Equity Not Required -- 5 Alternatives to Equity for Key Employees

  
"I want him to have a piece of the action." "I want him to have some skin in the game." "He wants equity in the company." In this case "him" is a key manager or valuable employee, male or female. If you're a business owner, you've probably said or heard one of these things. They come up all the time in meetings of Chief Executive Boards International.

There are two sets of assumptions in these statements, both usually mistaken. The employee assumes that he'll become richer if he has a piece of ownership in the company, and that the owner would be inclined to gift that to him. The owner assumes the employee understands the risks and rewards of business ownership, and is willing to take them, including putting some money at risk.

What the employee is usually saying is, "I want to make more money, and I want to be recognized and rewarded for my contribution to the company's success." What the owner usually wants is a way to motivate the employee to better performance, to think more like an owner, and to have some "bronze handcuffs" that would disincentivize him from leaving.

So, business owners spend an inordinate amount of mental energy, consulting fees and legal fees to put plans in place to accommodate additional owners (partners). You need buy-sell agreements, valuation plans, stock restriction agreements, non-competes, employment contracts and a variety of other suspenders and belts to make this work. And then?

"You want me to PAY for that?", the formerly-interested would-be partner exclaims. That's when the business owner gets offended. He can't believe, after all that begging and what he's spent to set the company up for multiple owners, the employee thinks he's somehow entitled to the gift of equity. I've actually seen long-time great relationships between owners and key employees spoiled by this misalignment of expectations.

So, what are the options? First, when the topic of equity comes up, make your position clear -- you're not giving it away and you're not buying into the idea of "sweat equity" (a euphemism for giving equity away). One CEBI member suggested the best response to "I want some equity" is, "How much is your house worth?", meaning "How much money could you come up with to buy into the company?"

That's usually the end of the equity conversation -- when the employee realizes he's going to have to actually put something at risk. So, what are some alternatives to meet both the objectives of both the employee and yourself?

1. A well-defined current-year incentive compensation plan that pays out annually. Then give the employee the option of diverting a large portion, if not all, of that payout into a qualified retirement plan (SEP, SIMPLE or 401(k)).
      
2. A long-term incentive compensation plan that accumulates performance over, say, 3 years and then pays out similar to #1 above.
       
3. A deferred compensation plan. This is usually calculated on the same basis as options 1 or 2 above, except that the payout isn't immediate -- it is deferred into the future, thereby incentivizing the employee to stay and quantifying the "leave behind" in case of termination. These types of plans usually "vest" some number (3-5) years after the incentive is earned and then pay out upon reaching an age, say, 60 or 65 or in the case of change of control (you sell the company).
      
4. A phantom or shadow stock plan. These plans are not "real" stock. The employee is neither an investor nor shareholder. It's essentially a promise of the company to pay in the future some compensation that emulates the outcome of stock actually owned. Shadow stock would be awarded as part of a well-defined incentive compensation plan.  The shadow stock would emulate the value of real stock, thereby providing the key employee with an "owner-like" benefit without having actually invested in the company.
       
5. A "change of control" agreement. You agree with a key employee that if he stays on until you cash out of the business, he gets a piece of that deal. Can be a fixed amount, an amount based on the transaction value, and may increase over the years. This "bronze handcuff" costs the employee nothing, and you owe him nothing if he doesn't stick with you.

These are just a few of the ways to recognize, retain and reward key performers. None of them tangle you up with a partner or change your relationship. You're still the owner and they're still the employee. They just have a more clearly defined reason to pitch in and to stay around.

If you've come up with a creative long-term compensation or retention plan, please click "Comments" below and share it with others.

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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

LLC? Want to Save Some FICA? Consider an S-Election

  
More and more LLCs are discovering the advantages of electing a different tax structure while retaining their registration as an LLC under state law.  Time is of the essence in this decision, which must be filed within the first two months and fifteen days of the beginning of the tax year in which the election is to take effect.  That would be March 15th for this year.   

The alternative?  Elect S-Corporation tax treatment for your LLC.  Yes, you can simply decide you want your LLC taxed as if it were an S-Corporation, while legally remaining an LLC. 

Why would you want to do this?  There are several reasons: 

1. If you're a multi-member LLC, some of your fellow members (and perhaps yourself) might rather get an "ordinary" paycheck and a W-2, rather than a draw or "guaranteed payment" from the LLC.  This includes ordinary withholdings, and considerably reduces the burden of members making large quarterly estimated tax payments.  This is particularly beneficial to minority % members.  It also simplifies distribution of qualified plan benefits, such as a 401(k). 
          
2. If you're a single-member LLC, you're currently paying FICA and Medicare taxes on the entire profit of the LLC, including the money you reinvest in the business.  As an S-Corp, you pay FICA and Medicare taxes on only your own W-2 income - whatever is justifiable as "reasonable" for your work in the business.  The remainder of profit is considered that of the entity, and taxable to the members as only ordinary income, as reported on a K-1. 
   That's fair, I believe, considering that some of that income is probably reinvested in the working capital of a growing company.  Why should you pay taxes on money you can't take home? 
           
3. Distributions of available cash are still allowed, and with no tax consequences, since they've already been taxed (Less FICA and Medicare -- see #2 above).  They must, however, be distributed proportionally according to membership %, just like an S-Corporation (including yourself). 
      
