In my prior posts, I discussed empowering key people in your organization to run the day to day operation of your business so that you could be freed up to pursue higher level strategic planning for the future.  One often expressed reservation against this idea is the concern that these key people will leave after many dollars are spent investing in them either to move on to other things or worse to compete with your business.  One way to reduce this risk is to be mindful of what motivates these key people as discussed in my prior post.  Another supplemental answer to reducing this risk is to consider economic incentives tied to long term employment.

The concept of providing a so called “Golden Handcuff” is a simple one.  It simply means to provide an economic incentive that is lost if the key person leaves your employ prematurely.  The key employee is highly incentivized to stay since if they leave then they lose something of meaningful value.  There are lots of ways to do this.  Many companies used to offer long term defined benefit pension plans that provided a meaningful economic incentive that was tied to long term employment.  These arrangements have largely been reduced or eliminated due to their high cost both in terms of administration and in terms of economic contributions necessary to fund the promises made based on assumptions that have changed drastically over the years.  For example, many old style defined benefit pension arrangements assumed shorter life expectancy and assumed more consistent investment returns.  The real world experience for such arrangements has been much more expensive than was predicted.

In the early part of the 21st century, most employers have looked to creating arrangements that are based on a defined contribution model meaning the amount of money going in is clearly defined as opposed to a defined benefit model where the employer has to put in whatever is necessary to achieve a clearly defined economic benefit.  There are qualified plans that provide these types of benefits such as profit sharing and 401(k) plans.  Although these are helpful concepts and are often an important part of providing a competitive benefits package, most employers who want to do something more to retain their key personnel wish to do it in a highly focused way to benefit just those key people in order to keep the cost manageable.

The most common answer to this issue is to implement some form of Non-Qualified Deferred Compensation Arrangement.  There are many different versions of such arrangements.  They can be specifically customized to a single person or they can be designed as a broader based plan for a small group of key employees.  The important part is to make sure that the arrangement is clearly understood, meaningful to the participant and that the arrangement both speaks to the motivations of the key employee while aligning their interests with that of the strategic goals of the business and the current ownership. Let me elaborate on these important characteristics.

Clearly Understood- one of the principal advantages of a Non-Qualified Deferred Compensation Arrangement is that it can be narrowly tailored to a specific person or for a small group of key employees.  The implicit downside of this flexibility is that such arrangements can become very complicated since they can have many different features and many different “bells and whistles” thrown in to accommodate the specific desires of the employer and the participants.  Although it can be intellectually stimulating to create very elaborate arrangements, they are often more difficult to administer and are often misunderstood to the point that they sometimes can fail to meet their intended objective by confusing the participants.  All things being equal, simpler is often better.

Meaningful- if the arrangement provides a very modest economic benefit that is overshadowed by a raise that a key employee might receive by going to a new employer, then the arrangement has failed in its objective as a Golden Handcuff.  How much is enough is often a function of finding a balance between rewarding key employees for their long term contributions to the organization and not overly burdening the employer from a financial perspective.  Oftentimes, creating a regular contribution to some form of arrangement allows the funding of such benefits to be more easily done rather than leaving the obligation to the future and hoping that there will be enough money to pay it.  An arrangement backed by real dollars is also one that has credibility which in and of itself makes it more meaningful.  An unfunded promise to pay a benefit down the road even if made in good faith can sometimes be doubted by key employees who wonder if the arrangement is “real”.  Such doubt is highly counter-productive to long term retention of such personnel.

Alignment- the design of a Non-Qualified Deferred Compensation Arrangement needs to be carefully considered so that it truly aligns the common interests of key employees with the business and with the strategic plan of the current ownership.  For example, if the current ownership have as their strategic plan the desire to transition the ownership of their business to the next generation of their family, non-family employees who are nevertheless key to the business ongoing success need to understand the plan.  Such non-family employees need to be incented to assist rather than obstruct the plan.  An arrangement might be tied to certain key milestones where the non-family employees are rewarded for long term employment, the mentoring of the next generation, and are ultimately rewarded when the next generation succeeds to full operational control of the business.  There are lots of ways to do this but a simple example would be to tie deferred compensation to continued employment for five (5) years (or some other time frame) beyond the retirement of the existing ownership.  This could be combined with specific metrics or milestones related to assisting the next generation in the transition.  If the key employee stays and helps make it all happen, then they are richly rewarded for their contribution.

