Remembering the holiday “plant shutdown”

I recently drove by the plant site of a manufacturing company where I had worked in the late 1970’s. The company was originally called Imperial-Eastman and was acquired by Gould, Inc. in 1976. I was part of the first Gould management team and it was my brash introduction to hands-on logistics and manufacturing management.

Imperial was nearly 75 years old at the time and primarily made & sold industrial and commercial valves and fittings used in manufacturing, construction or power generation.  It had moved to Niles, Illinois in the Northwest Suburbs of Chicago from its first plant on Chicago’s West side in the early 1950’s and joined many industrial companies relocating there. It was a bit of a manufacturing hub at the time.

We employed about 800 employees and operated in a 300,000 square foot factory and warehouse. It was big, noisy and full of machines shooting oil and steel and brass chips in all directions—you never went anywhere in the plant without your ever-present and thick safety glasses (I still routinely rest reading or safety glasses on top of my head ready for action all these years later). It was surely post-WWII manufacturing at its finest.

Working at Imperial was great fun and I was over my head from time-to-time, but I adapted and learned plenty about business in the process.

As I drove down Howard Street that day not long ago, I was shocked to see that the old Imperial plant was being demolished. I could no longer point out my former office to my children. It was gone. I was at first shocked, but not surprised. Several industrial sites in this area have been torn down and replaced with large warehouses or distribution centers over the last decade. As our region and country’s descent from a powerful manufacturing economy continues, the demolition of the old Imperial plant was surely inevitable.

In the past, while driving by the old Imperial plant at this time of year, I would often be reminded of that industrial-manufacturing tradition—the holiday plan shutdown.

The holiday plant shutdown was a forced 1-2 week vacation for all company employees over the Christmas holiday. The purpose was to allow manufacturing and maintenance staffs to do those extensive repairs or capital improvements only possible when the machines weren’t running or products shipping. Only very limited or essential operations were allowed and vacation schedules were coordinated to coincide with the shutdown. In the post-WWII years it seems everyone did it—I experienced 5 shutdowns during my years in Niles.

But the plant shutdown also had another unsaid purpose. It allowed the senior staff to come into the office to complete plans for the coming year without the daily demands of customers, broken machines and empty supply chains (or empty warehouse shelves—my particular problem at the time).  Further, it allowed senior staff to sit down and chat about improving the business without operating disruptions (like above). It was a nice break from normal organized chaos, and I found it a great way to celebrate the holidays and balance your job and family. But it was also a very productive interlude for the management team. Then, on the second day after the New Year, the machines were turned on again.

Today, the world is different. For one, there are fewer plants or machine tools to actually shut down for repair and maintenance. For another, business demand has become virtually seamless. In the old days, you could work with customers to fill up their supply pipelines with goods to assure that they had no interruptions while your plant was down for the holidays—if they were operating themselves. Try telling that to a customer today (just-in-time, you know). And lastly if you are a service provider, there is often nothing to inventory. If a client needs your services on December 24th, so be it—but it has always been like that.

With all of those reasons not to have holiday shutdowns, one would think that they have all but disappeared.  But, we do not think they have. We hear more and more cases of non-retail-based companies shutting down operations for a week or so during the “holidays” and giving their employees the time off.

Why? We think the answer is clear. While you do not have machines to renew and fix, you do have your staff. They also need renewal. And giving a week or so off at the holidays is a great way to do it. Remember that our plant shutdown (ostensibly for facility maintenance and repair) was also actually a vehicle and opportunity for senior management renewal and collaboration. Perhaps the people renewal has always been the primary benefit, and remains so today.  

So are you shutting down your operations for more than a day or two during holidays? If not, how do you plan to attend to executive and staff renewal during the coming months? You need to do something, so why not do it with a “plant shutdown”? And, you can fix some mechanical stuff or install that new software, while you are at it. See you after the New Year.

Ah, the spirit of that 1970’s plant shutdown is still with us.

Let’s talk about holiday bonuses

We have written much over the years about employee bonuses and incentives. Generally, the bonuses discussed in past years have been performance based and generally directly linked to individual or unit results.

This month we look at holiday bonuses which are quite different from most performance-based bonuses and reward methods. Here are three examples of those differences:

1. They are generally paid or offered to all company employees, although some firms (but not all) exclude sales forces, managers or executives who regularly participate in other variable pay arrangements. Hence, lower-level employees are the most common recipients of a holiday bonus.
2. They are universally quite small in size. It can be denominated in weeks of salary (often 1 or 2 is common) or in multiples of $100 bills. In any event, the larger the job, the larger the amount of bonus paid. The simplest method is to use salary multiples as the payout “yardstick.”
3. The holiday bonus is generally designed and meant to simply reward the recipient for providing a year of loyal service. It can also be related to company overall performance, but that must be done carefully to avoid both confusion and creating unfulfilled employee expectations.

Why do it? Believers in the holiday bonus say that it can be a unique opportunity for top management to communicate positively with employees whom they do not normally speak with or “touch,” and demonstrate an appreciation for their contribution. At its best, the bonus can be a team binder and “thank you” all wrapped up in a single act of company generosity.  

But not every company thinks holiday bonuses are such a good idea. Some question whether they are getting anything for adding another5-10% to the annual payroll expense with a holiday bonus. Why not just add the extra amount to salary and deliver it throughout the year? Or just save the money and not pay a holiday bonus at all.

Others fear that regularly paying employees (say) a week’s pay at year end will be viewed as a benefit by employees, and a lack of future year-end payments (for any reason) will be viewed as a loss of benefits.

Are you unsure about using holiday bonuses? Based upon our experience, let me suggest  some practices that are often present in successful holiday bonus plans:

• Keep it simple by including every employee in the holiday bonus, with the exception of company executives or select top managers.
• Pay holiday bonuses in multiples of a week’s salary. And in any given year, every eligible employee receives the same salary multiple—manager or clerk.
• Plan to vary the payout each year as a multiple of salary from zero to 2 weeks. Bonuses should be determined based upon some simple measure of company success. Then communicate to your employees why the decision was made. Leadership should deliver the news, either good or bad.
• Again, demand simplicity in standards of performance and success—for example, growth of 5% in revenue next year or some other unambiguous measure everyone will understand. And if sales growth achieved during the year is actually between 4-6%, one week’s pay is earned as a holiday bonus.  Larger or smaller bonuses naturally follow.

And, do not forget to tell your employees how they are doing against that single (all-important) company goal every three months. You do not want to build any employee holiday-bonus expectations that will not be fulfilled—a week before Christmas.

We recognize that the above is more complex than just giving everybody a week’s pay, or a frozen turkey for that matter. But we feel that it will mean more to employees when they have been acknowledged to be part of the team that earned it.

And, $500 in cash on December 15th is always more valuable than $500 in matching funds in their 401(k) that they will not be able to touch for another 30 years.

So, are you going to put on that Santa suit this year?