4. You retain the simplicity of the LLC - you still do not need a board of directors, meetings or minutes. 

Why wouldn't you want to do this?  Again, at least a couple of reasons to consider:  

1. Under an S-Election, your LLC must conform to the same ownership rules and restrictions on distribution of profits and cash as an S-Corporation.  LLCs can distribute cash or allocations of profit (on your K-1) any way they want, regardless of ownership %, which may be a flexibility you don't want to give up. 
       
2. You may limit some of your own qualified plan benefits.  For example, your 401(k) match, SIMPLE IRA limits or profit sharing calculations would be done on your own W-2 compensation, rather than the entire profit of the LLC.
       
3. While you can "undo" your S-Election, it's neither cheap nor simple.   Be sure this makes sense for you before you go down this road. 

This not advice.  It's an idea for you to become knowledgeable of, then validate with your own trusted legal, financial and tax advisors.  Here's a good article as a place to start.

Do remember you have enough time, but not a lot, to get this done for 2012.   March 15, 2012 is the drop-dead date to make an S-Election for this tax year.  

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Terry Weaver

CEO

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http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Assistants -- The Pendulum is Swinging (Again)

  
Have you gotten rid of clerical/administrative assistants and required your execs and sales people (and perhaps yourself)to handle their own correspondence, phone answering, order entry, etc.? That's now becoming "old school".

As email, voicemail and office automation swept through companies worldwide, many clerical and administrative jobs were eliminated with the thought that people could just do their own administrative work. Turns out, savvy business owners and CEOs are discovering that's not consistent with the highest and best use of their scarce resources.

A Chief Executive Boards International member has learned that he can increase productivity of his top sales producers by adding a "Sales Assistant" to help with the many time-intensive tasks of order entry, order acknowledgement, order changes, shipping information requests, etc. There are a lot of heartbeats and keystrokes needed to manage a customer relationship and many of those are not the best use of a sales person's time.

This is an easy return on investment (ROI) calculation. Just look at the incremental gross margin a sales person could produce by selling full time, rather than doing his own paperwork. Compare that to the cost of an assistant. For simplicity, if the assistant costs, say, $50,000 all in and your gross margin is 50%, it takes only $100,000 in additional sales revenue to break even. If you can split an assistant between 2-3 people, so much the better.

Take a look at your highest producers and see if they could run faster if you hired someone to carry their briefcases. You might find yourself part of a new "leading edge" of management thinking.

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Terry Weaver

CEO

Chief Executive Boards International
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TerryWeaver@ChiefExecutiveBoards.com

Drama Not Included

  
I came upon a business improvement strategy this month that surprised me. Drama eradication. It surfaced in a Chief Executive Boards International meeting, where a member was talking about an employee who has drama circulating around her most of the time, and he doesn't think he needs it any more. He's right.

My wife and I had a weird experience this past weekend. We went to our neighborhood Pak-Mail store to send off some Christmas packages. The store has recently been sold by an owner who was almost always there, was friendly, and seemed genuinely happy to see you come in. Kind of like my barber, just a casual, comfortable place to do business.  Businesslike, efficient, and no drama. 

This visit, however, two women were running the store. The one behind the counter was dashing between machines -- frenetically would have been an understatement. She actually tripped and almost fell once. Not like they were busy -- there was only one customer ahead of us. Now, the process of weighing and labeling packages and collecting the customer's money had never before been so dramatic, but this day it appeared someone had made one too many visits to Starbucks.

Her associate was at a counter, slaving over some kind of manifest with sighs and great animation, and stepped up the tension by dramatically announcing, "I'm not ignoring you, but I just have to get these packages ready for the postman, who's already been by once." These two seemed intent on feeding each other's drama to the point it was just plain uncomfortable being there. As we left, we looked at each other and almost simultaneously said, "I don't know if we'll be back in there." We've been shipping packages there for 15 years, but previously drama was not included.

Contrasting Scenario

I've had my second recent experience flying Southwest Airlines. Volumes have been written about Southwest, but I don't recall any focused on the lack of drama in the Southwest experience. What do I mean by that? The boarding process. First, there's no need to crouch at the ready to jockey for position when your boarding "group" is called. They give you a boarding number, designating your place in line. They have a well-signed queuing area where people just line up in their assigned order - 60 at a time. Then they call segments of the line onto the plane, by number, and people walk onto the plane. Simple, cheap, and drama not included.

On the plane, there's no drama, either. They don't charge for checked bags, so people are not attempting to stow small refrigerators in the overhead bins. As a result, there's plenty of bin space, just like there used to be on most airlines. With no assigned seats, people tend to distribute themselves down the aisle, filling windows first, then aisles. Nobody has to get up to let someone from a later boarding group into their assigned window seats. It's just an amazingly calm, orderly and swift process. Drama not included.

So, I'm wondering if drama might be an indicator to watch for and eradicate from your business. It's hardly ever positive, and if you can find the root cause, which may be a broken business process or, perhaps more likely, a person whose bias towards drama you just don't need.

I'm interested in comments on your experiences with drama eradication. Or maybe you have some metrics -- some sort of drama index?

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CEO

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TerryWeaver@ChiefExecutiveBoards.com

5 Signs You Have a Toxic Employee

  
There are marginal employees, weak employees, and problem employees. A drain on your business, and you'd be better off without them. Then there are toxic employees. These people are a cancer that's eating away at your business hour by hour. You have no idea how much these people are costing you, and they could cost you your company.

