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Employee Morale – How Does it Affect Employee Performance?

May 19, 2010 by Frank Goley, Business Consultant

 “Employee X” wrote an eye opening article in the January ’09 Entrepreneur Magazine, titled “Why I Finally Quit.”  Employee X, wishing to remain anonymous, is “a bright, 28 year old employee with a degree from a top university and a ton of high-level computer experience [who chose to] bail on the Company he really believed in.”  He was willing to accept a salary “$20,000 below market rate with pretty pathetic benefits while working up to 60 hours a week in a high stress environment.”

Why He Took the Job

1.     He was part of a team that would create a revolutionary product.

2.     Had strong incentives to help the Company achieve success with a Stock Option Plan.

Why He Left the Job

1.     Owners hired new managers from the outside and the corporate culture completely changed.

2.     The trust employees had built together was immediately extinguished by constant distrust and monitoring by the new management team.

3.     One evening at 9pm, Employee X was asked by a Manager from a different department why he was leaving work so early.

4.     Low Employee Morale set in under the new management scheme; hours were long with little payoff; no downtime between projects; and labor lawsuits were filed by employees.

5.     Employee X asked for and received a $10,000 raise but it was “too little, too late”.

6.     A mass exodus of employee talent ensued.

7.     Employee X went to work for a 10 year old company in the same industry; got paid market rate and overtime; and most importantly, has “an employer who invests in me [Employee X] as an employee, via everything from extensive training to Company barbecues….”

8.     When asked what would keep at his new job five years from now, Employee X responded, “if they let me telecommute at least a few times a week, I’d be more than happy to do whatever it takes to help my new employers succeed.”

Lessons to be Learned from this Story

1.     Company A could have successfully retained Employee X if they had held on to their team oriented corporate culture which fostered trust, sharing, openness, growth and hard work that was acknowledged.

2.     Instead, Company A’s lack of effective Compensation Planning and Proactive Performance Team Building lead to a situation where a happily underpaid, hard working, talented employee base went looking for greener pastures.

3.     As illustrated, retaining talent isn’t about pay.  It is more about contribution to the Company’s success; progressive compensation structures; open communications; trust fostering culture; team oriented success; investment in an individual’s growth; and smartly placed perks.

Resource: For more information on an integral part of a Company’s Compensation and Retention Plan – Perks and Employee Morale, please refer to my article on Small Business Recessionary Tactics.

Conclusions

The Central Point of this article: Compensation Planning, to be effective for both the company and employees, needs to address certain key areas in a comprehensive, yet targeted package:

1.     Built-in Incentives which aren’t a burden to the company’s cash flow or tax liability yet provide key employees rewards for growth.

2.     Business Continuation Planning and Key Employee Protection

3.     Performance Pre-View System which proactively rewards individual and team success toward achieving the Company’s Strategic Plan’s Goals.

4.     A Comprehensive, Cohesive Benefits package which isn’t held to be the Golden Parachute, but rather, a strong component of a Company’s overall Compensation Plan, yet minimizes the financial burden on the Company.

5.     The level of Pay is not the central component of an effective, attractive Compensation Package.

6.     Effective implementation of a Company’s well-designed Compensation Plan is vital to and oriented toward Employee Moral.

Posted in Business Compensation Strategies. Comment

Employee Performance Reviews – Are They Effective and How do They Fit in a Company’s Compensation Structure?

May 18, 2010 by Frank Goley, Business Consultant

The Annual Employee Performance Review should be a thing of the past.  Performances should be gauged by comparing the Actual and Targeted Budgets for Company Divisions, and how employees in those business units contributed or hindered the Company’s Budget.

Dr. Samuel Culbert, consultant, author and professor of management at UCLA (Reference: Wall Street Journal, October 20, 2008, The Journal Report, Human Resources Section, “Get Rid of the Performance Review” by Samuel A. Culbert), argues that the traditional Performance Review is detrimental to company performance; a prime cause of low morale; and damages inter-company communications and teamwork.  Dr. Culbert lists the negatives resulting from how traditional Performance Review is typically implemented:

1.     Two Different Mindsets:  The boss is thinking about performance improvements, missed opportunities, skill limitations and team dynamics.  The subordinate is concerned with compensation and job advancement.