Wilkening & Company has assisted scores of clients in the design & implementation of incentive or bonus plans for all types and levels of employee. If you have questions, or want to play Santa this year, give us a call at (847) 823-5090, bob@wilkeningco.com.

Secrets of Successful Companies—Our Perspective

Many articles and books have been written about the why’s and how’s of successful companies. New references and titles are available almost every month. “Google” the subject and you will see the breadth of both titles and opinion on the subject.

Our objective with this article is not to try to summarize already-published opinions or research. Instead, we will take a different approach. As a consultant, I have worked with nearly 200 client organizations. As the result of these assignments and also my contact with other companies and executives during a four-decade business career, I have found that certain characteristics are most often present in a successful company.

As a result of my observations, I have developed a list of eight characteristics that stand out the most for me. Let me share my brief list with you. See if you agree.

1. Successful companies know exactly where they are going. They have a tendency to look well into the future and broadly communicate company-wide expectations of success. CEO’s and other employees can generally tell you where their road leads in unambiguous terms.
2. Growth is the currency of success. We mean growth in all areas….sales growth, profit growth, market growth, technical growth, personal growth.  Growth goals and expectations are also everywhere (and affect everyone). But with goals, comes a responsibility for establishing expectations that employees, units and the company can achieve. Unachievable expectations are corrosive and deflate the growth bias (and morale) pretty quickly.
3. There is a company-wide culture of both fairness and respect. It is fully understood that if employees feel that they are both treated fairly and with respect by the company and by other employees, they will like coming to work and be committed to organizational (team) success. And, the result will be measured in growth. Such fairness and respect is institutionalized in company process and policy, and examples are set daily by the executive team. It is the culture.
4. Responsibility is pervasive. Employees know what is expected of them and most will do what they can to meet and exceed those expectations. They will do it for the team. Further, this cultural foundation also will establish high levels of company quality—in all matters. Every employee should (will) have the opportunity to exercise the highest level of responsibility they can muster.
5. Employees are paid (and know they are being paid) based primarily upon contribution and performance. Most pay processes are as objective as possible regarding results, outcomes and value. It does not really matter what type of pay system you use or whether we are speaking of salary, bonus or profit sharing. There are few entitlements or exceptions within such a pay-for-performance culture.
   In such an organization, you can generally draw a two-axis chart with increasing performance or contribution (however measured) in the horizontal axis and pay on the vertical axis for all like employees—top to bottom. You should see a pretty straight line from bottom left to top right. If this in not so in your organization, then ask what you are really paying for?
   
6. The customer always comes first. This is a simple and oft-repeated statement, but successful companies give it life. From the CEO down, every employee knows that the reason they have a job is because of the requirements and needs of their customers. And further, that customer makes decisions every day to affect the on-going relationship with the company—and ultimately to affect the employees' livelihood. Employees are never encouraged to believe they work in some sort of market-sheltered isolation.
   When considering the primacy of the customer, employees also understand the value proposition (quid pro quo) that exists between company and customer. For example while service and quality are absolute requirements, not all customer requests or demands are sensible to either party. Take customer-requested pricing concessions as an example. Smart companies will realize that serially cutting their profit contribution through price concessions will initially risk service quality and ultimately put company jobs at risk. Can’t cut prices to success, can you?
7. The CEO’s office door is a two-way street. The CEO will generally talk to any employee regarding just about any subject. This is an absolute requirement for a company with a culture of fairness and respect. On the other hand, in a successful company it may be hard to find the CEO in their office very much as they will be spending as much time as they can "in the field" with employees at all levels—listening and adding their voice to the dialogue.
8. Little should get in the way for employees and decision makers doing their jobs. In other words, if you are a sales person you spend most of your time with customers selling, if you are a customer service rep you spend most of your time servicing customer needs and speaking with customers, and if you are an executive you spend most of your time pursuing company strategy, growth opportunities and interacting with customers. Clearly anything that gets in the way of “doing your job” should be identified, evaluated for value added, reassigned or ceased.

Must a company exhibit every one of the eight characteristics noted above to be a success? No, but we have found that successful companies will do some or many of the things that we have outlined above to some degree. The best do more and get the “mix” right.
What should a reader do with this list? I suggest you consider three steps.

• First ask yourself if your company currently is successful. Of course, the primary standard you should use is financial success. But, also what about the quality of your products and services to the customer or the attitudes & morale of employees? It is unlikely you would have financial success without the latter two factors. Do you have ways to measure service, quality and morale? If not, there are straight forward ways to do so.
• Then (or in parallel with the above), assess whether your company exhibits some or all of the above eight success characteristics. It should not be that hard. I assume that a simple “Yes” or “No” will come easily.
• Finally, where you find that the answer is “No” to some or many success characteristics, assign a senior company executive the task of creating a one-year plan to turn them all to “Yes.” There may be much to do, but it can certainly return dividends. And if it actually takes two years, who cares? You win!

Sit back today and consider the above eight characteristics in the context of your company. Do you think you have (and do) what it takes to be successful?
If not, make it your priority for 2014.

If you have questions regarding our selected success characteristics or would like to add one or two of your own, call or write at (847) 823-5090 or at bob@wilkeningco.com. We will also share any reader input on this important subject in our November edition of E-Notes. Thanks for visiting with us.

Does your sales-pay plan need a 2014 tune up, or a new engine?

As 2013 reaches the quarter pole, it is a good time for CEOs and sales executives to pause and ask themselves whether the sales force’s 2013 pay plans are still effective and will still work for 2014 and into the future. In our experience, there are five basic questions to ask that will get to the heart of pay-plan effectiveness and its strategic compatibility:

• Is your pay plan delivering competitive earnings for those sellers who do what you ask? This question is answered directly by gaining access to market-pay data and comparing your actual pay-plan outcomes (or targeted pay-plan outcomes) with select job or industry pay benchmarks. We suggest using a national database like Towers-Watson, and coordinate it with other local or industry sources (if available). The trick is matching your jobs and performance expectations to the right market benchmarks.
  
  
• Is your current sales pay plan perceived as fair? Of course, fairness is always measured in the eyes of the beholder. From the perspective of the company we assume that it is a fair plan—otherwise why would you be risking the damage an unfair pay plan can cause—i.e.: lack of performance or high and costly turnover. But what about your sellers? We find the best way to answer that question is to ask them. Use either an attitude survey or third-party interviews to collect the attitudes and perceptions of the sales force toward its current pay plan. Never ask them if they should make more money—the answer is predictable. But, broadly inquire about such as topics as: paying “right” or “fairly” or “adequately recognizing seller performance.” A good survey or questionnaire can reveal much about seller attitudes and the sales force as a whole, and objectively establish a solid case for future remedial actions.
  