What's the difference between a lousy employee and a toxic employee? Intent. Most lousy employees are that way due to a benign disregard for what you want. Toxic employees, on the other hand are actively undermining you. Here are some examples of behaviors I've seen from toxic employees:

1. Manipulation -- They consistently manipulate others into doing what they want or forgiving their misdeeds. They ask forgiveness rather than permission, and then cleverly avoid any accountability or penalties for their actions (see #3 below).
      
2. Misrepresentation -- They spin communications to their benefit. They misrepresent the company to customers, and they misrepresent commitments they've made to customers. They say things like, "I didn't tell them we'd do that", when, in fact, they either did or they let the customer believe we would.
       
3. Misappropriation -- They use company funds in inappropriate ways. A recent example given by a member of Chief Executive Boards International was an employee's use of a company credit card to charge a personal vacation. He then came in and said, "You can take it out of my pay over the next 3-4 pay periods."  Imagine that, he wrote himself a personal loan out of company funds and expected (and got) no consequences from it! I once saw a toxic employee vote himself a raise by writing down unapproved overtime. I think he was in cahoots with the payroll clerk, who never called it to the attention of the owner.
       
4. Inciting discontent -- They start rumors or twist facts to pit other employees against each other, against their supervisors or against you.
      
5. General mischief -- They're troublemakers, sometimes not for any obvious reason. It's not that there's something in it for them, they just have a pathological need to stir things up.

You may be thinking, "Yeah, that sounds like Joe, but I'm working with him on it."  Forget it.  You can't fix these people.  They've been operating this way since childhood, and it's a deep-seated psychological problem that you're probably not qualified to fix (if indeed they want to be fixed). 

If you have one of these folks on your payroll, his antics have become a spectator sport. All the other employees are in the bleachers watching to see what you're going to do about it. They know. They know you know. They're just waiting to see how long it will take for you to get rid of the toxic employee. And then the REAL fun starts when all the other stories of misdeeds and toxic behavior come out. You won't believe some of the stuff you'll hear.

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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Hard Work Stopped Paying Off - or Did it Ever?

  
President Obama recently said, "Long before the recession hit, hard work stopped paying off for too many people." That statement applies to business owners, as well, although not in the context the President intended. Fact is, hard work alone never "paid off" - for anyone.  

Working hard is a virtue. It's a survival tactic. It's not a strategy. It's something you have to do when your business (or life) strategies aren't working.

A Chief Executive Boards International member once said, "The real measure of the value of your business is how much time you can spend away from it."

Think about it. If the route to improving your business by, say, 20% is working harder, what do you do if that "works"? How do you get the next 20% increase? Work even harder? Visualize 2 or 3 or 5 more iterations of that. Sooner or later you run out of gas. You're burned out and depressed, perhaps divorced or, worse yet, you're disabled by a stroke or heart attack. Working harder is not a strategy -- it's a downward spiral to an eventual unraveling of the company, created by yourself.

Here are 8 Alternatives to Working Harder -- ways and places to get some better strategies that reduce, rather than increase the amount of work you have to do.

Think about it.

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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

5 Steps to Triple Your Telephone Prospecting Hit Ratio

  
You want to contact a prospect by phone. Perhaps he's even expressed an interest in your product or service. You know you can't get an order by email -- it's going to take a conversation to get the selling process to the next step. You try to catch him answering his own phone - no success. You try leaving voicemails, asking him to call you back -- he doesn't.

You need a better plan, and here's one that's worked for me.

1. Send an email a day or two in advance, with a short (no more than 2-3 paragraphs of a couple sentences each) description of what the call is about or why you want to talk to him. In the first or second line of the email, usually in bold font, say, "I'll call you next Tuesday morning to fill you in on this. If there's a better time for you, just reply to this email or give me a call at 864-527-5917 to let me know." Use a subject line something like, "Can we catch up Tuesday morning?"
      
2. Build a process for sending these. You can send 10-12 of these for a single morning or afternoon of prospecting phone calls. Use a merged email generator like Worldcast, your CRM, or "Resend this message" in Outlook.
   You'll be amazed at how many people respond with a better time -- in one recent morning, I had that happen on three out of five prospects. Then you have an email dialog going, with no gatekeeper in between, where you can make an appointment that suits you both.
          
3. Many, of course, will not respond to you email, and you'll call them on the appointed morning or afternoon. Some of them will take your call. For others you'll get an assistant or voicemail. Voicemail is probably preferable, because you can leave a message something like, "Hello, this is Terry Weaver calling from Chief Executive Boards International. My phone number is 864-527-5917. You've been receiving our newsletter for business owners and we hope it's been useful to you. As you know, CEBI is a membership organization of business owners and CEOs who meet to help and advise each other. It's been hugely valuable to our members during these times of economic uncertainty. I'd like to take a few minutes to fill you in on how this works, and I'll call you again on Thursday morning. Please give me a call at 864-527-5917 if another time would work better for you. That's Terry Weaver, Chief Executive Boards International, 864-527-5917."
        
4. Pull up your earlier email about the Tuesday morning call, and forward it to the prospect, with a subject line like, "Can we catch up Thursday morning?"  That email body is something like: "I'll call you Thursday morning to fill you in on this. If there's a better time for you, just reply to this email or give me a call at 864-527-5917 to let me know."
        