2.     Performance doesn’t Determine Pay Levels:  As much as prevailing market forces do along with, employee experience and Company Budget constraints. 

3.     Subjective Objectivity:  It can be argued that a Performance Critique is as much an expression of the evaluator’s self-interests as it is the subordinate’s strengths and weaknesses.  The newest performance review method, 360 Degree Feedback, gives anonymous feedback on an employee without any credibility built into the evaluation method.  It is too easy for self-interests to emerge and axes to be ground with such a subjective, unaccountable performance evaluation method. 

4.     One Size doesn’t Fit All:  Cookie cutter Employee Performance checklists often create a situation of boss pleasing behaviors verses doing a good job.  Different people with different functions and backgrounds shouldn’t be judged on the same rating scale and one size fits all system. 

5.     Personal Development is Impeded:  Subordinates are often intimidated by a Boss’ involvement in job performance as the Performance Review Structure discourages self-honesty about an employee’s short comings and areas which need improvement.  Subordinates feel self-analysis and self honesty could very well come back to haunt them during the evaluation.

6.     Hindrance to Effective Teamwork:  The most important team dynamic, that between boss and his or her subordinates, is undermined by the Performance Review process.  The Boss is preaching teamwork, but the Performance Review process is one-sided, as the boss sees him or herself as the evaluator and doesn’t engage his team of associates.  Dr. Culbert, calls it like it seems to the subordinate:  “… a ubiquitous need for subordinates to spin all facts and viewpoints in directions they believe the boss will find pleasing.  It defeats any chance that the boss will hear what subordinates actually think.”

7.     Immorality of Justifying Corporate Improvement:  At first I thought, as a Business Consultant, this is an awfully “strong” statement by Dr. Culbert, but after reading the first sentence in this section, I think he makes a valid point:  “I believe it’s immoral to maintain the façade that annual pay and performance reviews lead to corporate improvement, when it’s clear they lead to more bogus activities than valid ones.”  Performance Reviews tend to dispirit the employee and create distrust and cynicism.  The amount of inefficiency created by “cover your butt” mentalities is probably much more significant than managers know.   

Dr. Culbert laid out 7 key areas where Performance Reviews do nothing to enhance performance, and in fact, create severe inefficiencies within a company, causing a negative impact on the Company’s bottom-line and poor employee morale.  Dr. Culbert’s solution to the “one-side-accountable, boss administered / subordinate-received performance reviews is simple: “…two-sided, reciprocally accountable, performance previews.”  Let’s break this down into parts:

1.     Two-Sided:  Open communication between the boss and his or her team members on a daily basis.

2.     Reciprocally Accountable:  The boss is accountable to the subordinate as much as the subordinate is accountable to the boss in meeting pre-scribed expectations and goals. 

3.     Performance Preview:  A meeting of the minds between boss and subordinate where they together layout a joint business plan for the month, quarter and year with periodic scheduled “check-ups” along the way not so much to gauge progress as much as discuss difficulties, as well as, successes in meeting the plan’s goals.  This will result in modifying the plan along the way as circumstance dictates.  Everyone under the Boss clearly understands the Company’s goals, the team’s goals and how each team member will contribute to it.

Dr. Culbert’s reasoning behind Performance Previews makes great sense:

1.     Boss’s role is to “…guide, coach, tutor, provide oversight and generally do whatever is required to assist a subordinate to perform successfully.”  I like this system because it is the boss’s job to ensure subordinate success. 

2.     Eradicates self-serving boss behavior and 360 Degree finger pointing, hold-a-grudge fellow employee tactics.

3.     It is a Pro-Active Process, not reactive.  Keeps the focus on the future and the subordinate is viewed as partner who contributes significantly to the Company’s success. 

