While cash may be the life blood of a company, the employees are the engine.
As an entrepreneur’s business grows, that entrepreneur can no longer execute at the scale and detail the was once done in the early stages. The entrepreneur shifts from the do everything, be everything responsibility to becoming the visionary who focuses on the high value activity to best execute the mission of the company.
Obviously, the focus of an entrepreneur changing from start-up to the role of CEO/Founder/(Insert ‘Top Executive Leader’ phrase), does not mean that the transactional and functional activities go away. It simply means that the work must be satisfied by someone else. Thus, to keep the engine going, staffing (good) employees becomes a core component of success.
Finding the Needle in the Haystack
For those that have owned a business and been put in a position to hire an employee, new hires are one of the hardest parts of running a business. Hiring a bad employee can be – at best – costly. At worst, a bad hire can systemically toxic, create discord, and create material setbacks.
Hiring the perfect employee is unrealistic but hiring really good staff is essential to free up the founders and executive management to drive the growth in a company. The underlying process of determining if ‘Candidate A’ is a good fit for the job goes well beyond the scope of this article. However, a key element relates to determining the compensation element and the actual recruiting of new team members.
Recruiting Employee – A Financial Focus
From a financial lens, the process of identifying new hires begins as part of an operating plan (if done properly). As business is expected to grow, business planning creates a roadmap so that actual ‘heads’ are earmarked through organic growth or triggering events. Either through annual planning or rolling forecasts, future hires to perform specific roles are budgeted to best manage cash flow and long-term profitability.
When the time does come to hire and a candidate selected, the big lever is salary. Market rate compensation (in most cases) is the first talking point that calibrates experience, function, and industry-specific consideration. Understanding the ‘range’ of salary that will attract the right person has become more and more key as labor shortage is prevalent. As well, there is a real need to strike the right balance of equity with current employees. A CFO is properly in tune with operational and human resource leaders to plan for the right resources so that competitive offers can be extended.
The two B’s, Benefits (“Benes”) and Bonus (Broad-based Incentive Plans), are also up-front parts of a package, but less subject to negotiation. Rather, benefits are extended ubiquitously across an organization while a bonus plan is typically arranged based on corporate design, performance, and seniority. Broadly, companies should benchmark against comparable companies and work in-tandem with finance departments to balance systemic operating expenses.
How much is a good employee worth… keeping? (Retention)
Salary, benefits, and bonuses are solid, opening ante bids to attract talent. However, finding a good employee can be like catching lightning in a bottle… rare, but when it happens, you do whatever you can to keep that good employee.
Chief Culture Officers (a relatively new role in larger companies) focus on employee engagement. Through programs, communication, events, and other qualitative perks, keeping an army of diverse employees positive and focused on mission of the company is an active role this generation had that prior generations did not. Studies show that money is not everything and that the experience/environment is crucial to a happy work force.
And while money isn’t everything… it is super important and much more for senior contributors and leaders. Moreover, how do we align compensation with corporate goals without breaking the bank?
For certain roles, the direct contribution and effort can drive the operational growth and profitability of the company. In kind, bonuses outside of a broad-based incentive plan are often created to drive value beyond the ‘staff’ level. Sales professionals embody this type of motion; typically carrying a ‘base + commission’ model that incents selling more units or dollar value of new business within a company.
For the non-sales professional, putting a performance bonus is intended to drive growth that surpasses ‘business as usual.’ As businesses scale, the owner cannot drive the same level of efficiency as once was done in the days of start-up. Hiring people with the skill to ‘take the business to the next level’ may extend across the entire lifecycle of a business. Innovating new product or services, delivering more efficiently or creating a better customer experience are areas where functional disciplines, practice leaders or niche-based contributors can deliver above and beyond. Performance-based plans allow for concrete, metric-driven results that yield empirically, calculated bonuses.
A softer version of a performance-based measurement is the bonus that has discretion. Typically, Discretionary Bonuses are smaller (acknowledging effort-based activity) or event-driven (i.e. a large transaction or internal success.)
Generating a long-term view can encourage the employees to stay focused on the mission. Real ownership in a company ensures that an employee is aligned to the owner(s)’ objectives can create significant growth.
A temptation by an owner is to horde ownership and keep 100% ownership for not only control, but maximum payout. A strategy such as this rewards well upon a successful exit, such that the payout pie is not split (diluted).
However, an employee or group of employees who have an ownership stake may create value for your business that far exceeds what a single owner could achieve. Long-term equity incentives are fairly-wide in design, whether it be geared to an individual, a small management team, or a broader, employee ownership program.
With an individual, we may see certain strategies employed to have that individual act as a CEO or COO and effectively run the company. Depending on the structure of the company, individuals may run business units or functions that require autonomy and self-motivation/sufficiency. An ESOP (Employee Stock Option Plan) extends ownership to all full-time employees. Each program may differ with the terms and magnitude, however, the goal for each is to shift from an employee mind-set to an owner. Whereby, the expected goal of such an employee incentive program will grow the company and its value that far exceeds the dilution of the existing ownership.
Ping Pong tables. Offsites. Corporate SWAG (Stuff we all get).
Various company culture rewards this type of ‘fuzzy’ benefit. How do events like ‘Taco Fiesta’ or a ‘Mardi Gras Casino Royale’ pen out in terms of a hard ROI? What is the culture value that can be indirectly attributable to productivity and employee harmony?
From a CFO perspective, they may not be the first in-line to champion this type of expense. In an advisory function, the event should be thought about in the context of a budget, adhering to corporate standards. As well, these are some of the first things to get cut when cash flow gets tight.