5. Call again, as promised, on Thursday morning.   You can, if you wish, repeat steps 4 and 5 one or more additional times. 

This has worked remarkably well for me. First, I do on occasion hear from someone proposing a different time for the call. And, interestingly, having sent the email just recently seems to increase the hit ratio of my call getting through - as if the prospect was actually expecting it. If you have some other telephone prospecting means that work for you, please click Comments below and share them with others.

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CEO

Chief Executive Boards International
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TerryWeaver@ChiefExecutiveBoards.com

Questions Down, Answers Up

  
"What would you do about that problem?" Good question, asked most every day in most companies. One Chief Executive Boards International member says it's usually asked by the wrong person. He says that question ought to be most often asked by the boss, not the subordinate.

Think about it. How often do you, the boss, become the "go-to guy", where your subordinates are asking you for answers? If your answer is, "most of the time", it's because you have it backwards. Instead, you're the one who should be asking your subordinates, "What would you do about that problem?"

Try inverting the information flow in your company, such that you're asking most of the questions and your subordinates are providing most of the answers. In other words, "Questions down, answers up". Give it a try, and you'll find yourself becoming steadily less essential to the day-to-day operation of the business.

Also check out:  Want Your Employees to be Independent Thinkers?

If you have some other ideas on how get your employees to think and act on their own, please click "Comments" below and share them with others.  

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CEO

Chief Executive Boards International
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TerryWeaver@ChiefExecutiveBoards.com

LinkedIn -- The Reference Checker's Friend

  
Businesses that sell mostly or exclusively to other businesses have found low return in most social media investments. The exception, in my view, is LinkedIn -- the social media site for businesses and professionals. It's not uncommon for people to use LinkedIn in one way it was intended -- to get a "warm" introduction by a mutual acquaintance to someone or some prospect you're trying to reach.

There's another use, however, that I've been amazed by. Use LinkedIn as a stealth reference checker. Here are a couple of ways I've done so:

1. I was recently helping a client screen some resumes for a key management position. We got down to one of the front-runners, and I said, "Let's have a look at this guy on the web." Google popped his LinkedIn profile, and would you believe a friend of mine was a mutual connection (knew both of us)?  I called him up, told him who we were considering, described the job opening, and said, "How do you think he would do in that role?"
      
   Long pause. Then he said, "Well." Another long pause. "I really can't divulge inside information from his previous employer."  Long pause (mine).  "Wow", I said, "Thanks so much -- I completely understand, and thanks for saving another business owner a whole lot of time."
      
   I consider this one to have been a bullet dodged.
      
2. Third Party References -- Search LinkedIn for other employees of a candidate's previous company. Call them and see what they'll tell you about the candidate, if they happened to be there at the same time. These aren't the hand-picked references a candidate might give, but rather people who in most cases have no reason not to be honest with you.

If you have some other ideas on how to use LinkedIn for recruiting or reference checking, please click "Comments" below and share them with others.  

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 
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8 Red Flags You Don't Want on Your Balance Sheet

  
Business owners have (mostly) a working knowledge of their income statements. For most, the balance sheet is something they don't understand and pay little attention to. I've seen several balance sheets recently that would best be described as train wrecks. Curious, since it's the balance sheet that several people look at first. Those would include:

• Bankers -- The balance sheet is the cross between the altimeter and the fuel gauge (the income statement is the airspeed indicator) for your business. The balance sheet shows the "vital signs" of the business. Bankers reject loan applications out of hand if they can't make sense of the balance sheet.  Their logic?  Why ask questions of you about the anomalies?  If you understood your balance sheet it wouldn't have been in that condition. 
   
• Buyers -- If you're remotely interested in the long-term value of your business, a credible, buttoned-down balance sheet is essential. If you present a balance sheet riddled with questionable items to a potential buyer, they automatically assume the rest of the financials are suspect, as well. The result is a reduced multiple for their valuation and far more rigorous due diligence, since you've damaged your own credibility right at the gate.  If it somehow gets to an offer, you can be sure there will be multiple painful contingencies in the buyer's favor. 
   
• Plaintiff's Attorneys -- I heard this from a sharp young lawyer this week. Things like loans into and out of the company, to and from shareholders, make it appear the business is being used as a personal "piggy bank". Running personal expenses through the business (usually over the company credit card) gives a similar appearance. Besides giving the impression of a lack of financial discipline, these actions can, in fact, provide evidence that the business entity (LLC, S-Corp or C-Corp) is really just a fake -- that the business is actually commingled with personal funds on a day-to-day basis. In the case of a judgment against the company, from which your corporate veil is intended to protect your personal assets, you give a plaintiff's attorney plenty of ammunition to prove that there's no veil at all -- the business and personal assets are commingled and therefore not protected. This is known as "piercing the corporate veil", and could easily allow a financial mishap in the company to take you down personally, as well.

I've recently worked through forensic accounting projects with several small businesses to clean up "red flags" on their balance sheets. Have a look at yours, and see if you find some of these red flags:

1. Loans to Shareholder -- These are usually distributions in drag, sometimes made because posting the cash you took out of the business as a distribution would strip all the equity out of the company. Good example of commingling funds. If you need cash to buy groceries, borrow it as a personal loan or a home equity loan. You went into business to make money, not to loan yourself money.
    