  
• Are there features inherent to your current pay plan that work at cross purposes to seller motivation, performance or retention? This generally requires a review of the “mechanics” of the pay plan. In such a review, we advise you look for telltale signs of trouble as:
• The payout mechanisms of the plan take (either already paid, or to-be-paid) bonuses away from the seller or freeze payouts for months at a time;
  
• The thresholds for acceptable performance (and payouts) are high and the average seller does not or cannot earn a bonus. [Now paying for performance is important in any plan, but you must pause and ask yourself if a general lack of bonus payout is a performance issue or caused by the design, metrics or goals of the pay plan?]
  
• A seller must wait too long to see any bonus payout throughout the year? If the sales plan is highly leveraged, “too-long” may mean the difference between paying bills on-time, or borrowing to do so.
• The sales pay plan is quite complicated in description and methodology, and difficult to understand or explain to a 3rd party, or anyone [Remember the one-page rule].
  
  
• Does your current pay plan drive the “right” behavior from your sales force? A simple way to answer this question is to look at macro results for the company and sales force. For example, if your multi-year goal has been to increase the profit contribution of the business, then the pay plan should have motivated the sales force to do so—channel-by-channel or transaction-by-transaction. If you have not grown profit as desired, the design or direction of the sales-pay plan may be suspect. While there may be other factors in such a shortfall, sales pay must be considered prominently in the mix of causes. On the other hand, if you have steadily met your strategic objectives over the past years, you can bet that something about paying your sales force has contributed to that outcome; even if you cannot make the direct link. In such a situation, be very careful if you decide to change your pay plan for the coming year. Beware of unintended consequences.
  
  
• If you are using revenue or profit goals to determine performance (and ultimately bonus payouts) have more than 2/3 of the members of your sales force earned a target-sized bonus (full-bonus), if overall company annual goals or objectives are achieved?  In other words, do 2/3 of your sellers have a statistically-high probability of achieving their performance goals? If not, your goals may be set too harshly—where sellers are destined to routinely fail. While some would argue that performance goals are not part of the mechanics of your plan, how (and where) they are set is surely instrumental in the motivation and confidence of the sales force. As is often said: a good sales pay plan with unrealistic goals will ultimately fail.

So, does your sales-pay program need a tune up for 2014? To answer that question, ask yourself the above five questions starting this week.

If you get mixed results to your inquiry, it is generally an indication that something is amiss. In such a case a pay-plan tune up may be more appropriate than a total overhaul. Of course if your company is dramatically changing its strategic direction or goals for 2014, forget the questions, a pay-plan overhaul is very likely required.

We have suggested that a good time to evaluate sale-pay plans is about this time of year (or, early autumn). This allows thoughtful preparation for the coming year. But, we really believe that these five questions should be on the desk of the CEO and top-executive team every day of the year.

Your sales-pay plans are far too important to be examined but once a year.

Wilkening & Company has assisted clients for near 25 years in the evaluation & design of effective sales-force, manager and executive compensation arrangements. Over 100 plans have been implemented. Are you having a problem with your incentive or bonus plans? Give us a call, we likely have a solution.

Bonus Plan Simplification

Compensation plans are one of the most effective forms of communication ever invented. Generally, if you clearly tell someone what you want accomplished—and tie a reward or recognition to the outcome—they will understand what you are asking them to do.

While this seems obvious, we have found that companies often fail to use or design their compensation/bonus plans to be sharp communication tools. This is usually true because bonus plans may not be clear as to what is expected, or the key message or priority gets lost in a forest of less-important messages. To help avoid these common problems, let me outline a few principles we have learned for designing simple and on-message pay plans.

Be brutally direct in stating your expectations—if you want your sales executive to grow revenue by 20% over last year, tell them that (and only that) and pay them accordingly if those results are achieved or exceeded.

Be concise and focus only upon priority outcomes—realistically, there are only a few key things that you can expect a sales professional or executive to accomplish in a year. For example, you may want an executive to successfully introduce a new product line in their business unit and grow unit profit by $250,000 over last year.

While there may be many other things you want to happen during the coming year, do not fall into the trap of trying to put them all into the executive’s pay plan. The extra 2-3 goals that often get added will become confusing to the participant and cloud the real priorities you have in mind. We often call overly-complex plans a “partridge-in-a-pear-tree” (PIAPT) design.

Avoid micro-managing with your incentive plan—tryto avoid the school of thinking that suggests that you must pay a sales representative or a key manager a bonus for everything you expect them to do or attempt (extreme version of the PIAPT design). I have seen as many as 6-8 small bonuses contained in an annual bonus plan with predictable results. The argument is that if you do not pay them to do something they will not do it. Examples of typical “non-bonus able” basic tasks or milestones would include: making sales calls, expense control, business planning, hitting deadlines or collaborating (well) with their peers.

For those considering a micro-management incentive plan, remember that there are at least three protections in place that obviate the need for such “coin-operated” pay techniques—

1. You pay them a salary to do all of this routine and daily stuff, in the first place;
2. If they are successful doing all of these underlying (and common-sense) tasks well, the proof should be in the end results; say improvement of sales or profits or the achievement of other strategic milestones; and
3. You have executives and managers to oversee that overall performance and activity of sales professionals or other key employees. There is no need to make the bonus plan a manager.

If all else fails, document your annual incentive or bonus plan in a single-page document (only allowing a second page for an example of payouts). This technique usually provides the desired bonus plan simplicity and clarity.

So follow the above principles and take the opportunity to make your bonus and incentive plan a highly-effective communication tool.

And, plant that pear tree somewhere else.

Wilkening & Company has assisted clients for near 25 years in the design of effective sales-force, manager and executive compensation arrangements. Over 100 plans have been implemented. Are you having a problem with your incentive or bonus plans? Give us a call, we likely have a solution.

The Affordable Care Act: A few months left to go

When we first discussed the impact of the Affordable Care Act and the future actions an employer should consider implementation was years away. Now it is a matter of months. And, ACA will impact both employer and employee.  

Within the last month or so, the White House has unilaterally decided to delay application of the insurance-coverage mandate for employers for at least another year (until 2105, we assume). It appears that (for the moment) an employer that fails to provide health insurance coverage for all full-time employees (if they have with 50 or more full-time employees will not yet incur a tax penalty for such lack-of-coverage until 2015. This temporary reprieve seems like good news, especially for smaller companies, but most executives and owners we speak with continue to plan and act as if that penalty is still due and payable in 2014. We believe this caution is a good course of action and generally a prudent use of 2014 to gain experience and monitor compliance.

On the other hand, the mandate for individuals to have health insurance who are not already (and adequately) covered or included in an employer-provided or other health insurance plan remains in place. Hence if an individual does not have health insurance in 2014, a penalty (assessed as a federal tax through the IRS) will be charged for all uncovered family members. These penalties will increase after 2014. This risk of penalty is particularly an issue with part-time employees. Of course, many uncovered employees may be eligible for governmental benefits to offset the cost of buying insurance—however sourced. Plus, there are a fistful of exemptions where penalties are not incurred.

It is likely that the majority of uncovered employees will be able to find low-cost or subsidized coverage or be exempted from the mandated penalties. But, some will incur this liability and the mere threat of this 2014 penalty is real to many part-timers.

