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High-Impact Executive Compensation Strategies for Fast-Growing Businesses

High-Impact Executive Compensation Strategies for Fast-Growing Businesses

This article was written by guest author Brandon Auster, Principal Consultant at BEA HR.

Acquiring and retaining top executive talent can be one of the biggest challenges faced by early stage and growing businesses. Maintaining a high-impact suite of executive compensation programs is a key strategy for meeting this challenge.  These programs must be viewed as an investment in growth and value creation that requires diligent focus in order to be maximized over time. 

Executive turnover is a disruptive and costly setback, with a financial impact of 100% or more of a departing executive’s salary.  Meanwhile, engaged leaders are far more productive and effective at rallying their teams to drive growth. Getting the right mix and design of rewards elements enables companies to attract, engage and retain top talent, while maximizing their compensation ROI and driving growth. 

Let’s explore some of the highest-impact compensation strategies that high-growth companies can employ in the effort to cultivate top talent, including:

  • Aligning compensation with company culture and strategy
  • Leveraging bonuses at every stage of growth
  • Rewarding real results
  • Leveraging uniqueness

Alignment with Culture and Strategy

Compensation is one of the most powerful and visible ways a company demonstrates what it values. 

Well-aligned compensation programs give companies an advantage in the talent market and are a catalyst for teamwork, goal achievement and thriving cultures. 

On the flip side, when full alignment is lacking, even the most well-intentioned and technically elegant pay programs can lead to disappointing results, discord among team members or tension between executives and ownership. 

Looking at the alignment of each individual rewards element is required, as is a holistic look across all elements of the rewards portfolio including base pay, bonuses, equity, perks and benefits.  This will ensure each element individually supports and drives the desired company results and culture, while together, the overall rewards program is greater than the sum of its parts.

Additionally, as a company grows and evolves, it must continually reassess its compensation programs to stay in alignment with new circumstances and objectives.

Bonuses for Every Stage of Growth

Bonuses can be a powerful element of an effective overall compensation program. It is a common misconception that cash bonuses are only useful for established cash-rich companies, while early-stage companies should focus solely on equity compensation.  However, the reality is that currently, almost three quarters of pre-IPO startups with less than $50M in revenue include bonuses in their executive compensation program.

Augmenting equity with cash bonuses can increase focus and urgency, while helping employees stay energized during the series of sprints required to generate long-term growth and equity payoffs.

Given their sometimes unpredictable and volatile pace of growth, smaller companies may face challenges when designing bonus plans.  This makes stress testing compensation plans against the entire range of possible business scenarios especially important.  It is required to fine tune plans to ensure that fiscal realities are well balanced with desires to pay for performance and retain key talent.  

Not only do bonuses encourage executives to contribute to the company’s short-term goals that will ultimately lead to its long-term growth, but they are essential in helping growing companies compete for high-quality executive talent with larger, more established organizations.

Reward Real Results

Annual bonuses are an extremely useful tool in the compensation arsenal. However, creatively supplementing a traditional bonus plan with a results-based program, such as one of those listed below can improve the impact and ROI of a company’s variable compensation investment even further.

  • Milestone Plan – payouts are tied to hitting a fiscal or other key objective.  This serves to: focus the team on specific goals, incentivize attainment of important results, provide execs with added pre-liquidity cash and celebrate short-term successes.  Costs can be fixed upfront at an amount that is commensurate with the value created by hitting the milestone.
  • Ad Hoc Awards – discretionary payouts are tied to positive performance.  While this approach is quickly gaining popularity below the executive level, it can also be used to recognize and encourage upside results for executives. Costs can be managed by pairing with a bonus plan that uses modest targets and/or maximums payouts.
  • Medium-Term Plan – a two to three-year medium-term performance period is created and payouts are tied to a key success metric such as revenue growth or value generation. These plans can provide liquidity if a longer exit period is anticipated and generate longer-term focus with more tangible risk/reward than either short-term bonuses or long-term equity.  

When clearly and proactively communicated, these plans contribute to a culture of transparency and goal-oriented thinking that is crucial to rapid and sustainable growth.  They lead executives to feel that their efforts are rewarded fairly while ownership has confidence that payouts are tied to results that also generate value for them.  This win-win situation creates a great foundation for long-term partnership and success.

Leverage Uniqueness

While smaller companies don’t have all the resources of major industry players, they possess many unique advantages in the war for talent.  Understanding these and using them for maximum impact goes a long way in attracting, motivating and retaining top talent.

Start with ensuring that people know how much the company is investing in them.  This is most effectively done through concise, graphical, high-impact total rewards and equity statements. Total rewards statements depict the value of base, bonus, equity, benefits and perks. Equity statements demonstrate current equity value and holdings along with the potential value derived from future vesting and growth in the company’s valuation. 

Closely held companies can exercise far greater flexibility in issuing equity awards than public competitors for talent.  They can use equity awards to reward strong individual or team performance, recognize milestone achievements or demonstrate commitment to key talent.  It’s also important to carefully develop a vesting and refresh equity grant structure that ensures everyone continues to earn equity for ongoing contributions while avoiding vesting droughts that entice them to look elsewhere.