2. Loans from Shareholder -- These are usually equity investments in drag. You put money into the company. Why was that? Company not financially healthy enough to support itself? If the business needs to borrow money, borrow it from a "real" lender, like a bank or an individual. Can't get a loan from someone else? I don't want to loan you money, either.  In the case of any shareholder loans, a sharp/aggressive IRS agent may try to use these accounts to retroactively terminate an “S” election if the company has more than 1 unrelated shareholder --  major tax consequences.
    
3. Missing Fixed Assets -- Where are the vehicles? Where's the furniture? Where's the office equipment (computers, servers, etc.)? The purchase cost, as well as the accumulated depreciation should be easy to find. There's a difference between fully depreciated assets and MIA assets.  Accumulated depreciation greater than cost of assets (see #4 below) means the owner does not look at the balance sheet and his/her accountant does not look at it either.
      
4. Negative Assets -- Negative assets are usually liabilities in drag. Some can be legitimate in limited cases. Most aren't -- they're usually posting mistakes, sometimes years old. Clean 'em up.
    
5. Negative Liabilities -- Why would you owe someone negative money? Generally a posting error.
    
6. Negative Equity -- How did you take more money out of the business than you've made? Using the business as a front for your personal cash flow problems?
      
7. Other "chaff" -- Odd "remainder" amounts in dormant accounts. If an item on the Balance Sheet hasn't changed in 2-3 years, it deserves a look. Is it real? Is it relevant? Can you explain what it is and why it's there?
      
8. Inexplicable "clearing" accounts -- QuickBooks Payroll is famous for creating these. They're a red flag that payroll doesn't balance, and sometimes accumulate to big numbers over time, meaning that expenses are being either overstated or understated, depending on the reason for the payroll imbalance problems.

If you routinely give your Accountant a messed up balance sheet – he will clean it up (or should) and send you a large bill to do it.

Take a hard look at your Balance Sheet, just as a buyer, banker, plaintiff's attorney or IRS agent would. Does it pass muster? Can you explain every line item? If not, get a good financial advisor to help you sort through where the bodies are buried, get them cleaned up, and get your balance sheet presentable as evidence that your company is operating in control and you're running a business, not a personal piggy bank.

For most small businesses, making sure your cash, accounts receivable, inventory and accounts payable accounts are clearly reconciled to the supporting schedules, lists, bank statements, etc. is all the owner needs to do every month to feel good about the balance sheet.  By the way, you'll be surprised at how much you learn about your business during the exercise. 

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 
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What's Going Right?

  
CEOs responding to the Chief Executive Boards International Fall Economic Survey confirmed that reports of the death of the US Economy are greatly exaggerated. In fact, things are generally working better than reported by the popular press.  Link to Video Summary of the CEBI Survey

I'm quoting one of my favorite economic forecasters, Brian Wesbury, who answers the question, "What's Going Right?": 

"Everyone knows housing is still weak. And, everyone knows jobs are growing, but not fast enough to seriously lower the unemployment rate, which stands at 9.1%.

"Everyone also knows real GDP has expanded for nine consecutive quarters, at an average annual rate of 2.5%. No one is satisfied with this; but it is a recovery, not a recession.

"So, how can real GDP grow when housing and employment are so weak? Something must be going right…somewhere.

"Well, it turns out that the strongest part of the economy has been business investment. Equipment and software investment (Cap-Ex) has grown five times faster than GDP – 12.9% at an annual rate over the past nine quarters.


"The strongest category has been transportation and related equipment (trains, planes, trucks, etc.), up 43.3% at an annual rate over nine quarters. Computers and peripheral equipment (including servers, printers, routers, etc.) are also up 26.2% at an annual rate in the past 2 ¼ years. All of this data is adjusted for inflation, and what it shows is, contrary to popular belief, businesses are spending and investing. Moreover, businesses investment is a bigger share of the economy than housing.

"Consumer spending is up, too, despite weak confidence data. After adjustment for inflation, consumer spending is up 2.2% at an annual rate over the past nine quarters. In a shocker, real furniture and household durable equipment spending (refrigerators, washing machines, etc.) increased by 5.0% in the past year and now stands just 0.3% below its all-time high from late 2007. Despite weak housing, and worries about credit, household durable spending has rebounded to pre-crisis levels.

"Last we looked, the only help government is giving businesses is a more rapid depreciation schedule – which is a tax incentive for investment. Yet, trillions are being spent trying to stimulate housing and employment. In other words, what government is trying to boost by spending is going wrong, but where it uses tax cuts things are looking up and going right. If government could find the courage to have faith in markets and not itself, more things would be going right.

"That said…it seems clear that the economy is finding enough strength in business investment and consumption to offset the pain caused by housing and employment. We expect the scales to remain tipped toward growth in the quarters ahead and look for 3% real GDP growth in 2012.

"This growth could accelerate if government spending and regulation were reduced in a significant way. Housing already looks to have found a bottom. Imagine what happens when it finally turns up? Buck up, not everything is going wrong. In fact, there are many things going right in the US economy."

You may be interested in the complete article:  http://www.ftportfolios.com/Commentary/EconomicResearch/2011/10/31/whats-going-right

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 
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Sales Commission Out of Control -- Do You Cap It?