For generations, employers have taken a lead role in providing health-care insurance to their employees through private or risk-pool insurance arrangements. As such, employees always have had an expectation that some health-care benefit might be provided. Sometimes it was, other times it was not (often in the case of part-time workers), but it was always a consideration in any employment arrangement. With ACA the federal government has forcefully put itself into the “deal” between the employer and employee. However, the relationship between employer and employees still remains strong and is primary.

Hence, we believe that it remains the employer’s responsibility to communicate with all employees (full- or part-time) regarding ACA and explain to each and all how it will affect them in the coming year. While some would say that it is the government’s job to do so, we all know this will not happen—other than a statement or two from the White House press room.

The ACA compliance landscape seems to be changing daily, and few can predict what will happen next. With regard to ACA compliance and penalties, we advise our readers to contact their tax advisor promptly and before year end for direction and advice.

But, your employees’ well-being and peace-of-mind are too important to be left to the agendas of a few politicians or bureaucrats. Make sure you inform and calm their ACA concerns directly and in person.
It is in your interest to do so. Arm yourself with the facts, and open an ACA dialogue with your employees. If you are waiting for the “final word” on ACA before you talk with employees, you may have a long wait. Reach out to your employees sooner than later.

Wilkening & Company has written a number of articles on the implications of ACA. If you go to our Search Our Site tool and type in “ACA.” It will link you to these previous articles. If we can help you navigate the through the requirements and implications of federal health-insurance legislation, or communicate change with you employees, do not hesitate to call or write.

Incentive Payment Thresholds—Making Them Work for You

Annual incentive plans generally use “thresholds” to set a minimum standard of performance below which results will not be rewarded. Think of the performance threshold as the fence over which one must jump before they can begin to earn their annual incentive or bonus dollars. The use of the performance threshold is generally what separates performance-based incentives from traditional commission or profit sharing plans.

Shown below are two typical examples of incentive plans where thresholds are used:

• A sales rep has an annual goal to sell $3,000,000 in their territory or within their assigned accounts. The rep will not earn any incentive until at least 75% of their annual goal (or $2,250,000 in sales) is delivered. After that the rep will earn a prorated incentive (just like a modified commission) for every dollar of sales over $2,250,000. That rate of incentive (in percent of sales dollars per $000) may also increase with higher levels of performance and after the annual goal is achieved.
• A VP of Operations is tasked with increasing year-end plant inventory turns (where inventory includes: raw materials, in-process production inventory and finished goods) to 6. If they meet that objective they will earn $20,000 at the end of the year. If the VP of Operations does not achieve the 6-turn goal but does achieve at least 5.5 turns (still an improvement over the prior year), an annual bonus of $5,000 is earned. Below 5.5 turns, no annual incentive is earned. Again, the VPO will earn a prorated incentive (just like a modified commission) for increases in performance over 5.5 turns.

Do these plans look familiar? They should for they are representative of commonly used reward tools and practices for sales forces and operating managers.

Thresholds can be strong performance communicators when used correctly. But, they can also backfire or lose much of their effectiveness depending on how they are employed or calibrated. Let us look at 3 common issues or problems that arise with performance thresholds that will negatively impact the underlying effectiveness of an annual incentive plan:

1. The annual performance goal is poorly set—it is either much too high or too low. When this happens the plan loses its meaning and motivational impact in general. Hence, if the goals are meaningless so are its incentive-plan performance thresholds. And, who cares about the threshold anyway at that point?
2. The performance threshold is set too high—i.e.: at 95% of the annual goal. When goals are set too high they become—what we call—“all or nothing plans.” While this situation most often meets management’s needs (“hit your numbers, or else!”), the “or else” can result in many sales reps or managers who will not earn an annual incentive. This, in spite of the fact they came close to their annual number—albeit somewhat low. Of course if goals are set too low to accommodate that high threshold, everyone hits their goal anyway and the reward-elements of the plan are pretty much meaningless. [Those darn goals again.] As a solution, we find that setting performance thresholds in the 75-80% of annual goal range generally strikes a good fairness compromise of progress versus fully-achieved results. But be careful, for if thresholds are set lower than ~60% of the annual goal, your plan begins to resemble a complicated commission plan.
3. The incentive earned at threshold (minimum acceptable performance) is too high—say $15,000 versus and an annual bonus of $20,000. When you pay out too much at the bottom of the incentive scale you greatly diminish the meaning of the payout for achieving the goal (in this case, the $20,000). As a solution, we advise that only small bonus payouts (compared to the full-annual bonus) be earned at threshold performance. You will seldom go wrong with this approach.

OK, enough of this numbers and pay plan design-speak.

We have been designing these types of pay arrangements for over 30 years and have seen goal-based incentives (with their associated performance thresholds) come in and out or pay-plan vogue. But whether in or out, they are likely here to stay. What you can see from the above discussion is that these types of plans are much more complicated than the commission plans that they originally were designed to replace, and have many more moving parts. Hence, they are inherently harder for management to design and ultimately control.

As noted above, there are a number of issues and problems that impact the use of annual incentive plans with performance thresholds. We have offered some solutions and practices to overcome these. However we believe that a better approach is what we call pay-plan diversification.

This is the use of a mix of pay-plan design vehicles (such as commissions, annual incentives with performance thresholds or bonuses) together. For example, a sales force can earn both monthly commissions combined with periodic bonuses (both earned and paid) based on achievement of their annual sales goal. With this type of approach you have picked the best features of both types of plan and will greatly simplify your new pay plan for a potential win/win outcome. Further, problems with performance thresholds are minimized or totally eliminated.

Having problems with you goal-based incentive plan and the setting of those pesky performance thresholds? If so, try using diversification next year.

Wilkening & Company has designed over 100 sales, manager and executive pay plans during the last 30 years. If you want to talk about your current sales or manager pay plans or further discuss pay-plan diversification, feel free to call at (847) 823-5090 or write at bob@wilkeningco.com.

Practical Succession Planning

A classic succession plan is an evaluation of key executive talent within an organization to determine who can (or cannot) assume greater responsibility in the future, what type future positions they can successfully hold and what experiences or development is needed to get them to that next job.

The purpose of such a plan is to maximize the utilization of executive talent, to minimize the risk to the company in the event a key executive departs and to identify impediments to executive or manager future promotion. Every “key” company manager should do, or be part of, a succession plan.

Succession planning is much like strategic planning. It can be an infrequent exercise that seemingly gets in the way of tactical priorities. As a result of the effort, a detailed evaluation and plan are produced and then may be put on the shelf and lost to history. So, when it is really needed, it is dusted off and used (if not already out of date). Of course, some companies and Boards do this better than others.

So what makes for an effective and practical succession plan that doesn’t end up sitting outdated on a shelf at headquarters, and is ready when really needed? We think three planning and decision-making practices will help.

