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Compensating, Rewarding, Retaining "A" Players

Gina Galgano Hoagland, President, Collaborative Strategies, Inc.

Whenever I ask business owners if anyone has enough "A" players-with "A" players defined as the top 10 percent of people out there who can do a job in the compensation range they are willing to pay NO ONE ever raises her hand and says, "I have enough." At my firm, I only hire "A" players, and I still don't have enough! Over the years, some wise people have shared with me all sorts of compensation axioms. Here are a few:

  • Compensation is a bad reason for a good person to leave your firm.
  • For most people, compensation is a hygienic factor, meaning we don't usually notice someone's hygiene unless it needs a little work.
  • Only 10 percent of people are solely money motivated.

When it is all said and done, I believe that there are many ways to keep "A" players. Compensation is one factor among many. If we focus in on compensation, let's look at what some of my clients have done over the years. And keep in mind, my clients are entrepreneurs business owners like you and me.

Also, take a look at the Sample Compensation Philosophy included in eVenturing's Executive Compensation Collection. It can serve as guiding principles to consider as you're establishing your company's overall compensation philosophy. These principles can be easily adapted.

Case A - The Architectural Firm

I had a client who was the second generation son of the founder of an architectural firm. Pretty quickly my client realized that as a young, impressionable, and ambitious leader, he was going to need to be surrounded by a cadre of talent to get the firm to the next level. His first impulse was equity—which I challenged him on immediately. If you think you might want to give, grant or sell equity to employees, ask yourself these questions:

  • Does my star employee even want to be owner?
  • If so, why does she want to be an owner?
  • Does she know what it means from a risk, hassle, responsibility, etc. point?
  • Is she ready to sign on the bank line guaranty?
  • Is she ready to mortgage her home when we have a capital call?
  • Is it important to her identity, status, and self-concept to be an owner?

Then I asked this client:

  • Why do you want her to be an owner?
  • Are you prepared for her to be an owner forever because that's how you have to look at equity—like it is forever?
  • What behaviors are you hoping to achieve with employees being owners?
  • What happens if this person turns out not to be a long term player?
  • Do you want a minority shareholder when it comes time to make decisions about your airplane? Your country club membership? Your car on the business?

In the end, this client realized he could grant several of his key employees something that got them to think like owners while he continued to study their long term potential and desire to be owners. Here's what he did:

  • He set up a bonus system that keyed off the company's EBITDA (earnings before interest, taxes, depreciation, and amortization).
  • We used EBITDA in his case because it allowed him to keep doing the things owners do—like running his airplane through the business—without compromising the figure from which bonuses were calculated.
  • EBITDA also enable the key employees to focus on the most important figure in a private company—the proxy for value. Maximizing EBITDA provides a quick valuation with a multiple applied to it. Some of my more capital expenditure laden companies use EBIT (earnings before interest and taxes) to allow for depreciation to fund capital expenditures.
  • By having a bonus program tied to EBITDA, the key employees were now thinking like an owner thinks about expenses, opportunities, and investment.
  • He paid the bonus straight into a deferred income vehicle, a non-qualified plan with a vesting component to it. This way if one of these key people left, they left behind value. This also forced them to save and gave them a chance to see their nest egg grow behind the tax shield.
  • He laid out the plan in clear and simple language and SELECTED who would participate. This became an honor and a privilege for those with the most potential.

See the Sample Proposed Incentive Program, included as a tool/template in eVenturing's Executive Compensation Collection. The tool can be customized to meet your situation.

Case B The Distributor

In this case, the owner decided to sell equity as a way to keep two key employees, the CFO and COO. He asked all the questions about ownership and answered them in the affirmative for his key employees. He had the company valued and sold the CFO and COO equity at a reduced rate. However, their employment contract contains a clause. Should they decide to leave, each must sell back his shares at book value. If they are released by the company, the buy-back is driven by a formula off the average of the prior three years' EBITDA.

So with these two cases, we see two different approaches. I encourage people to use compensation wisely. For sure, good people should not leave because of compensation. Ensuring the compensation is aligned with growth in company value is the best way to keep you and your "A" players on the same page. Compensation can play a role in keeping them on your team.

© 2007 Gina Galgano Hoagland. All rights reserved.

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