  
A manager posted a question on a CEO web forum about the idea of capping sales commissions:  "One of our sales reps is blowing out his sales numbers - and is set to earn commissions that far exceed any other rep and even place his total comp above any employee, including myself. I want to understand if it is ever wise to put a cap on commissions when we revisit comp plans for next year?"  

When is it a good idea to put a cap on the amount of commission someone earns? Resounding answer: NEVER. If you ever get these inclinations, take a cold shower and rethink.  Rationales for this conclusion ranged:

• That's a good way to demonstrate to someone that you can't be trusted -- set up a compensation plan, then when the person starts doing what you said you'd reward, renege on the bargain
   
• f you created a defective incentive compensation plan -- one that pays too much money for too little accomplishment, it's your fault, not his
   
• If your plan is well designed and you have a guy hitting it out of the park, what's the problem? Pay him what you promised and hope he'll just keep on doing it more.  If a star salesman's economic value is higher than yours, his manager, get over it. 

The prime objective (and litmus test) of a compensation plan is "The House Wins" -- hopefully by a factor of 4:1 or so. What do I mean by that? This is a good application for analysis at the margin. What's the marginal benefit to the organization (gross margin) of the next $100 of sales (or $100,000)? And what's the salesman's cut of that? Regardless of how the commission is calculated (on total revenue, on gross margin, on units sold, etc) you'd like the house to have a "win" of at least 4:1. That would mean a sales commission of 20% (or less) of gross margin. Of $100 gross margin, salesman gets $20 and house gets $80 -- a 4:1 ratio.   3:1 isn't bad, either -- 25% of GM for the salesman. 


What if there's a base salary involved? Is the commission rate the same? Perhaps, but you don't want to be paying commission on the first dollar of sales. See: "The #1 Incentive Compensation Plan Design Mistake". There's another variation on that theme at: "Incentive Compensation Not Working?  Try Plan "B".


Are you completely unhappy with your incentive compensation plan? You're not alone. See: "8 Questions to Ask if Your Incentive Comp Plan Isn't Working".


PS:  One misguided respondent commented that "Perhaps you could buy off the salesman with equity in lieu of commission".  If you ever start thinking about giving away equity, take a cold shower, slit your throat, then call me.

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 

Qualifying Sales Prospects -- Go for da MAN

  
Sales people habitually spend time on leads and prospects that aren't ever going to buy. That's because they're not the "MAN". What's that mean? They don't have all the qualities of a real prospect:

Money
Authority
Need

Steve Hoffmann of Skyline Exhibits and Design is, like many business owners, his company's lead sales person. He really knows his craft and we find ourselves regularly talking about sales training and sales management. Steve shared this simple, memorable and effective algorithm with me. Breaking it down into parts, here's what makes the MAN (it's not clothes anymore):

• Money -- The money is not only budgeted, but it's available (no "if" qualifiers in the way) and the project itself fits into the company's overall strategy. No contingencies -- the money is there.
• Authority -- The person we're dealing with is the one who can sign the order. Not a recommender. Not a committee. Someone with the authority to spend the budget without any additional levels of approval.
• Need -- There's some kind of pain that this proposal addresses. Something is missing and your proposal fills that void.

So, the next time your sales person talks about a prospect that's just about to buy, ask, "Is he da MAN?"

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 

Make an Additional 100 Marketing Impressions a Day

  
Would you like to put your marketing message in front of another 100 qualified prospects or current customers each day? You could reach at least that many, if you'd put that message in the email signatures of not only yourself but also your entire staff. The signature feature is available in almost any email client, including Microsoft Outlook, and is an easy way to put something interesting, provocative or humorous in front of everyone receiving an email from your company.

Chief Executive Boards International member Tim Gase, owner of Peerless Saw Co., has a signature footer that's provocative and a bit humorous at the same time. Tim's company makes circular saw blades for, among others, the sawmill industry. Here's his footer:

NOTICE: It is okay to print this email. Paper is a plentiful, biodegradable, renewable, recyclable, sustainable product made from trees that provide jobs and income for millions of Americans. Thanks to improved forest management, we have more trees in America today than we had 100 years ago.

Consider a company-wide policy and standard for marketing messages in Email signatures. The emails are going out anyway -- they might as well be part of your marketing plan.

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 
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It's Time to Take a Look at Your 401(k) Strategy

  
As a business owner, you deserve to be taking maximum advantage of qualified plans available to you. Your qualified plans -- 401(k)s, IRAs, SIMPLE IRAs, etc. are almost bulletproof up to $1 million. If the worst happens to your business, those funds could become your only financial lifeboat. Don't neglect this gift of security from creditors and potential judgments. During the month of September you need to decide whether a Safe Harbor provision for 2012 makes sense for you, and get that election in place.  

Many 401(k) plans operate on a calendar year basis, and right now is a good time to reconsider your 401(k) options as an employer. This topic came up in a recent CEBI Local Board meeting. The discussion centered around Safe Harbor provisions, something that must be declared and communicated prior to the beginning of the plan year, and can be changed in subsequent plan years.

Safe Harbor provisions fit into the "fairness" provisions in the 401(k) statute. Congress wanted to make sure owners and executives didn't set up 401(k) plans, forget to tell their employees about them, and then take maximum advantage (in the forms of maximum contributions and company matches) for themselves alone. So the concept of "participation testing" was implemented. Simply described, the "top heavy" and "highly compensated" tests limit the maximum participation of owners and highly compensated employees, proportional to participation of lower-paid workers. You may have had the unfortunate experience of getting a taxable "refund" of your 401(k) contributions after the fact, due to over-contributing.