1. Keep your plans fresh by getting “two for ones.” Link executive performance evaluations directly with succession planning. In our opinion, the most important element of any performance evaluation revolves around answering the following  questions about the executive or manager (or any employee)—

• What is the next job to which they can be promoted (1^st step), and when will they be ready?
• What is the potential second job to which they can be promoted—after the 1^st step (the 2^nd step) and again, when will they be ready?
• What should be done in the next 12 months to get them to that next promotion and beyond?

Now I am about to give heartburn to my HR friends, but most of the performance appraisal process (I used to call is green-paper time for the color of the Gould, Inc. forms) is generally nothing more than an administrative rationale for giving the incumbent the raise you want. But asking these three questions will change all of that.

Gathering this information yields a well-documented succession plan—without all of the pretty binders and big words. And, it is updated (automatically) each year. Call it your annual succession plan.

2. While creating your annual succession plan, do not be afraid to just say No. Resist efforts to rush candidates into that “next job” or to a place where they are needed to fill a gap today. Your first reaction (and response) should be “No.” Then take some time to consider what it will take for the incumbent to be ready. The organization will generally not come to a halt if a single box on the organization chart remains empty for a few months.

Avoid the risk that:

• The incumbent will not be able to get the job done without much intervention from above; and/or
• A promising career can be ruined or set back by a premature promotion.

Of course in reality no one is ever completely ready to move to the next step. So while you should be cautious, there must always be a day to fly solo. I had to solo, didn’t you?

3. Be careful when looking in your rearview mirror. I am sure you have all been in a situation where your boss has asked whom (amongst your staff or direct reports) could do your job if you were run over by a truck. [By the way, has there ever been a recorded case of a top executive being run over by a truck?]

Your first response may be to bypass a strong business generalist or two to choose the candidate with the strongest (say) marketing background—perhaps much like yours. But wait a minute, you might be looking backwards! What if the company’s future strategy demands someone with a background and experience quite different than that has been needed in the past to lead and grow the firm—say those generalists you just bypassed?

Perhaps it would be better to hire a new top-marketing executive and not look for an exact replacement (clone) for you. Look to the needs of the future company when choosing a successor, and do not be afraid to question (or abandon) the talent model to which the organization has become accustomed.

In closing if an executive cannot identify a qualified successor and outline what it will take them to get there, the Board or CEO may be very reluctant to promote that executive. Pure self-interest suggests that succession planning is the first thing an executive should think about every morning.

Do not be that executive. Start by adding three simple questions your company’s performance appraisal form (and process) this afternoon. Tell HR later.

Retire the Monthly Sales Meeting & Grow

For decades sales organizations have routinely gathered together to participate in the monthly field sales meeting. The subjects are broad and generally range from telling the sellers about “exciting” new products, price increases, potential customers (they should be calling upon) and other matters of sales administration, marketing or support.

While we would never disagree that it is important to share experiences amongst members of the sales force and communicate organizational information face-to-face, we do think using sales meetings to do so is a pretty nonproductive use of the sales force’s time.

Consider that—every time you bring eight sellers together for a day, it costs the company the opportunity to make (say) 25-40 sales calls. That monthly sales meeting may cost you the equivalent of one-half of a sales representative each year. Clearly sales meetings are pretty costly ways to share information. And, we have really not even considered meeting travel, if that is involved.

To get all or some of those sales calls back, start by taking a few simple steps this week—

1. Limit all sales meetings to a single annual event and coordinate the meeting with developmental activities like training or trade shows (I can probably make a similar productivity argument about shows). If “excess” meetings are already scheduled, cancel them.
2. Have a professional (e.g.: your IT folks) build and operate a secure informational website solely for the sales force (and this tool may already be available using CRM or other off-the-shelf software). On it be able to—
1. Communicate new product or technical information;
2. Post topical information regarding the market or competitors;
3. Distribute prospect information;
4. Host Q&A discussion sessions to share experiences and ask questions (avoid giant & circular email FWD dialogues); and
5. Maintain a how-to section for the use of support staff—doing expense accounts, call reports.........
3. Calculate the amount of “new” added sales calls the sellers can make because of #1 above, and assign more new prospects to each seller to absorb these found sales calls.

We are always amazed at the cost of sales meetings and similar activities. Retire the monthly sales meeting and use those extra 5%+ sales calls to yield 5%+ sales growth.

Improve your sales force effectiveness with job clarity

We often address the topic of increasing the effectiveness and productivity of the sales force. This typically concerns motivation, pay, work methods and/or standards. In this issue we will shine a light on perhaps a more fundamental element of sales force performance—job clarity.

“Job clarity, what do you mean? Everybody knows what selling is!”  Really?  Let me tell you a story.

I was once asked to assist a client that manufactured and sold high-quality office furniture. The company’s sweet spot was selling to large corporations or government agencies that were upgrading their executive or manager offices or moving to new quarters—with the obligatory requirement for new furniture.

The client had a sales force that was disbursed in 4 local sales offices with showrooms (branches) in major markets with large populations of corporate and governmental offices (New York, Boston, Chicago and DC). The sales force sold directly to the company or agency, or would be recommended (or “specified” as acceptable) by architects or engineers engaged in the design of new office space for the buyers. The architects and engineers were customers and treated accordingly. The sales process was pretty simple: know your customer, get a subscription to the local construction/real estate trade journal so you know who is doing what, stay in the face of local architects and engineers (coffee & donuts) and plan to make a lot of sales calls on both known buyers and influencers.

The company was becoming concerned that it was not getting the sales or market share it desired (or deserved), and was convinced that its current sales-pay plans were at fault (and, the sales force had already suggested that paying more money would surely help improve performance). We were contacted to help evaluate and then redesign the current sales-pay system, if needed.

To begin, we started with a series of field sales force and manager interviews to understand the sales process, the motivations of the sellers and impediments to success. When doing such interviews, the first question we always try to answer is: Is this really a sales-pay problem?

What we found was startling! First, as you can assume when a potential client is buying or replacing furniture for 1,000 offices, the sales proposal can be very detailed and fill many notebooks. It was taking up to two weeks of uninterrupted sales-rep time to complete each proposal. They had little or no administrative support to help with the task.

Then we found something even worse. Not only was the sales force spending nearly 100% of their time preparing the sales proposal, they were also doing all of the detailed design & logistical work to deliver and install the 1,000 suites of furniture. In short, every time a furniture deal was closed, the client lost a sales rep for the next 2-3 months.

By our estimate the sales reps spent 2/3 of their time doing non-selling activities.  Hence, if there were 8 sales reps shown on the organizational chart, in truth there now were effectively only 3 reps selling. The sales force was routinely doing the wrong job.

Everyone was shocked by what we found except the members of sales force—this was their normal “deal.” They accepted limited company resources in the field and generally did not want to complain as many were more comfortable doing back-office work than making sales calls.

Well, the deal promptly changed when the client recognized that its real productivity issue was a confused and misdirected sales force. What did they do next?

