My title is a riff on Tom Nixon’s recent blog post, “Sorry, but your website’s broken.” I’d summarize what Tom wrote as: Websites and Web marketing are so complex that, unless experts are actively and regularly managing them for you, you’re almost assured to have a “broken” site that is not doing what you want it to.
Well, I’m here to say…
If you’re a Second Stage company, I’m pretty sure your compensation program is broken.
There are lots of complicated areas in strategy and management, but I think compensation has to take the crown. On top of the usual issues that show up in strategy – prioritization, coordination, planning for the future, resource allocation – compensation is intensely personal and intensely important to the ability of the business to create value and stay competitive.
Pay people too much, and you rob the business of resources it needs elsewhere. Pay people too little, and you won’t get the productivity you need and want, and you may lose key employees, too.
As my other posts show, management gets much more complicated in Stage 2. Let’s look at what goes on with compensation in Stage 1 and Stage 2 so that we can get some sense of how to solve these challenges.
In Stage 1, compensation is relatively simple. The rationale for pay is a combination of intuition, personal opinion, emotion and limited budget (don’t underestimate the ability of emotion and a limited budget to hide compensation problems). Job descriptions are usually pretty broad and flexible, and the team is small so that evaluation can be done based on personal experience. Changes are either ad hoc corrections (“We really need to do something about Jane’s salary – she’s not making enough for what she does for us”), or automatic each year.
Complexity creeps in – usually unnoticed – to the compensation “ecosystem” as a business grows. As people are hired, job descriptions need to become more specific. But the situation is fluid enough that duties often shift as the company adapts to new positions, or as it continues to change and develop new needs. As roles become more specific, the pay differentiation among those roles needs to get more specific, too. Yet there is more budget available, so there’s more flexibility, and rules can be bent if intuition or emotion drive them to be.
And, surprisingly, the overall reward “horizon” of the business – whether people get rewarded for their value in the long-term, medium-term, or short-term –actually shortens as the business grows. In Stage 1, because budgets are limited, everyone knows that the payoff comes in the long-term. People hired during Stage 2, though, usually don’t have the same risk profile and expect to be rewarded more in the short- and medium-term. This shift of horizon presents a big challenge for most Stage 1 leaders because their reward model over-emphasizes long-term reward.
How do most Stage 2 leaders deal with all of this complexity…well, let’s call it what it is…all of this confusion? They create a compensation “black box” that makes compensation decisions, but doesn’t show how they are made. The black box is how the leader combines loose performance data and gut feeling into subjective assessments about how people are performing and how they should be rewarded. This process is usually managed by the founder of the business, who has a high degree of credibility and power in the company. As a result, the black box is usually able to hold the (broken) compensation program together even though it no longer works for the business.
The black box has two problems: First, it lets the business off the hook in deciding how value is created and what should be rewarded. Second, it confuses people about why and how they are being rewarded. A typical comment about a black box program (this one is an actual quote): “There have been years when I did a great job, and I get a tiny bonus. And then there are years when I don’t really contribute much, and I get a huge bonus. I think [the founder] has a sense of who should get what, but I have no idea how he makes the decision.”
Where does the black box need to evolve to? What does compensation need to look like in Stage 2?
The compensation program needs to have clear rationale for how and why people will be rewarded (there are 8 compensation drivers that a leader can choose from to develop that rationale). Compensation needs to be aligned with strategy – for example, if the strategy calls for going into new markets, then the comp program needs to reward activity along that path. The program itself needs to be multi-dimensional – in what is evaluated and what rewards are given. There needs to be a distinct pay for performance component, and the way that works needs to be defined at the start (i.e., explain at the start of the year how performance will be assessed over the coming year, not ex post facto when the year is over). And pay changes should not be ad hoc or automatic – they should be planned and connected to an explicit purpose.
With everything that is going on in a compensation program, it’s likely yours is broken. And compensation programs are a challenge to fix. But the long-term cost of not fixing them is far worse.
I hope you decide to fix yours. And if you do, please, please, please, go slowly, expect it to take a lot of work, stay at it, involve your staff and get help from someone with expertise and experience.
Read more blog posts like this on Crain’s Detroit Business.
One of the overriding themes of Crain’s Scaling Up Fast session in September was that managing people is a key to Second Stage success – and it takes a lot of work.
In Stage 1, hiring decisions are made intuitively, and, as Second Stage executive Tom Nixon of Identity Marketing & PR described during the event, you can mostly hire people who you know, or who someone you trust knows. Plus, once the person is on board, the team is small enough that leaders can use the usual Stage 1 mix of “gut feelings” and direct business results to assess whether the person is effective.