These participation tests rarely work out so those who wish to max out their 401(k) contributions can actually do so.

Let's also review the allowable maximum contributions (if not limited by participation testing). For 2012, those are $16,500 for most employees, with a "catch-up" provision of an additional $5,500 for those over 50 -- a total of $22,000 annually for that group.

And it's also a good time to point out that a Roth-style 401(k) offering is now available. If you already have plenty of pre-tax deferred income in either a 401(k) or IRA, you can amend your plan to allow participants to designate their contributions as Roth-style, meaning that despite paying taxes on the income now (at historically low tax rates), the income, dividends and growth in net asset value are tax free forever! Of course, the company match contributions, since they're deductible to the company, go into a parallel account that's considered pre-tax.

Whether you're interested on your own account or not, you should amend your plan now to make a Roth option available to your 401(k) participants. 

So, how can you make the most of these extraordinary opportunities for yourself as an owner? The Safe Harbor provisions allow you to make company contributions in either of two ways, thereby nullifying all participation testing. Those two ways are:

• A 3% (of salary) match, automatic, across the board, regardless of the employee contribution, for all eligible employees. Eligibility is usually based on a waiting period after initial hire and a minimum number of hours worked in a year, as specified in your plan. 

or

• A specific (or better) employer match formula of:
  
  • 100% of the first 3% of employee contributions
  • plus 50% of the next 2% of employee contributions

Thus, for an employee contributing at least 5%, the company would match 4%.  For an employee contributing nothing, the match is 0%.   

In the CEBI meeting where this was discussed, one member said he had done the math, and changing his existing match formula to the Safe Harbor formula would cost him about $30,000 in additional match -- far more than the value of himself and his partner being able to max out their contributions.

A member in another meeting had mentioned that he went to the 3% Safe Harbor option one year, in lieu of pay raises. Now, said the member who had done the matching math, "That's an idea worth looking at." Note that a 3% "raise" through the 401(k) is, in fact more than 3%, considering that both you and the employee also save the combined FICA burden of 15.3%. That saves you 0.23% of salary, and the employee the same amount.

As always, these are ideas, not recommendations. Consult your own legal, benefits and/or tax advisors before taking any course of action, to ensure they are appropriate for your own specific situation.

If you do decide to amend your plan, you haven't a moment to spare -- call your 401(k) fiduciary today and be sure you understand the timeline necessary to get plan changes in place for 2012. You must get your plan amended and provide notice to Safe Harbor-eligible employees not less than 30 days before the new plan year.

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 
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7 Steps to Achieving Your Highest and Best Use

  
Experts in innovation agree that the most innovative ideas -- those most likely to be game-changing -- come from outside your industry or vocation. At a recent CEBI Summit, member Chuck Smith applied that principle to business ownership and leadership. Chuck invoked the core principle of real estate appraisal, the highest and best use (HBU) of a real property.  A Wikipedia article cites The Appraisal Institute of Canada:

Highest and Best Use: The reasonably probable and legal use of property, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value.

So, let's restate that idea to describe the highest and best use of a business owner's or CEO's time. That might sound something like:

Highest and Best Use: The reasonably probable and legal use of the owner's or CEO's talent, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value for the enterprise.

How might you determine that? Here's an interesting exercise that may be helpful in finding your highest and best use(s).

1. Take out a blank sheet of paper
    
2. Draw a horizontal line across the center of the page
    
3. Above the line, write "More of", and list those things that you should be or wish you were doing "More of" for the benefit of your business.
    
4. Below the line, write "Less of", and list things that you're doing now that you should be or wish you were doing "Less of". These are things that you may be doing for several reasons:
• There's no one else who can do them
• There's no one else to do them
• You're the best qualified to do them
• You like doing them (despite the fact they may not be HBUs)
   
5. The "More of's" are your HBUs. Pick the one most likely to benefit your business, and write 2-3 sentences on how you'd accomplish that strategy
    
6. Beside each of the "Less of's" write in ideas for how you could off-load those things. The idea is to free up time you're now spending on "Less of's" so you'll have more time to focus on the HBUs above the line. Pick one of those things and write 2-3 sentences on how you'd get that task offloaded to someone else (or perhaps just stop doing it).
    
7. Put the list in a followup file for 2-4 weeks from now, then revisit steps 5 and 6

We test-drove this exercise in several recent CEBI Local Board meetings and several members discovered a lot of clarity in their HBUs as a result. In one case, a member said he knew he was not operating at his HBU, but just didn't have a way to identify what he needed to be doing and what he could stop doing to free up the necessary time to accomplish his HBU.

Perhaps there's a minor epiphany in here for you. If that's the case, please click "comments" below and share your experience with others.

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 

8 Key Success Factors in a CRM Implementation

  
An earlier article, 5 Reasons A Spreadsheet Is Not A CRM, we gave an overview of CRM selection attributes and a partial list of available vendors. So, by now you've evaluated and chosen a CRM. Considering that your CRM could (and should) become the backbone of your selling system and the center of all your ongoing customer interactions, what's important about your implementation? That you get it right, and get it right the first time. Resurrecting a failed system implementation is at least 5 times as hard as getting it right on the first pass.