Another type or style of Non-Qualifed Deferred Compensation Arrangement is one that ties the reward to the key employee directly to the growth in the value of the business.  This type of arrangement is particularly useful in aligning key employees with goal of maximizing shareholder value.  These arragements are often described as Stock Appreciation Rights programs.

Next Time – Stock Appreciation Rights programs.

In my prior posts, I discussed the importance of developing a middle management team to run the day to day operations of your business so that you could be Operationally Irrelevant. (See my prior posts for a definition and discussion.) Operational Irrelevance allows you to give yourself a promotion so that you can be the Chief Executive Officer of your business rather than be the” jack of all trades” Chief Operating Officer. Unless you free yourself up so that you can look beyond the immediate day to day operational issues of your business, you will not be able to plan for the future which is what business succession strategies require. One key aspect of building an effective management team is retention. If you have a revolving door of personnel, you cannot build the lasting teamwork necessary to execute your business strategies at a high level.

The very first step is making sure you have the right people and that they are functioning in the right role. Developing a plan to retain someone who should not be in the business in the first place is the height of absurdity. I will speak to the issue of finding the right people and the process of determining their proper role in the business in future posts. Assuming you have the right people in the right roles then the first step is to get to really know these people and understand what motivates them.

Most business owners/founders are surprised to find out that monetary compensation is generally not the most important factor in retaining key personnel. With that being said, compensation should be internally and externally equitable (fair) since perceived fairness is a huge motivator for most people. If they think that your business does not pay its people fairly (which is not the same as being the highest payer in your industry) it will breed unrest and defections. Internal equity means that your people are compensated fairly based on their relative contributions to your organization. External equity means that your people are compensated fairly compared with other organizations in your industry for similar personnel performing similar functions. The key point here is that you need a process of compensation that communicates a strong good faith intention of achieving internal and external fairness. You do not need to pay people the most in your industry in order to retain them. Traditional employee benefits (health insurance, life insurance, etc.) also have the same quality. For many employers, having a decent health insurance plan is a good recruitment and retention tool for their rank and file employees. With that being said, for your key management personnel they typically see this as a given rather than as a meaningful element that leads to their staying with you. You need to provide a set of employee benefits that is comparable (but not excessive) compared to other organizations in your industry.

Once pay and benefits are properly set, the retention issue becomes one of speaking to people’s needs. What motivates some people is meaningless to others.

Vision -Some people want to be part of something greater than themselves and will work tirelessly at below market pay to be a part of such a visionary organization which is aligned with their views. Most non-profit organizations and political organizations have at least some of their personnel who are motivated in this way. A for profit business can potentially achieve this result by tying their business plan to an ambitious and noble vision for truly helping the company’s customers and getting “buy-in” to such a vision from your key management personnel.

Time/Convenience – Most people in the early part of the 21st Century in North America are stressed for time. They are very busy and time is their most precious resource. For people motivated by time/convenience great low cost retention tools include concierge services such as coordinating assistance for car repairs, home repairs, elder care and child care issues, and other day to day matters. Outside service providers can provide such concierge services at very low costs per employee. If the employee needs a vendor to provide such a service, they call the concierge and the concierge arranges it for them. The concierge is able to keep a list of high quality service providers and due to their regular routing of such requests, the service providers want to do the best job to stay on the list.

Ownership – Some people (perhaps you) are motivated by being an owner of the business. Some key management personnel also have the same motivator. Sharing the ownership of your business with your management team can be a very powerful motivator. It also can be fraught with problems if it is not implemented and managed properly. I will discuss this at much greater lengths in future posts.

