Lessons in Leadership

I have always had an interest in history and have been known to read a military-history book or two. Just before the demise of our friends at Borders (we covered that ground last month), I purchased a hardcover book entitled: Neptune's Inferno; The US Navy at Guadalcanal by James D. Hornfischer. For those of you that do not know, Guadalcanal is a dismal island in the south Pacific and part of the Solomon chain. It was the first major island battle of the Pacific war and was a bloody struggle with grave consequences for the loser. It began in August 1942 with a Marine landing and raged on for nearly a year. The US Navy played a pivotal role in the campaign by protecting the Marines ashore and securing the sea lanes around the island. It is not a tale or book for the faint of heart. I am glad that I know how it came out—it wasn't always that clear. In October the results of battle were not going well for the US Navy and it was decided to replace the theatre commander (Admiral Robert Ghormley) with Admiral William F. Halsey (aka "Bull"). The author is quite knowledgeable of the US Navy during that period and its senior commanders. Halsey is no exception. About half way through the book, he wrote a paragraph to describe the incoming admiral and his qualities with stunning clarity. That paragraph follows. Halsey was neither a genius nor even a working scholar in any academic or technical field, but he had a quality of brilliance that may have been even more important in a combat capacity. He was, it was said, "brilliant in common sense." He knew that battles and wars were not won most principally with well-drafted paperwork or subtle diplomacy or high materials and engineering ratings aboard ship, but by something quite simple and direct: placing ordinance on target. He knew, working backward from there, the quality of the mind and spirit of the men distributing the ordinance was at least important as the mechanical state of the weapons themselves. And he knew that small and simple acts, trivial themselves but intangibly powerful, raised and perfected that quality; sometimes those things were as prosaic as showing up and listening to people.   That is one of the best descriptions of a leader I have ever heard or read. I had to read it three times when I first came upon it because it was so striking. What does Hornfischer say about Halsey and leadership? The mission is generally pretty simple to define. I have found that if you cannot articulate your mission in a handful of words you do not understand it in the first place, or you do not have one (e.g.: ordinance on target). Planning is a wonderful thing, but it means absolutely nothing if it does not aid in operational execution, or worse, gets in the way. People operate enterprises and the quality of their execution is crucial to end results. Machines and processes generally do not operate themselves—I do not care what your engineers try to tell you. So, do everything in your power to enable and prepare the executors. Most people look for (crave) a leader to help inspire them to go that extra mile. Further, they expect their leader to be standing with (and engaging) them when there is a tough job at hand. Sometimes engagement is as simple as walking the shop floor and stopping to talk with a machine operator or forklift driver, and showing an interest in their job and their lives. I am often surprised at how predictably people perk up and smile when you show an interest in their job or just say hello. Halsey knew what he was talking about. There are no great management secrets noted in the above paragraph; just some common sense and an understanding of what makes people want to work for and with you. We went on the win the battle of Guadalcanal. Halsey turned the tables by picking his time and place of battle and sending his fleet out to fight. And fight they did in some of the most historic and costly naval battles ever fought. Those sailors were remarkably brave by any standards, and so were the Admirals standing next to them at battle stations. They were our fathers, grandfathers and uncles who faced mortal danger and put ordinance on target. Next time you see one of those guys, thank them.

Is setting annual incentive goals each year a requirement?

As long-time readers probably know, I am a strong believer that an employee, manager or executive should have annual performance metrics and objectives, and these should be measured against annual expectations or goals for each defined performance metric. Our rationale for such goals is that if you do not employ such performance metrics and expectations you cannot tell if you are winning or losing. And, winning is the name of the game in a successful company. We often advise clients to link their annual incentive or bonus plans (or portions thereof) to achievement of an employee's annual goals. Hence, the company will pay the employee, manager or executive based on performance. (Now, that also has a familiar ring.) In such a reward environment, it is generally a requirement to set (and reset) annual goals and expectations each year—across the organization. However, it is also possible that employee expectations can be stated on a multi-year basis and results can be measured on a longer-than-annual cycle. However in truth, you will usually "settle up" on an annual basis for purposes of bonus payouts. We like goal-based annual plans because of their clear communication value regarding pay and quantifiable performance. The linkage is clear. But with that clarity comes increasing complexity in the form of goal setting, payout tables, calculations, reporting, communications and measurement. This clearly takes management's time and attention and is one of the main reasons we often see push back from senior executives regarding the use of annual goal-based incentive plans. And, recall that simplicity is one of the top design criteria to achieve in the design of any effective incentive plan. During the last few months we have been involved with the evaluation and design of a different type of annual-incentive plan that is simple in nature and may not (always) require the use of explicit annual incentive goals. Let's talk about it. The annual incentive design we refer to is the creation and sharing of a cash bonus pool that is allocated among managers or key executives. In our experience, these pools are mostly created as a percent of enterprise or unit profit—however defined. These types of annual-pay arrangements (pool-participation plans) are most often reserved for executives or very senior managers—including the top operating executive.  But, they can work at lower organizational levels, if properly designed. They generally work something like this— A pool of cash is created at the end of the year based upon pre-determined levels of (say) pre-tax profit. The pool is then created as some agreed-to percent of the annual pre-tax profit. (e.g.: 10% of $2 Million) There is sometimes also a threshold of performance below which the pool is not funded, and incentives are not paid. The pool is then allocated among a select group of executives or managers based upon rank, responsibility or performance. "Pecking order" is too strong a term to describe it, but it can work that way. For example, the Vice President of Marketing may get 10% of the pool, and other executives or managers will get more or less determined a priori. OK, so what are the differences between this and an annual goal-based plan? The main difference is that you might not have to set or reset your goals each year. For example, you could decide that a profit pool be set up for multi-year period (say 3 years) with same percent(s) of profit, same thresholds (if any), same metrics, same executive allocations; each year. Technically you do not have to reset your annual incentive goals in that circumstance. In fact, what you have just done is set a "goal" that will last for (say) 3 years and made an agreement with the owners (or management) regarding how much they are willing to share with the executive team for that same multi-year period—at various levels of performance. While you have actually set a goal, you are just not changing it every year. Of course if the deal is to just pay the participants their share of a set percent of all profit, the only goal or expectation established is that the company makes money. Is a goal-based plan or a profit-participation plan better? That is like asking whether you like a blue or red car better. It really depends on the application and circumstance. The profit-participation plan is generally much simpler to understand and explain. Further, it clearly links the interests of the management team with the owners—simply more profit equals more pay.  On the downside, you should certainly expect more from an executive than what is described in a single collective metric like pre-tax profit. We believe profit-participation plans are best applied when combined with other annual incentives and where goals, thresholds and rates reflect ownership expectations on an annual, or generally timely, basis. So must you set annual incentive goals every year? No, it is not necessary. But, if you do not, we believe that you are leaving important tools from the manager's toolbox lying on the table.