Here are some ideas and suggestions for a successful CRM implementation:

1. Don't delegate this. In a mid-sized company, this is important enough to have the full attention of the CEO, COO and VP of sales. Notice I didn't mention IT. CRM projects led by the IT staff are the single largest group of CRM implementation failures. This is a business system, not an IT system. The underlying IT challenges are minimal - almost nonexistent.
    
2. Decide in advance what you want to accomplish. Hopefully you did this before making a product selection. Write (or bulletize) a set of requirements that you expect from your CRM. Look out a ways -- 2 or 3 years. Get past the initial implementation and visualize what a "real" e-marketing company's backbone data platform would look like.
    
3. Include the "thought leaders" of your company in the planning. Get the key influencers invested in the project. They'll help you through the rough spots and they'll help you promote usage.
    
4. Define exactly how you expect your employees to use the CRM. Just collecting contacts? Logging phone calls? Tracking quotes and proposals? As an E-marketing campaign database? As a long-term customer relationship history? As a project workflow tracker? A retrievable company-wide knowledge base? The possibilities are almost endless. Your CRM can, in fact, become the hub of many of your business processes.
   HOT TIP: Survey your workforce, asking for a list of every spreadsheet they're keeping themselves that contains information about customers or prospects. You'll be stunned at the number of invisible "information silos" you have. If that information about customers is worth keeping, it's worth keeping so everyone has access -- not just spinning around on 1 user's hard drive.
    
5. Break old habits -- One of the hardest habits to break is getting people (including yourself) to use the enterprise-wide contact directory in the CRM vs. your own directories. Mandate that Outlook or Email client address books are to be used ONLY for personal contacts. All business contacts and contact information should be stored (and shared) in the CRM's contact database (and only there).
    
6. Use it yourself. Clearly demonstrate that you're doing what you say everyone else is supposed to do.
    
7. Incentivize -- Hand out some $50 Target gift cards to people who jump onboard early and use it the way you want it used, or perhaps in ways you never imagined. (see:  How Much Employee Motivation Can You Buy with a Car Wash?).
    
8. Recognize and reward -- When you see someone doing something great (you'll have to be looking at the data), such as an extraordinary call report, send a company-wide email blast recognizing the accomplishment (and don't forget the Target gift card).

CRM implementations are notoriously stalled by lack of top-down leadership. Once they stall, it takes at least 5 times as much energy to get them out of the ditch and back on track. Your CRM implementation can be the best thing that ever happened to your company or your worst nightmare. The way you approach it on the first try will make the difference.

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

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Crafting the Perfect Job Description

  
Are you struggling with a job description for a new position? Or trying to figure out a reasonable set of roles and responsibilites for a new hire? Perhaps you're creating a new role for someone you're intending to promote. In any of these cases, it's a daunting task to sit down with a blank sheet of paper and create a job description from scratch.

You'd really rather start from a similar job description that someone else had sweat his way through, wouldn't you? But where would you find it? A Chief Executive Boards International member offered a great idea in a recent meeting.

Go to the big job boards -- http://www.monster.com/, http://www.careerbuilder.com/ -- and search job postings as if you were a candidate for the job you're intending to describe. Geography, of course, isn't important at first. Perhaps you'd want to put some query parameters in like your industry and allied industries, to get an idea of what's typical in your line of business.

This approach has some huge paybacks. First, in surfing through a couple of dozen other companies' job descriptions you'll likely find one that's at least a 75% fit with what you're looking for. What about the job title? That's important too, since you want the title to be as descriptive and intuitive as possible when you start advertising your job.

Look also at educational requirements and salay ranges if those are posted. How do those align with what you were thinking? This is also a bit of a "market survey" for competitive salaries. As you home in on the appropriate job title, then neck down the search to your own geography. This gives you an idea of who your competition is -- who else nearby is looking for essentially the same person. If you're well networked, you might actually find a non-competitor who's looking for a similar talent and be able to compare some notes or candidate referrals.

Another good day at a CEBI meeting -- an idea that's portable across almost any type or size of business, and almost cost-free that will give you a huge leap forward in what otherwise would have been a daunting task.

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

 

7 Key Differences Between a CPA and a CFO

  
You're flying along, running your business, thinking you're making money. And then something happens -- all of a sudden, cash is a problem and you're worrying about making payroll. What happened?

Usually, it's because you didn't understand your financials. Not just your Income Statement (Profit and Loss), but that other nasty part of your financials, your Balance Sheet. I'm working through this problem with a business owner who thought someone else was watching his back. Who did he think that was? His CPA.

NEWS FLASH: A CPA is NOT a CFO.

In my business coaching practice, I generally find myself drilling into a client's financials, asking questions like "What's this item?", "Why did you book it that way?", "Why is gross margin % bouncing around month-to-month like a random number generator?", "Where's your company car on the balance sheet?", "And where's the loan for it?"

As I explain why those things are important (like you might want to borrow money or bring in an investor or sell your company some day), it's almost predictable that the client will ask, "Why hasn't my CPA ever asked me any of this stuff?"

Or perhaps you've approached a bank (or 4 or 5) for a loan, and after they look at your financials (sometimes quizzically, while looking at you over the tops of their reading glasses) they suddenly seem disinterested. You may have interpreted that as weak net income. It's just as likely that your financials just don't make sense.

So, here are 7 Ways a CPA is not a CFO.

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com