1. The sales force was no longer involved with installation of future closed furniture projects. That work was now shifted to engineers and administrators assigned from the home office and managed by corporate resources. In addition, each branch had a specific support person assigned to writing sales proposals. In parallel, any current sales rep who wanted to change from selling to installation & logistics was allowed to promptly make that transfer. (Management also strongly suggested to three of the sales incumbents that they consider the transfer.)
2. The sales force was now expected to make a set number of sales calls every month on current and prospective accounts, and their progress toward reaching this goal was measured& reported frequently.
3. The client started to manage the sales “pipeline.” Members of the sales force were responsible for having 4-5 deals of 500+ office suites or more working at any given time and be able to assess the probability and time of close for each.
4. Finally, there was something wrong with a pay plan that provided good (market+) earnings for a sales force that only spent 1/3 of their time selling. In response, the commission-based plan was modified to continue to reward for volume, but some pay dollars were now shifted to rewarding for closing big deals with new high-potential customers. Hence if you wanted to make money, you had to make that sales pipeline sing.

Suddenly, the sales force had no time left to manage an installation or anything else not involving a sales call.

Over the years, Wilkening & Company has recommended a number of tools for improving sales force effectiveness. But, assuring that your sales force clearly understands their job and your expectations may be the most fundamental tool of them all.

What is your sales force doing today?

Rewarding & retaining non-family executives in a family-owned business

Discussions and analyses of compensation or reward practices within a family-owned and operated business often focus solely on family members—really not a revelation nor a surprise. This narrow focus can create difficulty and a challenge as the firm begins to grow. This typically happens when the hiring of non-family executives increasingly (and suddenly) becomes part of top company leadership discussions. Hence, the pay game suddenly can change.

Why are family-owned and operated businesses often challenged when non-family executives begin to appear on the horizon? In our experience two factors explain this.

1. Owner and partner pay practices in family-owned and operated businesses are often different and unique. These unique practices may include such factors as: pay premiums for family members, a reliance on owner’s cash distributions in lieu of “normal” salary or bonuses (“who needs a bonus when I get money as an owner?”) and pay levels based upon ownership stake or family generation rather than job or contribution. In such an environment, fair or market-based executive pay may have little meaning. But if you are hiring a new non-family CEO or promoting an insider, fair pay means nearly everything to them.
2. Members of senior leadership in a family business are generally all (and substantial) shareholders and owners. Conversely, that new non-family CEO or EVP you are looking to hire will likely not be a shareholder. Now, shareholders generally have a pretty good feeling for how their actions and those of other leaders/owners will impact future company value and return (i.e.: their stock). But, if the new CEO or EVP is not an owner, that fabric of “pay” and performance can change.

Does any of the above sound familiar? If so, let me suggest that you and your company take some simple and proven steps to assure that key non-family executives are attracted to your company, are properly rewarded for their efforts and that these key players (and non-owners) are highly motivated to remain with the company well into the future. We suggest that you take two steps if you have not already done so.

• Find out what it will take to adequately and fairly reward top non-family employees. Do this by "pricing" or comparing your positions versus similar positions and similar companies within the market place. The investigation will typically include both salary and annual bonus.  Methodologies and information for such analysis are both available and generally well known. (If you find that is not true in your case, call me. I will direct you to the right techniques and “books.”) Plus, you should also consider the competiveness of the benefits you offer. In our opinion, you want to assure the company is paying at or above the market for similar executive talent. Beware of findings that suggest that you are underpaying. That is potentially a risky situation.
  
  As you read this, I presume you are only thinking in terms of non-family employees & executives.  Actually, the objective process that I have briefly described above is exactly what you should also be doing with all of your family employees, as well.

• Next, find out what other companies & competitors are doing to retain & reward their key executives for the long term—in addition to competitive pay. In our experience, the most oft-used and mentioned tools will typically fall under the broad description of long-term incentives (LTI’s) offered to encourage outside executives to act like owners. These can include such plans as: stock options, phantom stock, stock appreciation rights or other performance-based cash awards. Now I used the term “stock” three times above, but these arrangements seldom (if ever) involve actual private-company stock—just something that acts like it.  The trick is to offer rewards to executives that will be determined (or valued) and paid a number of years into the future. The value of such payouts will generally be established by: 1) increasing enterprise value, 2) the executive staying with the company in an increasingly productive role, 3) some other performance benchmarks or events, or 4) all (or some) of the above. It is also important that the company assure that these rewards are competitive and fair in the eyes of the receiving executive.

While we have found that both steps are valuable, often clients will address the broader issue of market competiveness first. This is a prudent starting point.

As your firm considers the hiring of top executive talent, know that you are competing in the marketplace with firms that may be larger, sophisticated, savvy, and may be publically-traded. They will use whatever tools are necessary to win. This will include the “right” annual pay package and perhaps long-term executive incentives.

Do not get surprised by a letter of resignation, or by a prospective CEO or EVP who turns down your offer and goes to a competitor. Prepare to compete—and win.

Wilkening & Company has assisted a number of family-owned and operated firms with building competitive pay and reward structures to attract, reward and retain non-family executives. If you would like to discuss the how’s & why’s in more detail, or speak about what other companies have done, do not hesitate to call or write.

Long-term incentive eligibility: The make or break decision

The most important decision a client will make when designing and implementing a long-term incentive (LTI) plan concerns who should participate in the plan. While eligibility seems like a simple and somewhat innocuous decision, it can have a great impact on the effectiveness of the plan—as a sustainable & cost-effective tool. This can be a crucial decision for the CEO and Board.

So, why is eligibility so important? In short, if you pick the wrong person for plan participation you will significantly overpay for their retention (if you even needed to retain their services, at all) and they will absorb scarce “value creation” compensation dollars that would be better awarded to a more deserving executive or contributor.

Further (and more painfully), if you find that you have chosen the wrong contributor (or they just up and quit) after they have been in the plan a couple of years, unwinding their agreement can be complicated and costly—particularly if they hold vested rights. 

What can a company do to select the right participants for their long-term incentive plan? Try our three selection criteria or tests.

1. Only include cannot-lose executives. If you are trying to retain key talent for, say, five years, be sure that the selected participants are those who will have the greatest impact on company success for the next half decade. And, they are one of the very few contributors you cannot afford to lose to competitors. [the competitor test]
2. Minimize rewards for past contributions. Often clients desire to use LTI plans to reward executives for past contributions or loyalty. If you have such a group of executives and they do not meet the competitor test, limit their participation in your LTI plan. Better yet, create a separate Founder’s Reward plan that is not part of the LTI plan—or is a limited branch of it. [the save your money for the future test]
3. Limit eligibility to a small group. If you are firm under (say) $100 million in revenue, our experience suggests you will generally select no more than 2-4 eligible executives or contributors. As a company grows to twice or three times that size, you can consider doubling participants. But always ask yourself: “How many key players does it really take to run this company?” We typically find that the answer is less than more. [the run the company test]  

As you can see, we generally come down on the side of limiting the number of select LTI plan participants. This generally yields the most deserving participants, provides better outcomes and preserves future flexibility. And, you can always add more later.