As a business gets bigger and more complicated in Stage 2, hiring gets more complicated, too. There are more hires that need to be made, more people who need to get along with the new person and more positions and responsibilities to coordinate. Because of the number of hires, and/or the specific skills needed, your network can’t provide you with all the hires you need. And, to top it off, evaluating performance gets harder because each person’s performance is more dependent on team, culture and behaviors that can be hard to evaluate on an individual basis. There is also a more indirect relationship between each person’s efforts and the results of the business.
So, how do you make the right hires?
I have hired about a half-dozen people for my clients over the last three years – mostly COOs, but also other managers – and all of the clients who used the steps I outline below made successful hires who are still at their respective companies.
There are four steps involved in an effective hiring process for Stage 2 companies:
Position Plan: A successful hire starts by defining the needs of the position. At its most basic, this involves a “job description,” but I’ve found that a broader position plan forces the hiring team to talk about some of the harder issues. Job descriptions are often lists of tasks, and the context for those tasks needs to be clear to position the job for success. In addition to the usual components of a job description, I like to make sure that the position plan clarifies the business factors driving the need for the position, the results that are expected from the position and the priorities for the next 12 months. Most job descriptions have at least 10 responsibilities listed, and many have 20 or more. But only a few of those are the key, core responsibilities for the immediate future.
Hiring Plan: Once it is clear what you are looking for, then it is time to determine how you are going to find and select the person. Where will you find candidates? What will the interview process be? Who will be involved? How much time and budget are you allocating? In addition to the nuts and bolts of the search, I think it’s also good to discuss (and document) the risks and concerns you have for the search and the selection criteria you’ll use at different phases of the search process.
Hiring Process: I typically use a hiring process with six-to-eight discrete phases. It starts with creating a candidate pool (I think the odds of a successful hire correlate closely to the size of the initial candidate pool), has two screening steps, follows with two-to-four phases for evaluating the fit of the candidates and then finishes with negotiating the deal.
By starting with an adequate candidate pool, having distinct phases with different purposes and “down-selecting” the pool with each phase, the process gradually brings into focus the most qualified candidates. Just as importantly, it enables the hiring team to clarify exactly what the team is looking for. This is a particularly good – I’d say necessary – process when you are hiring for a newly-created position.
On-Boarding Process: The hiring process does not end until the new person is integrated into the business, and that definitely does not happen on the first day of employment (much to many Stage 2 leaders’ chagrin!). When I put together an on-boarding plan, I cover three areas: the tasks, the team and the company. New hires need to be integrated into each of those areas, and the introduction process is usually different for each.
Now that you have an idea of the four steps, let me make a few points about doing all this work.
First, it’s my belief that you can invest the time before the hire, or after the hire – but the amount of time is going to be the same. So, it’s not a question of whether you should spend the time; it’s a question of when you do it. And, if you do the work before the hire, you’ll have a lot more flexibility. The reality is even more dramatic than that – this work is almost always much less expensive to do beforehand than afterward.
Second, not every position deserves the same amount of preparation. Invest more time in planning and managing the more important or challenging hires, and invest less time in the less important or challenging ones. But follow the steps to some degree in all hires.
Third, these steps do not need to take a long time or be overly elaborate – but they do need to be talked about enough and described clearly enough that the team has a common understanding of what is happening.
Last, if you don’t have any experience in making the kind of hire you need to make, you need to know that your chances of a successful hire are meaningfully lower, even if you do use the steps above. Much of hiring is about knowing what to look for, and the reason that recruiting firms can be worth their price is that they know what to look for. If you or someone on your team doesn’t have experience in the position you’re hiring, consider getting additional help from someone who does.
Your success in Stage 2 is largely connected to your ability to build and manage your team. And that is tied to your ability to change from the quick and intuitive hiring process that worked in Stage 1 to a more disciplined approach in Stage 2.
Read more blog posts like this on Crain’s Detroit Business.
I recently interviewed the panelists of Crain’s Detroit Business’ upcoming Scaling Up Fast workshop, and I recommend you read the interviews if you want a sense of what scaling your business involves.
One of the reasons why Stage 2 is special is that it is the stage when a business is most idiosyncratic – when the mix of business dynamics, company culture and individual personalities has the most variation, because a second stage company is big enough to be complex and small enough that individuals can be more important than systems.
So, one thing that stands out in the interviews is that each panelists’ situation is different. At the same time, I think there are several themes that are worth highlighting…
Scaling requires a higher-risk, higher-reward mindset. The panelists talk about going after the bigger opportunity that’s available and taking more risk to do that. There are many Stage 2 companies that are not interested in scaling (many quite successful) – but if you want to scale, you have to want a bigger reward and have a tolerance for higher risk.
Scaling takes short-term sacrifice. Since the purpose of scaling is for a bigger reward that is in the future, the panelists highlighted that scaling took near-term investment and commitment. It’s unusual for a scaling company to “have its cake and eat it too,” and it’s important for Stage 2 leaders to have the right expectations about the significant investment that scaling takes – especially because almost all companies make costly mistakes along the way. To understand more about this sacrifice and the mindset needed to manage it, read Seth Godin’s The Dip.
