Patrick Peyton is chairman and CEO of Minneapolis-based thermal processing company, Despatch Industries, a family business. Previous to Despatch, Patrick was CFO of the Gordon P Getty Family & Trust.
Showing potential management talent you mean business is a challenge for family companies. Patrick Peyton explains how family businesses can attract and retain a strong management team against stiff competition for talent with non-family corporates
The stakes today for any organisation in hiring and retaining the best top executive talent are higher than ever – even more so for family companies. The challenge is two-fold: business is more competitive and global, and companies are under relentless pressure to grow profitability faster, with increasing returns to shareholders. But the pool of well-rounded and experienced talent is shrinking. In addition to financial performance, boards and stakeholders focus a critical eye more and more on how a business conducts its affairs, insisting upon the highest business ethics and value standards. The senior management team, led by the chief executive, is being held to ever higher accountabilities and standards for the methods with which they lead the business – and even their values outside the workplace. All of this has its effect on hiring power. Failure to attract and retain executive talent leads to a lack of confidence and credibility in the CEO from stakeholders. The failure to retain top talent is extremely expensive, in the terms of money, time, lost opportunities and for the CEO, personal credibility.
The privately-held family organisation is not immune to these challenges. In fact, the ability to attract and retain the best talent is generally more difficult for these organisations, particularly when competing with the compensation schemes of public corporations offering benefits and stock options plans. That said, attracting and motivating top executive talent within the family organisation is not impossible. Annual compensation can be market-based, annual short-term incentive plans can be creative and tied to both financial and strategic objectives, and longer-term compensation can be accomplished with 'phantom' equity programs that mirror traditional public company stock incentive plans.
Nevertheless, these strategies don't tackle the initial problem family companies may have in persuading potential employees away from the bad name sometimes attached to family ownership. Fears among potential talents include changes in the families' long-term plans for the organisation, such as the fear of a sale; fears about the status of the company after the death of the controlling family member; fear regarding the true financial state of the company since financial records are often confidential; fear of the role family members in the business will play; and fear of being underpaid in a competitive marketplace. Such perception and fears among potential employees who have not worked in a family organisation before will create a challenge for the chief executive.
However, all of these fears can be avoided and communication among the employee base can diminish potential discomfort. Clear communication of the family's long-term plans for the business, including the effects of a controlling family member death can assuage concerns. Transparency creates trust and knowing that this process is in place will help potential employees buy in to the firm. Fears of family members' roles in the organisation can be avoided when family members are in highly visible and highly accountable positions. The fear of under-market compensation can be avoided with a visible and objective compensation philosophy and plan. These are simple but undervalued concepts for the family business.
Organisation, compensation, philosophy and plan
An organisation's written compensation philosophy should clarify the companies' compensation philosophy for executives. This philosophy will assist senior management and the board, not only with annual compensation plans but with the design, development, competitiveness and implementation of short- and long-term incentive compensation for the executive management team. The visibility of this plan, along with a complete understanding of the awards, will retain and motivate the senior team. The plan should ensure that expenditures relative to cash compensation are cost effective and should be easy to administer, communicate and understand.
Total compensation costs are typically one of the greatest expenses an organisation incurs, so it is very important to ensure that the overall programme is aligned with the business objectives, appropriate for the organisation's culture, and allows the company to continually attract and retain skilled employees. It is important to ensure conscious choices about all elements of total compensation and the purpose and objective of each programme offered, while promoting a strategic, integrated approach rather than piecing programs together. The plan should define all aspects of the competitive market and the organisations' desire to be an aggressive, moderate or conservative payer of compensation in relation to market levels. The plan should also detail eligibility categories for participation in various compensation plans, and clarification of objectives for each component of the compensation program.
An objective third party evaluation of executive pay should be benchmarked against market and industry standards annually, or at least every other year. Each executive position should be benchmarked to comparable companies and industries. Well-defined job descriptions will aid the third-party compensation advisor in benchmarking the positions fairly and properly. This evaluation has many benefits, including ensuring the most current data to ensure competitiveness of annual pay, a credibility factor with the employee to demonstrate that decisions are not personal and without market consideration. It also creates credibility with the board and other stakeholders that the compensation plan is fair and without bias from the CEO towards particular people or positions.
Annual incentive plan
The objective of the annual incentive plan is to recognise and reward eligible employees for the achievement of short-term or annual financial and individual goals tied to a strategic organisation plan. In order to fund any annual incentive payout, a threshold level of company profitability must be met. Sometimes a minimum amount can be available for achieving less than the stated profit goals to reward them for strategic goals and accomplishments. However, stakeholders must be paid first and without reasonable profits; an incentive should be minimal. Employees should be eligible to receive a targeted percentage of base salary when the company meets both its targeted financial goals and the employees meet their individual goals. Individual goals should be tied to the organisations' strategic goals. Participants should be strategic leaders who can have significant impact on the financial and strategic results of the company.
A tiered payout based on a percentage of base annual salary could be structured in the following way. A CEO could receive 50% of their salary; CFO 40%; and other directors within the organisation 30%. The incentive award can be based on results within two areas, financial results and individual results. For example, 75% of the award can be tied to financial results and 25% tied to the completion of individual goals. The company must be required to meet a minimum or threshold level financial goal in order for the employee to receive any payout from the incentive plan.
Payout of an award for individual goals can be 25% of the total award weighting. The employee can earn all or a portion of the remaining incentive potential based on achievement of individual objectives tied to the organisation strategic plans. Each team member eligible to participate should meet with the CEO at the beginning of the year to develop and mutually agree upon no more than five clearly measurable objectives to be accomplished during the year in support of the company annual strategic goals. Each objective should have an established value or weighting, depending upon the impact to the business, and should total 100%. The objectives should support the strategic plans of the company and be supported by a measurable action plan with targeted completion dates and resources required. Progress against established objectives should be reviewed with the CEO on a quarterly basis. At year-end the CEO will review the employee performance against the individual objectives and determine the payout amount. The employee's overall evaluation score will determine what portion of the individual objective award they will receive (for example, if 95% of individual objectives are met then 95% of the individual incentive portion will be payable). However, employees will not receive any incentive payout unless the threshold level of company financial performance is achieved. In other words, if the pool cannot be funded with a threshold profit level then there will be no awards in spite of the employee accomplishing their individual goals. In addition, at least 75% of the individual objectives should be met in order for the employee to qualify for payout under either portion of the plan. Therefore, an employee who does not carry their weight during the year to support the organisation's strategic goals cannot be eligible to participate in the financial award.
Some individual awards can also be subjective in nature. For example, a portion of the family business CEO's incentive can be based on an evaluation by family members if the CEO has led the company in a manner consistent with the family's values. Payouts of the annual incentive award should be made as soon after the fiscal year end as possible, both to ensure tax deductibility in the year the expense is incurred, as well as for motivational purposes.
The key to remunerating and motivating a senior management team is to provide a clearly defined, well communicated, and well executed compensation program which is tied to corporate strategic objectives and that is achievable. The CEO should provide a challenging yet enjoyable environment for the team to feel empowered to stretch their imagination, speak openly, have their opinions heard, fail safely and succeed magnificently. These things create a level of trust and credibility, and for a family-owned company, this is vital in attracting the kind of talent listed or non-family corporates often have the edge on.