If you are considering a long-term executive incentive plan, weigh the decision of eligibility carefully. Selecting the right contributors will make your plan cost effective for the company and a real winner for company and participant alike. Try applying our three rules and see if they help. And, if you have more rules you believe are helpful, please pass them along.

Wilkening & Company has helped privately-owned and operated clients design and implement long-term incentive plans for key executives for over 20 years. Eligibility is one of the key decisions that must be made as part of LTI design. During the remainder of 2013, we will discuss other decisions.

Aligning Sales Pay with Cold Calling

During recent months we have focused upon the issue of cold calling by the sales force. Much of our discussion has been from an operational or organizational perspective. With this article we will now turn our focus to reward and motivation.

Some would say that successful cold-calling by your sales force will be rewarded as increased sales and profits drive increased commissions and bonuses. While this is both true and logical, we have found that the actual results of cold calling can occur a year or more after the calls are actually made—i.e.: you do the work this year, and may not see a dollar of sales or profit until next year. Cold calling is often an investment of time and effort with future payoffs (that may or may not occur). Hence, traditional sales pay plans and cold calling can sometimes be tough to align.

However in our experience, there are successful ways to create such an alignment. Following are three examples:

1. A sales bonus for completed cold calls. To lay a solid foundation for cold calling, it is our belief that a company should ask each and every member of its sales force to complete a certain number of sales calls on new and prospective accounts annually. While every company has to decide upon its own “quota” we believe that if less than 10-15% of all sales calls are allocated to new accounts, you may be losing share of market—in a slow and subtle process.
   
   You can decide you want each of your sales reps to make (say) 150 annual calls on new accounts with which the company has never done business. To assure this new task is done, pay a modest quarterly bonus if their assigned cold-calling quota is met. Of course this says nothing about success of the calls or quality of each, but it does get the sales force’s immediate attention. This is particularly true if cold calling has not been measured in the past, or you want to reemphasize it this year.
   
   
2. A bonus for new business. If regular cold-calling is part of your sales culture you can pay an annual bonus to members of the sales force for achieving expected levels of new sales or gross profit generated by customers which were not on company rolls last year. Say you want $300,000 of 2013 sales from “new sources” this year, if a sales rep achieves that goal they will receive a commensurate bonus at year end—and may earn more or less based upon actual results. The purpose of this reward is to reinforce a cold-calling sales culture and persistently assure that those sales calls (of last year) result in positive outcomes (this year).
   
   Now some would argue that sales from new sources may not only be the result of cold calling. That is technically true, but all sales from new accounts (however sourced) are likely good business for the company and should be nonetheless rewarded.
   
   By the way, do not forget your sales managers. They should also participate in this type of new-business bonus as they are the direct overseers of the company’s cold-call efforts.
   
   
3. Do not change your current pay system, but openly measure (and recognize) cold-calling efforts and success. Whether you currently have or are introducing a cold-calling culture to your company, start to measure cold-calling activity (and closings). Every month share results amongst all sellers and managers.
   
   It is well known that you do not have to use actual dollars to either change or reinforce behavior. Sometimes the mere measurement of results will make sellers want to succeed and be seen to be the best at accomplishing a tough task.

We have found that a particularly effective way to reinforce cold calling and the development of new-customer business is to use a combination of both #2 and #3 above jointly. You will find they are a good complement to one another.

If cold calling (or the attraction of new accounts by the sales force through any means) is important to the success of your business—and it should be, find a way to reward and recognize success in cold calling and new business generation, in general. As you have seen, you can use $100 bills, performance reports or other means to get the job done. But remember, cold calling activities require both visibility and feedback to assure success. Just saying “we want our sellers to increase their cold calling,” is meaningless without benchmarks and reinforcement. How do you measure and recognize cold-calling success?

Wilkening & Company has published a number of articles on the subject of sales force performance & pay. To read earlier articles on cold calling or other subjects, go to www.wilkeningco.com and type in your subject of interest at our Search Our Site prompt. If you have additional questions, please call or write.

Is My Company’s Culture ‘Performance Based’?

Recently, I have had the privilege and opportunity to speak with owners and senior executives of privately-owned companies regarding the subjects of compensation strategy, planning and pay practices. In such discussions, the subject of employee, shareholder-employee or partner performance will invariably arise. A typical question asked is: How should differences in employee performance and contribution be recognized within a company’s compensation system?

The answer to that question depends upon a variety of factors and generally involves a mix that includes: job definition, expectations and variable compensation design. It is not our intent to try to discuss such a broad and open-ended question in this article—we will save that for another day. However, we generally suggest to a client or meeting participant that the best way to avoid pay and performance confusion within any organization is to develop & employ a performance-based culture. We believe this is a crucial first step. But, what do I mean by a performance-based culture?

A definition could be long, wordy and pretty abstract. But, let’s look at this from another perspective. Instead of a definition, let’s ask what are the typical characteristics that we see in a company with a performance-based culture? Here are six characteristics we most often observe:

1. Everyone in the organization clearly understands their job and what is expected of them. [This also includes partners, stakeholders or family employees, if applicable.]
2. Every job in the company has measurable benchmarks or standards of performance, and job incumbents know how they are performing.
3. Employees place the practice of high-quality customer service at the top of their job’s priority list.
4. Employees understand that they are responsible to both customers and peers for their actions and performance and are willing to shoulder that responsibility come good or bad.
5. Employees in the organization are willing to collectively do what it takes—whether part of their job or not—to meet customer (or company) requirements.
6. The company (and its owners) treat & pay its employees fairly, and employees know it.

Notice that the above emphasizes both personal & company responsibility and an acknowledgement that premier customer service is a requirement for premier company performance.

Do you recognize your company when you read the above characteristics? If so, your organization is likely an industry leader and has built pay & reward systems that effectively and fairly recognize individual performance and contribution.

If not, take out a piece of paper and chart your company’s performance or cultural deficits and why these exist. There generally will not be any mysteries, only a reluctance to recognize the problems.

So why is it important to have a performance-based culture? It is if you think it is a good idea to put a few extra points to the bottom line this coming year and attract top industry leaders to your organization. If you doubt that is possible, do some fixit work to improve the performance bias of your company and see what happens.

Wilkening & Company has assisted companies 30 years with improving company group and individual performance. If you want to talk more about performance-based cultures, and your company, feel free to call or write.

Outside Directors and the Privately Held Enterprise

In our experience, a private-company Board of Directors is often comprised of select and small groups of shareholders and non-shareholder top executives. Most private companies have a Board to advise the Chief Executive or its owners with the conduct of the business, engage in strategic decision making or attend to the matters outlined or required in the corporation’s bylaws, business (loan) agreements or policy.

The activities of the Board can be anywhere from highly structured to ad hoc. As an organization matures, it is normal for a Board to increase in size and reflect the diversity of ownership amongst shareholders.

