weekly meetings.) Lastly, they must define the benefits of participation and establish the consequences of not participating.

"In business there is no order, only managed chaos. Those with the best information, understanding and motivation will manage it the best." T. J. McCoy.

Innovation as a Competitive Advantage: Part 2

2006-05-02T13:59:00.000-05:00

Dave’s company was experiencing competitive and pricing pressures and he wanted to get all employees pulling in the same direction. As a way of creating focus he developed the motto; “Unmatched service in all we do.” He knew in order to deliver on that motto, he would have to develop employees who were innovative, who would initiate change in the established way of doing things. His only concern was that the business might spin out of control as everyone changed “the way we have always done it.”

Dave called me and asked for help solving his problem. I provided the experience and research and together we built a model we could use to develop an innovative workforce.

First, we examined the workplace cultures of companies known for their innovation. We found their employees had four things in common. They had:
1. Understanding
2. Ability
3. Authority
4. A Reason

We assumed, rightly so as it turned out, we could encourage an innovative environment if we introduced these elements into the workplace. Here is how we did it.

Understanding: The research showed that in order for employees to become innovative they must understand the objectives of the company. We found it was important to educate them about the industry, the company’s target market, products, business plan and competitive pressures that affect the plan. We learned that innovative employees need to know about the customers, their needs, and what expectations were developed by the company’s marketing promise. Only then could they begin to think about how they contribute to company success. We also found that it was important to share performance information on a timely basis, to communicate about the ongoing business situation and how well the company was performing against business plan.

We concluded that information and understanding are the raw material from which new ideas are created. As part of our research we found support for this conclusion as far back as the 1880s. Reme de Gourmont, a turn-of-the-century writer and philosopher observed “You can’t possibly get ideas if your mind is bound up by associations. One needs to become disassociated from current circumstances in order to get ideas.” For us as managers this meant “distracting” employees from the micro focus of the daily details of their jobs by providing them with new information about other, bigger picture aspects of the company and the customers.

So we developed an education and information sharing campaign. It wasn’t difficult. We didn’t open the books and expose the financial statements. Instead we conducted a communications audit to identify the information each group needed. We stopped providing unneeded information and started providing information that would enable each group to expand their thinking.

Ability. We also learned it was necessary to establish a system within the workplace that enabled the employees to participate in the business. Most companies are organized to control the workforce. This management style inhibits employees from making changes and discourages innovative thinking. In order to stimulate innovation it would be necessary to develop a system that provides employees with the ability to make changes, to turn ideas into action.

Dave was understandably reluctant to turn loose the reins of control until the employees demonstrated they understood the effect of their actions on the bottom line. So we started with a small step. We developed “Idea Teams.”

These teams were voluntary groups of employees who agreed on the need to change and had an idea how to improve a process or procedure or for a new product or service. We provided them with initial training on how to conduct a productive meeting and the criteria required for successful implementation of change. Initially, the criteria was focused on revenue, cost and customer satisfaction. Armed with this knowledge and information the teams would meet to discuss their ideas. Once they defined the benefits of the idea and documented the cost of change they would present it to the senior management team for final review and approval.

Authority. Dave first announced the concept of innovation in an all-hands meeting. He provided a compelling reason for change and described the Idea Teams program. We were aware that, initially, employees may be reluctant to engage in this new behavior. So during the meeting he clearly stated his desire for an innovative workforce. In doing so, he provided them with the authority to participate, request information, gather as a group, and question the status-quo.

A Reason. Having considerable experience with the development and implementation of employee involvement plans, I knew the importance of providing a reason for employees to participate. As part of the plan we included an opportunity to earn incentive pay. Team members would receive 50% of the first year’s net savings for every approved idea. This not only encouraged participation but also ensured that profit-building ideas were implemented first.

Dave’s company now has over 50% of the workforce participating on Idea Teams. The company has grown in revenues and profitability. Employee turnover has declined and market share has increased. The company has become more responsive to the marketplace and the customer. According to Dave, “My employees are beginning to embrace change because it makes their work more interesting and they have a process they can use to manage and control it.”

Is Dave’s company like 3M when it comes to innovation? Not yet. But they are on their way. They have taken the first step toward building a culture of partnership, where each employee thinks and acts like a business partner. You can do it too. Getting started is as simple as 1, 2, 3, 4.

Innovation as a Competitive Advantage: Part 1

2006-05-01T21:13:00.000-05:00

Thinking of growing your business? The other day I spoke with a business owner about her plans for the future. Her company currently generates $3.5 million in revenues and I asked how much revenue she planned to generate in 5 years. The response alarmed me. “About the same,” She said, “Maybe 4 million.” Well, that presents an interesting problem because we all know there is no standing still in business. Over time a company either grows or declines, but rarely holds steady.

How do you plan to grow your business? Through acquisition? Price reduction? Through “value added” services or head-to-head competition? Each of these traditional growth strategies has inherent problems, many of which are cannot be easily resolved.

There is another strategy. It’s called innovation. It’s the growth strategy of the new millennium. Innovation provides such a competitive edge that the European Union has created a commission to foster “the innovative culture.” It promotes innovation at the community level, supporting European business to innovate, develop and market new technologies. These are the folks that are competing for your business.