Strong leaders seek out companies and roles where they will have significant impact, experience professional growth and contribute to an important mission.  Each small company has its own compelling story to tell current and prospective team members that other suitors for their services cannot match.  For example, will company executives: have greater access to the CEO, board, or other thought leaders; be part of shaping the future of an industry; work with uniquely passionate team members; build a team from the ground up?

Every company is unique.  The most successful ones understand and use their special blend of culture, opportunities, programs, perks and purpose to create a competitive advantage whenever possible. 

Key Takeaways

Highly capable and motivated executives are required for any company to generate sustained growth and succeed in bringing its vision to life.  Implementing smart and creative rewards programs are a difference maker in the ongoing effort to acquire, engage and retain top executive-level talent.  

The high-impact compensation strategies outlined above are a great start for any organization looking to optimize its approach to executive compensation:

  • Let business strategy and company culture guide compensation priorities
  • Leverage bonuses to engage employees at every stage of growth
  • Focus on bonuses that reward real results to fuel company growth and long-term success
  • Leverage the unique assets at your disposal to attract and retain the best talent

If you want to take your compensation strategy even farther, don’t miss our upcoming webinar on high-impact executive compensation strategies. We’ll delve more deeply into the strategies in this article and provide more strategies to optimize the effectiveness of your compensation plan, including the most effective approaches to equity grants. Register today.

How Great CEO’s Don’t Spend Their Time

The way that a CEO spends her time makes a huge difference in what gets done in a company. Few CEO’s get the chance to see into how other CEO’s are spending their time, they don’t have the chance to compare their decisions to those of others. So when I saw that Michael Porter published an extensive study called  The Leader’s Calendar  in the Harvard Business Review, I dug in.

1. They don’t get much “me” time.

The average CEO in Porter’s study slept just under 7 hours a night and worked out about 45 minutes a day on average. The most disciplined of them had about 3 hours a day of family time, but they were diligent about protecting it!

Running a business whether you are a small business owner, or a corporate CEO is all consuming. For your well-being, health and longevity you need to be diligent about treating your body well, getting good sleep and spending time on activities that nourish you.

2. They don’t hide in their office, work from home, or depend on email to get things done.

The best CEOs spend the majority of their time (61% in Porter’s study) face-to-face with their team, their clients and their partners. In order to do that they need to be very disciplined about the time they spend on email! Leaders naturally get copied on a lot of stuff that they don’t need to answer or take action on. Separating out what needs their attention (a small fraction) from that which can be ignored, archived or deleted is a major skill that CEOs need to develop.

Porter reminds us that nothing substitutes for face-to-face interaction.

3. They don’t let their agenda get set by others.

One of my best bosses used to tell me, “If you go to a meeting with Bill Gates, who’s meeting is it? It doesn’t matter who set the meeting, if Gates is in it, it’s his meeting!” He told me this story to remind me that, as a leader, we set the agenda. In Porter’s study, just shy of 50% of the CEOs time was devoted to driving forward the goals or objectives they had set for the quarter or year. They know what they want to accomplish and make sure that everyone else does too.

Porter calls out as a best practice CEOs who look back every quarter at where their time went the previous quarter so that they can eliminate those things that took them away from advancing their agenda.

4. They don’t ignore the fires.

About a third of the CEOs time was spent “dealing with unfolding developments”. There’s always something that comes up, employees that quit, customers who are disgruntled, competitors who introduce something new… Those things need to be dealt with in a timely way — but without getting distracted from their goals and agenda.

5. They don’t get distracted by the routine or ceremonial duties of the office.

A little over a half a day a week got eaten up by routine duties, or events where the CEOs presence added gravitas but didn’t advance any agenda. The best CEOs worked to minimize the time spent on these activities, substituting someone else, or eliminating the need for it altogether.

6. They don’t forget their team.

One of the most important levers for these top CEOs were their direct reports and their direct reports. The best CEOs know that nurturing and developing their team is a prime responsibility for them and allocate their time accordingly (about one-third of their time was devoted here). By staying in contact with this group they were able to develop an “early warning system” to see problems before they grew too large. It also helped to burst the bubble that sometimes surrounds the leader where all the information they get is highly filtered. Finally, it keeps them tuned in to the talent pipeline so that they can nurture the next generation of leaders.

7. They don’t skip meetings.

Meetings are highly leveraged activities for CEOs. They can see a lot of people face-to-face, they can advance their agenda, they can hear information straight from the front lines. When you are the CEO, going to meetings is your job.

I don’t think there are any of us who love meetings, but getting good at running an effective, time-efficient meeting is a core skill for a CEO.

8. They don’t skimp on alone time.

Once a CEO has been with their team and has soaked up information, they need time to think. Most CEOs do that best alone. The best CEOs spent about 25% of their time alone, yet it was often in small segments of less than an hour. Blocking off time for thinking was critical to the success of the highest performing CEOs.

Key takeaways
There is one resource that we all have in equal measure, time.  If you are going to be a great leader you need to be proactive in determining how best to use that time. Working through your team by seeing them in meetings and one-to-one, gathering your own information and spending some quiet time to think it all through will make you more able to advance your agenda and succeed as a leader. If you don’t you may experience business owner burnout.

About the Author
Brad Farris is Principal Advisor at Anchor Advisors, Ltd. Anchor Advisors helps small business owners to make the transition from the center of all things in their business to a leader with experts who report to them. To find out more visit anchoradvisors.com