Vision is important. The panelists all mentioned the importance of their company vision for driving their scaling efforts and for providing their teams with a common purpose. I have blog posts on how Stage 2 companies should use visions here and here.
People are a key challenge. There are a number of times in the interviews that the panelists talk about the importance and challenges of managing their people – getting the right people, hiring at the right time, creating a team environment. People are complex, and managing people at the same time that the business is changing is hard. In fact, though it wasn’t covered in the interviews, I suspect that the panelists would say that you can work either on creating the infrastructure for scale (systems, processes, structure, etc.) or on staffing up, but you should try to avoid doing both at the same time.
Scaling is driven by internal passion or external opportunity. When the panelists described their scaling efforts, they talked about either creating a bigger impact and legacy, or capitalizing on a bigger market opportunity. You have to have one or the other to make the effort involved in scaling worthwhile, and if you aren’t clear on your passion or your opportunity (believe me, one or both will be challenged in the scaling process), then trying to scale will give you more problems, not fewer. Get clear on your passion and your opportunity first.
I’ll be facilitating one of the table discussions at the Crain’s workshop, and I hope you’ll attend and explore these ideas first-hand.
Read more blogs posts like this on Crain’s Detroit Business.
Earlier in the summer, I wrote about Stage 2 leadership. If you don’t have time to look at that post now, here’s an important excerpt:
For someone with profit and loss responsibility, traits that are assets for an individual are liabilities for the company. What that means is the things that make you strong as a leader – your ability to design a product, sell, motivate others, make quick decisions…whatever your unique strengths are – at the same time create vulnerabilities in organizations you lead. Why? Because organizations need balance, and your strengths create blind spots – and your blind spots create imbalance.
So, as a Stage 2 leader, your job is to counter-balance your strengths! The opposite of what your job was in Stage 1!
Since leaders often have to change their style as the business goes from Stage 1 to Stage 2, I promised to give some tips for how Stage 2 leaders can manage that change based on the work that I’ve done with Stage 2 executives. Here they are:
Motivate: Change is hard – if it weren’t, we’d be doing it already. You need to have a good reason to go through all that effort. So, to change, you need to clarify why you want to do it – what’s the bigger purpose? As part of that process, clarify what you want the outcome to be – what success looks like and how that will contribute to your bigger goals. Lastly, have reasonable expectations. Moderate change takes three-to-six months of effort. Deep change should take a year or two (or longer), though you should start to see meaningful progress in three-to-six months.
Assess: Our most important liabilities are the ones that are blind spots, so it is important to get an independent view about yourself. This could be an assessment that shows your style in an objective framework. (I mentioned the assessment from Perth Leadership Institute in my last post, but there are many out there, and I work with several). It could be you asking for feedback from your peers, colleagues and subordinates – and really listening to that feedback, non-defensively. It could be talking with a coach. If you are not used to working on your own development, then the assessment may be challenging for you, so pick whatever method you are most comfortable with.
Change your “mental model”: For us to change, we have to think of ourselves, or our situations, differently. We can’t create a solution for a problem until we think of the problem differently! For more on mental models, see my post earlier this summer called Axes, Chain Saws, and Mental Models.
Get help regularly: To make an important change in yourself, you are going to need repeated, consistent help from someone else who has the mental model that you need to change to. This could be a co-worker or a coach. It could also be a CD that you listen to in the car, or a book that you refer to regularly.
Keep at it: Repeat the activities I listed above on a quarterly or semi-annual basis. Re-motivate yourself by connecting back to the higher goals, reassess where you are (looking for the progress you’ve made) and recommit to the help you’re getting.
Or…don’t change – just have someone else do it. Some change we have to do ourselves – we’re going to be on the stage and have to get better at speaking, or we’re going to be leading and have to have a clearer idea of where we’re headed.
But change is hard, and often times it is better to get someone else to do whatever it is we need to do – someone who is built differently than us and finds it easy to create the result we want. Hire the extrovert to sell, hire the introvert to market, hire the analytical person to make better decisions, hire the grounded realist to slow things down. They’ll do it with an ease and success that will amaze you. The big idea for you to remember here, though, is that you have to give up some of your control to that person for it to work.
There is a great book on change called Change or Die, by Alan Deutschman. He boils the change process down to Reframe (change your mental model), Relate (get help regularly from someone who has the new mental model you want), Repeat (keep at it) – so if you want a simple summary of my thoughts above to take with you, I think those three words sum it up well.
Stage 2 Leaders: Reframe, relate, repeat – and your businesses will be stronger.
Read more posts like this on Crain’s Detroit Business.