Fun/Social – Some people are motivated by the social interaction that comes from working with other people.  In many businesses, employees spend more time with each other than they do with their own families.  This is particularly true of highly motivated key employees.  If this is a major motivator for a key employee, consideration needs to be given to creating a business culture that reinforces the positive social experience without taking away from the need to have the business thrive economically.  As with many things that I will discuss in this blog, balance is the key.  A culture that emphasize highly concentrated effort at the cost of social interaction may drive otherwise high performers away from your business.  It is okay to work hard and play hard.

Financial Security – Many people want to achieve financial security for themselves and their loved ones. A long term plan that gives them strong assurance of achieving such security is a strong motivator for such persons. The plan needs to be clear and simple. Numerous approaches to this exist including both qualified retirement plans which generally must be non-discriminatory as well as customized non-qualified plans which can be legally structured to discriminate in favor of the key management personnel who you wish to retain. These non-qualified plans can sometimes have the quality of acting as so called “Golden Handcuffs” meaning that they provide a strong incentive to stay in order to get the benefit.

Next time – Golden Handcuff Arrangements

In my prior posts, I discussed the importance of achieving operational irrelevance for the business owner/founder and on the Key Business Functions necessary to achieve this result.  This post is focused on empowering your people to handle the Key Business Functions.

Sales, Production & Administration as defined in my prior post are the three (admittedly simplified) Key Business Functions of any business.  In order to be operationally irrelevant, the business owner/founder needs one or more persons to be reasonably effective in each of these roles.  It is often the case that two or more people are needed to cover the various skill sets required.  In today’s modern business environment, this does not necessarily mean hiring more staff.  Many smaller (and in some cases even larger) businesses will outsource one or more of these functions.  For example, some business models are based on outsourcing everything except the Sales function.  For example, many web based businesses outsource the Production and Administration functions to other organizations.

Even if your business is a more traditional “brick and mortar” business, you can still use outsourcing as a partial or temporary back up plan.  For example, many businesses outsource many of their Administration functions to Professional Employer Organizations (“PEOs”) and/or to payroll/bookkeeping services.

Whether you use existing employees, newly hired staff, outsourcing or some combination of the above, you need to create checks and balances in the system to prevent fraud, mistakes, and blunders.  As best-selling business author Jim Collins has suggested, you need to get the right people on the “bus” and you need to get them in the right seats.  Once you have done this, you need to train the system and the people.  What I mean by the “system” is that you need to write down the training so that it survives the people you are training.  Otherwise, the system will break down when the people leave.  Just as you want your business to be less dependent on you as the owner or founder, you want your business to not become dependent on your newly installed middle management team.  Make sure your key people or outsourcing vendors understand and agree that it is absolutely essential that they write down and provide you with a comprehensive summary of their activities so that it can be used to train their replacement.  If they are unwilling or unable to do this, then you need to find replacements that will do so otherwise you are just moving the problem to another level in your organization.

Once you feel comfortable that the system as newly reconfigured is operationally functional, you then need to test the system.  How do you test the system?  You leave!  At first, I would recommend that you take a long weekend off.  Come back and see what happened.  The most common result is that everything waited until you returned.  This is not acceptable.  Having your middle management team put things on hold until you return means that they are not doing the job.  They need to make decisions.  You need to realize that they will make mistakes and so you need to keep “safety net” systems in place to make sure the mistakes are not fatal.  With that being said, you need to also “let go” and encourage and empower your direct reports to take on meaningful decision making responsibility.  If they make mistakes (and they will) you need to balance your emotional reaction by remembering that you make mistakes as well and theirs are often no worse than yours have been.  If they are not allowed to learn from their mistakes and to “own” them then they will not learn to avoid them in the future.  The key to this and many related issues is balance.  If you go off on your direct reports to the extent that they are so intimidated by you that they feel they can never again take any risks or make any decisions then you will have overdone it.  If you are so mild in your reaction or if you otherwise do not communicate your displeasure, they might very well not realize that they did anything wrong.  Having an outsider to bounce these ideas off of can be very helpful as a sounding board to finding the appropriate balance.

Once a long weekend feels comfortable, then longer stretches outside the office should be done to test the system.  One common mistake is to call back to the office constantly and manage from afar.  This temptation needs to be resisted otherwise, there will be no autonomous decision making which once again defeats the purpose that becoming operationally irrelevant is intended to accomplish.