4.     Replace the one-size fits all Evaluation Check-off List with custom-constructed Inquiries tailored for each employee the boss oversees.  Once the boss has exhausted all his questions about how a subordinate thinks he or she can better and best perform work, the boss should ask the subordinate what else the boss needs to know.  The boss needs to know how the employee will achieve performance goals, and what help the employee requires from the boss.  An individual and team business plan is built so all team members know their roles, the boss’s expectations and company performance goals.  The Business Plan becomes a pro-active tool for the Boss to manage and assist his or her team.

Dr. Culbert argues when the Performance Review is taken away and replaced by the Performance Pre-View, “…people will find more direct ways of accomplishing tasks.  Accountability comes from team work; what the boss-subordinate team accomplish together.”  While job improvement comes from the individual worker, an environment characterized by  “…a trusting relationship where they [subordinates] can ask for feedback and help when they see the need and feel sufficiently valued to take it.” 

As a Business Consultant and Entrepreneur with over 20 years experience working with different corporate cultures, I completely agree with Dr. Culbert’s Performance Preview strategy as it contributes to the company’s bottom-line profits, while the Performance Review framework detracts from company goal achievement and inhibits profitability.  In the end, shouldn’t Performance Systems be about a Company’s Profitability and individual’s growth?  Of course it should be.  Bravo Dr. Culbert.   Performance Pre-Views should replace Performance Reviews in a Company’s Compensation Structure to achieve better subordinate-manager relationships and common-goal-teamwork toward achieving a Company’s Strategic Goals.

Let’s take this a step further to see its real benefit. Doesn’t Performance have a lot to do with a company’s Compensation Strategy, contributing significantly to the bottom line?  Well, I say, everything!  Fostering an atmosphere and structure of bilateral relationships between managers and team members should be built into a Company’s Compensation Plan, as that achieves:

1.     Common goals toward achieving company success.

2.     Higher individual productivity

3.     Accountability between team members and management, as well as, upper management and the executive level.

4.     Happier employees work harder and smarter

5.     Retain highly valuable, well trained, experienced employees as this system fosters trust, improvement, loyalty and advancement.

6.     Achieves the same objectives as do Stock Option Plans.  As people improve and add to a Company’s success, the reward of stock appreciation is the financial payoff, more so than pay raises.

However, the question to be asked is where do Benefits fit into Compensation Planning for new and growing small companies?  Well, I argue that it is more a part of employee morale than it is a part of the compensation package.  Ok, so you maybe scratching your head on this one as Benefits are often viewed as an integral component of a compensation package.

Where most companies dangle the Benefits Package, which in turn can be very expensive to the company, as a carrot to attract and retain talent, the most progressive companies understand its importance in the grand scheme of things.  Young, growing companies have a hard time affording comprehensive Benefits Packages and find them to be a big strain on cash flow.  However, if your Compensation Package includes Stock Options, Tax Preference Compensation, Key Person Protection and a Proactive-based Performance System, then the Benefits Package becomes less the focus, as does pay scale for that matter.  Let’s not, however, diminish the fact that Benefits are critically important to retaining and keeping talent, but if your Compensation Structure is designed as previously indicated, the entrepreneur will find employees who are willing to defray the cost of Benefit Packages with the Company via cost sharing, HSAs, etc.

A Benefits Package should be comprehensive in its offering, i.e. Health, Disability, Life Insurance and a Retirement Investment Vehicle, but if designed as part of a whole, a progressive Compensation Package whose sum of the parts is very competitive in attracting and retaining top talent, then it becomes more a question of structure than importance.  The best advice I can give to companies, as a Business Consultant with a Financial Planning background working with small businesses:  hire a Financial Planning Expert who specializes in designing and implementing Benefits Packages which aren’t seen as the focal point of a Compensation Package but a part of.  If designed and packaged properly, a Benefits Program does not necessarily have to drain cash flow, and for minimum financial contribution on the employee’s end, it can still be an attractive incentivized component of the overall Compensation Package. 