Not to worry, “American business is known for it’s innovation.” Perhaps as a nation we are, but does that statement apply to your company? Is innovation your competitive edge? What’s that you say? In your industry innovation means expensive hardware and software that becomes outdated in a few years? How can you justify the cost of innovation?

We’re not talking about that type of innovation. Lets take a moment to clarify what we mean when we refer to innovation. The definition found in the Random House Dictionary of the English Language is: “To introduce something new.” “To make change in anything established.”

According to this definition, innovation is more of a process than a purchase. It has more to do with people than with assets. At least this is the way companies like 3M view innovation. It is not only about new products and services but, perhaps more importantly, about new ways of performing the day-to-day activities. The owner of a Midwestern company with a regional market (we’ll call him Dave) had the following observation, “It’s not about making another capital investment. It’s about improving the return on my current investment in human resources.”

Stay tuned for Part 2.

Completing the Bridge

2006-04-28T13:08:00.000-05:00

Of course, growth and managed change don’t happen in a vacuum. Individual employees perform the work that eventually adds value to the organization but to fully capture the benefits of motivated individuals it is necessary to provide the appropriate support and resources. Working as a group or in teams, employees can make a greater contribution than as individuals. Teams, working in a culture of cooperation and in an environment where the systems and processes enhance work accomplishment can make a greater contribution to value.
That’s why HR professionals speak of incentive pay as a sociotechnical bridge. It can act as a bridge to link the social (human resources) to the technical (non-human resources) in such a way as to maximize the return on investment in these resources.
Financial management is essential in putting together the merger and/or running the business. However, experience and the data show that by developing a strategic plan to engage the people in the business plan via the company’s processes and systems, a company can realize a substantial increase in value.
Real value is the result of three elements: a strong history of earnings growth, a focused and dedicated workforce, and a leadership team that can run the business. Incentive pay is an essential element in creating this value but it is only one element. Other elements are People, and how they interact, Processes, and how they contribute to achieving the goals, and financial management. When you get all four in alignment you experience phenomenal improvement in value and, if it’s a merger, you actually realize the benefits promised by the financial analyst.

Case History
A Midwestern manufacturer was suffering from margin pressures caused by overseas competition. Their product, a commodity, could be produced in China and shipped to the United States at a cost that was less than the cost at which they produced. The answer was to engage the workforce in the business to increase productivity and quality and reduce costs. The foundation of this effort was an incentive plan.
They identified the value drivers of the business and designed a ScoreCard™ for each department based on the value drivers they affected. Once the employees understood they could earn more pay by their value drivers, they began to ask questions such as “What do you mean by productivity?”, “How do we measure Quality?”, and the best question; “What can we do to improve results?”
The incentive plan became the foundation on which the company developed a communication and education campaign. Managers held regularly scheduled meetings to discuss how to get a better score on the incentive pay systems known as ScoreCard™. These meetings became discussion-based learning opportunities and the employees began to evolve from hired-hands into business partners. The results speak for themselves.

Profit Margin (pre tax)
Peer Companies: 1.6%
Case History: 4.1%

Return on Assets (pre tax)
Peer Companies: 3.4%
Case History: 3.7%

Direct Labor
Peer Companies: 18.7%
Case History: 12.9%

Ave Collection Period (days)
Peer Companies: 42.4
Case History: 37.0

Inventory Turnover (times)
Peer Companies: 7.6%
Case History: 20.9%

Sales/Employee
Peer Companies: $ 93,658
Case History: $138,053

Gross Margin/Employee
Peer Companies: $ 26,716
Case History$ 41,852

Compensation, A Bridge To High Performance

2006-04-27T13:02:00.000-05:00

Pay – just another budget line item expense...or maybe not.

True, pay is a cost, but if we view it as an expense we immediately set ourselves in conflict with the workforce. This is because the workforce is selling time, its primary resource, and is intent on getting the highest price for it.

However, if we view pay as an investment, concerned only with receiving a reasonable return on our investment, then we can develop a pay system that builds a partnership rather than conflict.
We transform pay from an expense to an investment when we link it to performance, i.e. incentive pay. Incentive pay is a sociotechnical bridge. That’s a fancy way of saying it can be used to link people to an organization’s objectives (business plan), resources (human and otherwise), systems and processes (workflow, operations, etc).

Here’s how it works. Compensation is a powerful communication tool. Start talking about pay and you get everyone’s attention. Link pay to performance outcomes and you have a tool for communication and motivation, the foundation on which to lead growth and manage change.
The process of developing an incentive pay system requires us to define those key elements that add value to the organization. Examples are profit, revenues, expense control, productivity, quality, customer satisfaction...you get the idea. The process also requires us to identify how to measure the performance of these value drivers and establish performance criteria for them (good performance, average performance, poor performance). When we link rewards to improvement in the measures, we establish a powerful platform on which to engage and develop our employees.

A properly designed incentive system encourages the employees to focus on what drives value into the organization. For example; if we tell the workforce they can earn an additional 10% of their pay if customer satisfaction improves by 15%, we most certainly will have focused their attention on customer satisfaction. We will also have developed within them a desire to understand how they can help improve customer satisfaction. If we take the time to educate them as to how their roles affect customer satisfaction (develop their line-of-sight), then we can ask for their commitment to improvement.

Focus, understanding and commitment. Sounds like just the ticket for a successful growth or merger strategy.