RO Compensation in Entrepreneurial Companies

Speaker A Let me just say by way of introduction that I'm a professional management consultant and have been all my career, but come at this compensation thing from the point of view of entrepreneurial companies. And it's a combination of history and the way the world worked out. I started a business of my own with partners, and so I'm sort of an entrepreneurial guy. And we built that company up to be a successful national company in Canada and then sold it to, you know, is an enormous bloody place. And I spent five years with Mercer, and during that period I did a fair bit of executive compensation. And of course, they come at it from the publicly traded company side because that's basically their clientele. And so I have some of that background. And then for the last 18 years, bonnie and I and others have been in more or less in private practice, and we're back basically focusing on entrepreneurial businesses. And partly that's because I spent a number of years in YPO, and so I tend to have clients and contacts and people that we know in that entrepreneurial range. That's the slant I have on it. Now, entrepreneurial companies doesn't necessarily mean startup companies. It might, but I'm working with a company now that will do a billion and a half in revenue, and they've been in business since 1925, and they're still an entrepreneurial company because the leaders drive it that way and think that way, and it's the way they respond to the world. And sometimes I work for publicly traded companies that are led by entrepreneurial leaders, and it's a style of approach that's different than many of the bureaucratic companies. So what I've got here is an approach to felt fair pay that I use with these companies. And the thing about working with these sorts of businesses is that you've got to be more of a jack of all trades, especially for the smaller ones, than you would if you were working for the very big companies. And so while I wouldn't see myself as a compensation specialist, I need to be able to deal with that aspect of the strategy, structure, and staffing work that I'm helping them with. And so what I'm going to show you here very quickly is part of the toolkit that I have. And that column here of total direct compensation is basically what Nancy was talking about, except that's what roughly we would call the midpoint in the range of six steps. Now you can't have a midpoint in the range of six steps. So this is the column that's the fourth step over, but it roughly corresponds to the midpoint. So you got a sense for stratum one up to stratum seven in terms of total direct compensation. That's roughly correct, I think, for Ontario in 2007 and the one year PayPoint that Nancy was talking about, the top of stratum two. Well, it's actually two columns over here, Nancy. Yeah, it's actually $96,000 for Ontario in Alberta. I think it's more like about $112,000 current. I noticed that Mark had 113,000 yesterday for the whole of the US. So we're talking roughly comparable things I think. So this table is in Excel and you do the surveys that Nancy talks about, find out what the community you're working with and basically where they want to pay and then you just drop in that one number and the whole thing calculates. So that's the starting point. Then the first decision is the percentage of total direct compensation that's going to be paid in salary. Now I know the pure Elliot point of view is that you pay everything in salary but that's just not realistic in North America. At so the first calculation here, first policy thing that needs to be set here is the percentage that will be paid by salary and it usually varies by level. And the rule of thumb at above five, that is five and above it's half salary, half incentive. And then you will see here 55% salary at four, down to 100% salary at one in this particular case. Now these are policy decisions and do depend on the nature of the business. Some leaders want to take the incentive down farther, some of them the nature of the task doesn't really allow for that. And then how much incentive should be long term and usually none below stratum four, maybe half. At stratum four and above, five and above. You want more skin in the game, you want more long term pay lined up with long term time span and long term initiative and in Mark's terms long term innovation. Because maybe one of the things that distinguishes the entrepreneurial company, publicly traded or not, is the degree of innovation that's driven by the leadership. So then the balance is in bonus and by that I mean annual incentive get what you inspect, not what you expect is the rule. So you won't need clear criteria. You want it as simple as possible. And wherever you can do this easily you got profit share is a good way of coming at that where that's fair and makes sense. So then you'll see that these numbers, if you could read them in the column, actually reflect these different percentages that we've chosen. So then here's the kind of place where you can use this to help with structural problems. And here's a fairly typical case of a small business, that the owner pays himself at three, even though he's operating at five. And he does that because he's always done that. And that's the way he keeps his base expenses low. And he knows that if he succeeds in what he's doing, he'll have the money. There'll be more money later. But they don't usually pay themselves a lot. Entrepreneurs. So this pink band here is what he's actually paying himself. He's total direct compensation of $177,000 and then in the way the business is shaping up. He needs key support at four at some point, because a stratum five guy that's trying to move a business with just stratum three subordinates is impaired and he's pulled down. But you say, well, if you're going to have four, you've got to be paying here $223,000. And he just says, Christ, there's no way I'm going to do that. It's way more than I make. And it's crazy. But the thing is that if he doesn't get stratum force board, he may be stuck. And so this whole approach allows us to have the kind of discussion where he can see that he's got to bring a guy in that he thinks he's paying a lot more than he's earning himself, which isn't if he's successful. True. And so when I put all those things together, you see that's the salary on the left hand side, this is the requisite long term incentive plan by the percentages that we've chosen. And here's the requisite bonuses. And you can see in the case of the owner, who was practically, probably drawing $142,000 a year, and you're asking him to go to the market and hire a guy, maybe at a salary of 134, and you don't. Want to give him skin in the game. So you're not going to offer him a long term stake, but you need to be able to show him how he can make another 89,000 or $90,000 a year in order to be able to induce him into the organization. And the truth is, as the owner, you may be drawing $142,000 a year and you might want to take out $45,000 a year in bonus to buy that new boat or whatever it is. But in truth, if you're doing what you're setting out to do right here, you're accumulating long term value that's currently worth $250,000 depending on the business plan. And the way you can see it unfolding sometimes you can see these long term numbers mound up very large. And I do have a client who have had some of this problem with and in terms of him not being willing to pay higher levels to get higher stratum people in that he needs and well, we can't pay that kind of money. And he says, but on the other hand, I take home $5 million a year. He says when he stops and thinks about it. Now he pays himself a quarter of a million dollars a year. But the truth of the matter his business has throwing him off $5 million a year in cash. So once he starts to see the total picture, then you can start to get structure to be put in place properly without being bound by pay that isn't right and that's it.