I highly recommend using a Financial Services Company to package the entire Benefits Plan as the bundling will save you significant dollars, and the employee will have a cohesive, very comprehensive plan which offers a singular, un-complicated customer support system.  It is vitally important a Company utilize the expertise of a Benefits Expert to find a Financial Services Company which offers substantial-breath of investment options and benefits to satisfy a wide range of employees, managers and executives.  A well-crafted Benefits Package should pay for itself and not be a burden on Company Cash Flow. 

I also make the contention that Pay Scale is not very important in the overall scheme of things as long as pay is not the focal point but a part of a Progressive, Incentivized, Comprehensive, Competitive, Proactive based Compensation Plan.  Highly talented and experienced people will work for less pay than the market offers if a Company offers a Compensation Package as prescribed in this article. The Performance Preview plays into this fact that a fair employee and executive evaluation and education system considers Compensation Structures and Benefits, and if done properly, will save the company tons on their Compensation Program yet still promoting higher levels of profitability. It is necessary to have a good balance between the two areas to attract and retain talent at a level a company can afford and still have plenty of room to grow.

Posted in Business Compensation Strategies. Comment

Building an Effective Compensation Program for Small Businesses

May 17, 2010 by Frank Goley, Business Consultant

By understanding the basics of Compensation Plans, Packages and Structures, a Company can effectively lay plans to help incentivize Employees toward achieving Company Goals.  A well designed and implemented Compensation Program will pay for itself in increased company profits. Here are the significant areas of the business to consider and the applicable compensation strategies to consider.

A.    Ownership

1.     Founders Stock Strategy

a.     Issue convertible preferred stock to outside investors and reserve common stock for founders and key employees.                                     

 i.        Convertible Stock should have a liquidation preference large enough to eliminate the book value of the Company, and in subsequent funding rounds the liquidation preference of each stock class should be increased to cover the current book value.                                    

 ii.        The Convertible Preferred Stock should have Senior Dividend, Preemptive and Redemptive Rights; registration rights and rights of co-sale.                                   

iii.        Holders of Common Stock own only the remaining Shareholders’ Equity after the convertible stock preferences has been satisfied.                                   

 iv.        The Goal:  The superior rights of the Convertible Stock, when combined with the probable profit loss of a new venture, will substantially reduce the taxable fair market value of the Common Stock.  Founders and Key Employees can obtain Common Stock at significantly reduced prices and tax liabilities than paid by outside investors. 

Resource:  For more information regarding Convertible Preferred and Common Stock, along with more details on stock dividends, rights redemptions, liquidations and anti-dilution provisions, pre-emptive rights and so forth, please visit my article on Funding Sources for Your Business.

2.     Stock Options Incentives

a.     An Incentive Stock Option Plan (ISO) provides employees with tax preferable stock acquisition.

b.    There are many rules, conditions and tax implications for an ISO, so the ISO Designer should be knowledgeable with factors the IRS considers instrumental to a fair market stock valuation.  Penalties can be severe for miscalculations.

c.     A Qualified Stock Plan is a fantastic way to attract and keep talent, as long as, the design and use of the program understands potential issues, such as the Alternative Minimum Tax, Sequential Exercise Rule, Loans, Holding Period Requirements, ISO Exercise Conditions, Stock Exchange and Fair Market Valuation.

3.     Non-Qualified Stock Options

a.     Maybe good to mix with ISO plans for certain employees to balance tax implications.

b.    Excellent vehicle if want to grant an option to an Outside Director, Consultant, Adviser, or Supplier.

c.     Issues to consider when utilizing a Non-Qualified Stock Option Plan include Inadvertent ISO Qualification; Institute withholding, Shareholder’s Grants, Loans and Valuation Methods.

d.    Considerations:  In some situations a Non-Qualified Option can be more advantageous over an ISO; however, an ISO has a lower tax burden at exercise, and the time value of money is superior.  Also, long-term capital gain implications are often better tempered through an ISO.  Again, it is very important to hire experts in this area to fully explore Qualified and Non-Qualified Stock Option Plans. 