In a family business, this increase in structure & process often occurs around the transition from 2^nd to 3^rd generations, but may occur earlier.

At some point in its growth, an enterprise will generally consider the inclusion of outsiders to the ranks of its Board of Directors. By outsiders we generally mean Board members that are: non-owners, non-family members (stakeholders) or non-company employees (directors without direct company ties). The duties and inclusion of outside directors within a publically-traded company is directed (or suggested) by regulators. This is not so for the private enterprise. But, we think their use within a privately-owned enterprise is a good idea nonetheless.

Should outside directors be on your Board? If you see yourself in one or more of the following situations, the answer may be yes:

• Your Board practices and activities are somewhat disorganized and lack focus. This is undermining Board effectiveness, and may actually pose a risk.
• There is a lack of external perspective in Board discussions and deliberations. Sometimes it is hard for members to see outside of the building.
• As the operations and scope of the company become more complex, it is apparent that this growing sophistication is creating a challenge for current Board members.
• Industry expertise on the Board (or available to the Board) is more limited than is needed or required.
• The annual (compliance and other) workload of the Board—as a whole—is increasing at a pace that is beyond the ability of current Board members to absorb its volume and scope of deliberation. Much (too much) is left on the table and undone at the end of each Board meeting.
• The company staff-support work available to the Board is either weak or inadequate to addressing the issues at hand, and Board members do not know to ask for or affect needed upgrades.
• There are a majority of younger generation shareholders on the Board. They collectively have little business experience, but can vote their shares. The lack of gray hair is telling.
• There is much family-member stress between generations regarding such matters as policy, resource allocation, pay and capital spending. The Board meeting has become a place for these differences to be aired, and consequently Board effectiveness is being compromised.

Sound familiar? It may be a good time to consider outside directors for your Board. If so, read on and I will outline for you how you can expect an outside director to help “raise the bar” for your Board. My comments will also suggest what type of person you should seek to nominate or retain. Let me summarize with three things an effective outsider can do for your Board and enterprise—right out of the gate:

1. Add the experience of an already seasoned member of a board of governance to your review and decision-making processes. If you are unsure regarding Board or process “how to's,” or if things do not run smoothly, an experienced hand will help fix that promptly.
2. Add the expertise of someone who has solved tough, marketing, sales, human resource, pay and partnership problems with industries or companies—just like yours. With their help, you should be able to rapidly clear away those nagging impediments to growth and profits.
3. Add the ear of an unbiased (un-affected) 3^rd party to discussions and decisions within the company and amongst Board members (or other stakeholders). Sometimes it is difficult for an insider to tell a relative that they are missing the point, without emotion or the appearance of bias. An outsider should and will speak his or her mind. Their job is to increase long-term shareholder value, and they will generally (and diplomatically) cut through the baloney and point all efforts to that end.  

However, at the mere mention of adding outside members of the Board of Directors, some owners will bristle because “no one but a shareholder should be able to vote on or decide matters of company policy.”  That is a very credible argument (and may be true according to your company’s bylaws), and is an understandable position. On the other hand, the company does not need to broach this issue if it adds non-voting directors, or outside advisors to the Board. In this way the company can enjoy all of the added experience, expertise and objectivity discussed above. In any event, we advise that you consult company bylaws, existing Board policies and your chief legal counsel to assure that outside members or advisor are added to the Board in an appropriate and effective manner. Be sure to do it right.

Are you in a position where you think it is time to add outside knowledge and perspectives to your Board, or have your tried and it has not worked? In either case, ask yourself 4 questions: 1.) Why do we need to do this? 2.) What should (must) the outsider bring to the table? 3.) Who do we know that will fit the bill?  And 4.) What must the company and Board do to make outside Board members or advisors both welcome and effective?

Ask, and answer, the above questions, and I think you will be happy with the outcome.

Wilkening & Company has advised clients for 30 years in areas of strategy, organization, resources allocation and governance. If you would like to discuss Board effectiveness in more depth feel free to write us at bob@wilkeningco.com.

Cold Calling for 2013

As we line up in the starting blocks for 2013, the subject of sales-force cold calling will surely arise—either as a companywide strategic imperative or as a tactical to-do discussed amongst sales managers. In either case, the sales force generally will not want to discuss cold calling nor allocate much of their time or energy to the enterprise.

But first, what do we mean by “cold calling?” Generally, cold calling is considered the development of a commercial business relationship with accounts with which the company has not done business in the past. Generally, it is about the process of gaining new business in a sales representative’s market or territory. Such new business can also be defined as selling wholly-new company products or services to existing accounts. Clearly, the latter is much easier to achieve than the former—you typically do not trip over a competitor in an existing account and, at least, the customer ought to know your name.

We believe that cold calling is a strategic requirement for a company. This is because cold calling by the sales force is absolutely necessary to create sustained company performance. As such, it is both defensive and offensive in its intent & implementation.

It is a defensive measure employed by a company to counter the surety of account loss on a year-to-year basis. Some of these account losses will be large and others will be small, but surely some of your 2012 accounts will find new suppliers in 2013. And, it will happen for reasons both in and out of your control. In our experience (and based upon our original research), companies can lose up to 15% of their accounts every year. You cannot afford to ignore this risk, or (worse) convince yourself it does not exist.

Cold calling is also an offensive measure employed to attack competitors to take away their accounts. And if you do not succeed in stealing the account, the cold calling activity on your competitor’s accounts will surely reduce their profit margins as they are forced to respond with price reductions or added service. Of course, recognize that the same can happen to you.

In either case, a company that is not actively cold calling in its market place is courting business stagnation and ultimately failure—one lost account or opportunity at a time.

If cold calling is so important to a company and sales representatives' success, why do sales forces shy away from it? In our view, there are two obvious reasons—

First, it is hard work! Convincing someone you do not know to talk with you will summon every ounce of sales skill you have (or do not have). It is much easier and more fun to call upon a “buddy”, who you know will likely place a small order and represents little risk of flight or loss. But, you generally do not cold call a “buddy.”

Second, it often takes a long time to close the business (if ever)! Cold calling will get in the way of making other sales calls with sure and immediate outcomes. Further, a cold call will seldom result in an event that will promptly put dollars in the sales rep’s pocket. Conversely, they can think of about 50 other accounts where their efforts and their compensation are more directly linked. This is particularly true when a company uses a commission-based arrangement to pay its sellers.

Is it any wonder why cold calling is about as popular with the sales force as the flu? Yet it has to be done by that same sales force.

Clearly, this is not an activity to be left solely to the discretion and purview of the sales force. A successful company will provide structure, motivation and training to assure that its sales force will succeed & prosper.

During this month and next, we will focus on the how-to’s of effective cold calling. In the following article, we reprint our October 2009 E-Note article entitled: “Let’s Talk about Cold Calling”. In it we provide real experiences in helping a client train its experienced (and frustrated) sales force to successfully get to a decision maker by phone and be ready for the unexpected.