Once the system seems to be functioning without you, you need to improve the system to make sure that you can still keep it functioning in the event of a loss of any of the people or outsourced vendors that you have installed.   You also need adequate financial reporting to make sure that you can stay apprised of the continued financial results of your operation.  It is helpful in this regard to develop simplified financial reports that provide a highly summarized method of tracking the key financial and other indicators of your business.  Some commentators describe this approach as having a “dashboard” for your business.  The metaphor is that just as you only need a quick glance at your car’s dashboard to decipher your speed, your remaining fuel, and whether your engine is overheating, the same glance at your business dashboard should allow you to quickly evaluate the key business metrics of your business.  I will discuss dashboard metrics further in future posts.

Next time – how do you retain your key people?

Recommend books by Jim Collins:  Good to Great and Built to Last

In my last two posts, I raised the concept of Operational Irrelevance as an important tactic to achieve many business succession planning goals. I defined Operation Irrelevance to mean that the owner/founder can step away from the day to day operations of the business and still have it grow and prosper. The question for this post is how do you do it?

The first step is to figure out the key components that drive the success of your business operations. For most businesses, whether large or small, the key components typically consist of: Sales, Production, and Administration. These generic categories can be applied to almost any business activity.

Let’s define our terms:

Sales – the process and activities that result in clients/customers coming to your business and paying your business for whatever product or service that you provide.

Production – the process and activities that go in to delivering your product or service hopefully leading to appreciative customers who come back for more.

Administration – everything else that goes on in your business. This includes bookkeeping, payroll, insurance, legal, accounting, human resources, technology, communications, regulatory compliance, banking, billing, collections, etc., etc.

You need one or more key middle management people who can take on these roles so that you can be freed up (become operationally irrelevant); so you can focus on taking your business to the next level, or find time for a life, or avoid burn out, or prepare your business for sale, or prepare for a transition to the next generation, or whatever other business succession planning strategy you wish to accomplish.

In 20 years of legal practice, I have never seen a business succeed for any length of time without having one or more people reasonably skilled in these three areas. I sometimes see highly successful sales people who fall flat on their face because they cannot deliver (Production) the products or services they are able to sell. I sometimes see highly technical engineering types who are able to design and produce high quality “mouse traps” but the world does not beat a path to their door and without an effective Sales function they fail. I also see business owners that are highly effective at Sales and Production but do not address the Administration needs of their business. Some succeed for a period of time but then fall into trouble with the taxing authorities, or have an otherwise insurable risk that they failed to insure destroy their business. Sometimes they fall victim to embezzlement since they did not bother to set up any internal controls since Administration was “not important”.

Even in very small businesses, it is possible to outsource some of these functions and they are all critical. Larger businesses tend to internalize these functions and sometimes they are all done well and sometimes the strength of one function is enough to carry the mediocre level of capability in the other functions.

You need to develop a “depth chart” meaning a list of personnel (or outsourced service providers) that can collectively do all three of the critical functions (Sales, Production, and Administration). It may well be that you (the Business Owner) are the most capable person in the organization in a particular function. Just because this is true does not mean you should not be grooming someone to be able to take over that function so you can take some time off or just so you can have time to take your organization to the next level.

Next time – Operational Irrelevance: Step 2: Empowering Your People

In my last post, I suggested that Operational Irrelevance was a tactic that is very important for achieving many important business succession strategies.

What is Operational Irrelevance?  It means that your business is able to continue to grow and be successful without the founder/owner’s day to day operational involvement.

Why is this important?  Well, unless you are able to live forever and never lose your passion for your business, it is critical.  In order for a business to survive the departure of its founder(s), the business must be able to operate without him or her.  You may say that you are healthy and that you plan to be around for a long time.  That is all well and good, but the simple reality is that none of us know how long we have and even the best of us can suffer from “burn out”.  If we lose interest, get ill, or pass away, then unless we are or can become operationally irrelevant, our business will struggle or even cease to exist.