4.     Subordinated Common Stock

a.     Junior Stock can allow key employees of startup firms or high growth companies to acquire a subordinate class of Common Stock at a fraction of the value of regular class Common Stock.

b.    Have an option to possibly convert into the regular Common Stock.

c.     This stock structure awards key employees from substantial improvements in the Company’s Sales and Earnings.

d.    The associated rights of Junior Stock conveys inferior rights to those of regular Common Stock, such as, reduced voting and dividend rights, and inferior liquidation preferences.

e.     However, if the Company achieves specified Strategic Goals in Sales and Net Income, the Junior shares convert to regular shares on a one to one basis. 

f.     Junior Stock Plans should restrict ownership of shares to continuing company employees and include transfer limitations, repurchase provisions and rights of first refusal. 

g.    Junior Stock can be offered through an ISO or Non-Qualified Stock Options.                                        

i.        There can be certain tax preferences to a Junior Stock Option Employee when purchased through a Qualified Plan, yet issues of Valuation, Lapsing Restrictions and Conversion should be considered by a tax professional.

h.     Goal:  Junior Common Stock Plans is a very economical compensation structure for a Key Employee; yet clearly incentivizes Employees to contribute to the overall success of the Company.  While Convertible Preferred Stock and Junior Common Stock have many common features, the goals of each are opposite:                                        

i.        Convertible Preferred goal is to depress value of regular class stock into which a secondary class will convert.                                       

 ii.        Junior Common Stock’s goal is to depress value of the secondary stock class which will be converted to regular class.

B.    Harvesting Value:  Rule 144 Implications

1.     Founder’s Stock is subject to Rule 144 Restrictions, which sets standards and procedures by which restricted and control stock can be sold.  The rule specifies when, how and how much restricted stock and control stock may be sold in the public market place by private company owners and is subject to the SEC’s Securities Act registration rules. 

2.     Restricted Stock is stock acquired from a Company which has not been registered with the SEC through a Private Placement. 

3.     Control Stock is stock owned by Company Principals who control the business affairs of the stock issuing company, which would include Officers, Directors, Major Shareholders and individuals who influence Management Decision Making. 

4.     Changes:  There have been substantial changes in Restricted Stock Transactions whereby Small Cap Venture Funds have incentives to buy into small companies.  The holding and sales periods have been significantly shortened.  Please confer with a Tax Professional to measure any Rule 144 implications to your Company’s Stock Structure and Plans.  These changes to restricted stock holding periods have made this type of stock a lot more marketable, as a result, much easier to determine fair market value. 

5.     Implications: Expert counsel should be utilized when designing your Company’s Compensation Structure and Package to fully understand the extent of Rule 144 regulations, penalties and implications.

C.    Returning Ownership:  Termination Considerations

1.     A Company needs to be protected against founders, key personnel and major shareholders departing, to include disability, termination and death.

2.     Buy/ Sell Agreements help a company retain the ability to recapture the value of stock and ownership, normally through the use of insurance policies to fund the Buy/ Sell Agreement.

3.     A Buy/ Sell Agreement will protect the entrepreneur’s return on his or her efforts.

4.     Other forms of protection are utilized through Vesting Programs for Stock Options and profit-sharing plans.  As a Company matures and achieves success, vesting plans can secure key employee loyalty while maintaining adequate incentives to excel and increase company profits. 

D.    Conclusions

1.     A company’s choice of Compensation Structures and Programs should reflect both its ability to reward and incentivize employees and affect the company’s future growth.

2.     Typically, Founder’s Stock, an ISO and Non-Qualified Stock Option Plans are often best suited for early stage companies, while Junior Common Stock Plans may be more appropriate for recent IPO companies or later stage private companies.

3.     Experts in tax, accounting and compensation structure, regulations and laws should be sought as laws governing compensation structure and package design and implementation change constantly.

Posted in Business Compensation Strategies. Comment