Business owners often tell me that if they take any meaningful time away from their business, all hell will break loose.  To be candid, such a business does not have much value if it is so dependent on the owner.  Who would want to buy such a business if it “crashed and burned” after the departure of the former owner?  Even if you do not have any intentions of selling your business, it also means that you are putting all of your employees at risk by not strengthening your “bench”.   What would you think of the coaching staff of your favorite sports team if they had no depth chart (no back up plan) for when the star player got hurt or was out for the season?  If you get sick or pass away suddenly or even if you just get distracted or burnt out, all of your employees who rely on you to feed their families will be seriously hurt.  This is not a responsible way to run any human enterprise.

Some business owners tell me that they enjoy their business so much that they do not want to do anything other than be actively involved in it.  This passion is very commendable but it (like many things) can be self destructive if not balanced by other more long term goals.  Don’t be selfish! If you make your business totally dependent upon you, it will not only mean that you will be unable to take time away and spend time enjoying other aspects of life, it also means that you are putting your employees and their families at risk.  The right thing to do is to find a balance.

Finding time away from the day to day operations of your business gives you the perspective to make significant strides toward taking your business to the next level.  Time spent away can help you to maximize your opportunities and minimize your risk of loss.   In the simplest of terms, if you want to be a servant to your business then just keep doing the same thing. If you want to grow and develop your business, you need to stop working IN your business and start working ON your business.  In order to do this, you need to take your nose up from the grindstone and get some perspective.

Some business owners are afraid to empower their middle management team or even to have such a team.  Managing people is often difficult.  Managing people who are empowered to run your business without you is sometimes a scary proposition. How do I find such people?  How do I keep such people?  How do I keep such people from competing with me? If they do not need me to run the business, how do I keep them from moving on without me?

These are all good and valid questions which I will attempt to answer in future posts.

Next time – how do I make myself Operationally Irrelevant?

One of the most important aspects in developing a successful business succession plan is to first be clear about your goals. Your goal may be to create a long lasting legacy for your business; it might be that you want to maximize the value of your business for sale; you might want to create an opportunity for your children or grandchildren; you may want to provide ongoing employment opportunities for the people that work with you; or you may just want to have the ability to say that you left a “mark” on the world.

Whatever your goal, it is important to write it down. It has been said that an unwritten goal without a deadline is no more than a dream. Sometimes it is hard to be sure of what you want especially in terms of something like your future. Please know that just because you write it down and just because you set a deadline to achieve your goals, IT DOES NOT MEAN THAT YOU CANNOT CHANGE YOUR MIND! The reason to write down your goals is to get you in motion. It creates a sense of accountability and it allows your sub-conscious mind to work on the problem while you go about your day to day activities.

For example, you may choose to have your goal be to create a business that can sustain itself beyond you and carry on after you are gone. The next element is that you have to have a deadline. In other words, by what date will your business be ready to operate without you? I realize that setting such a date is not necessarily easy but you should pick a date and then once we are further in the process, we can always refine the date.

For example, you may want to be “operationally irrelevant” (meaning that the business can operate day to day without you being present, by the time you reach age sixty five (65); or fifty five (55) or even nearly immediately regardless of your age.

This tactical objective of being “operationally irrelevant” is hugely important for a number of common business succession goals.  For example, if you just want to be able to not be a slave to your business you need to get to the point where it can continue while you take some time off to do strategic planning.  If you want to sell your business, it will have much greater value if it is not so dependent on you.  If you want to hand the business over to the next generation, then you need to be able to let go and let them start running the business while you still are around to give them high level guidance and provide a safety net for their likely mistakes.

So – stop reading and write down a goal.  No – really stop reading. . . . . . .Okay, did you do it?  Now pick a date by when you would like to see the goal achieved.

No more reading until you do it :)

NOW, take what you wrote down and share it with someone.  Yes, really.

You need to let someone else see it to make it real.  It might be a key employee, it might be a good friend, or a relative, it might be your spouse or significant other.  It does not really matter who you share it with as long it is someone who is an ongoing part of your life.

NEXT POST – Operational Irrelevance – Why would I want that?