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University of Massachusetts Amherst

Family Business Center

Capitalism Rediscovered: Compensation as a Strategic Tool

by Shel Horowitz

Most speakers who rely on detailed slide presentations would be sweating bullets if there was a technical glitch. But Don Jonovic, returning by popular demand to the Family Business Center, proved he's a pro when the power was out for the first half of his talk. He knew the material so well that a later review of the slides on a handout showed he'd covered his points flawlessly. And the staff of the Delaney House was equally up to the challenge, lighting the ballroom with elegant tapered candles under glass and preparing a sumptuous buffet. They even supplied the bar with bottled seltzer, because the soda dispenser runs on electricity.

Those who were there on October 13 will not soon forget the professionalism of both the speaker and the service staff.

Jonovic came to discuss a completely different topic this time: using compensation as a strategic tool.

Too often, says Jonovic, compensation is used as a sort of family socialism, dividing the perks of a successful business among people who may or may not deserve it. Instead, Jonovic urges business owners to make compensation decisions strategically. It does not make sense to pay every family member the same amount; they contribute differently to the business, and should be paid accordingly.

And there may be some adjustment as the new strategies force family members to wean themselves of "perk addiction."

As many industries change under the pressure of outside forces such as mergers and huge-scale customers that dictate sales terms, the issue will become more and more important. The problem, says Jonovic, will be "how to survive and attract great people while orders are cut." Many businesses will crumble under the pressure of customer dictates. Those who withstand the coming shakeout-those who survive among the few suppliers to the retail giants-will have a strategic opportunity.

Jonovic criticized family business owners who check their stocks daily-stocks that might account for 5% or 10% of net worth-but fail to regularly check the health of their family business, even though it may represent 80% or more of their assets.

And key people are assets, Jonovic believes; thus, their compensation should be seen as an investment, not an expense. If you manage negatively, seeking to drive down personnel costs, you give a message that the person isn't valued-and your best people will leave! But positive reinforcement, including compensation, creates a climate of appreciation. Just as you keep customers by doing more than the minimum in customer service, so you should reward-and retain-your best employees.

How do you do that?

Family Business Center sponsor Charlie Epstein of Mass Mutual addressed this question in an interlude presentation. In brief, he discussed setting up "non-qualified" deferred compensation plans that enable you to reward just the employees you want, and accomplish the specific goals you set out to achieve (examples could include providing an incentive for the employee to stay a number of years, funding specific needs such as retirement, and, of course, maximizing the after-tax return on investment. "Would you rather pay 39% in taxes or 1% to an insurance company?"

Still, says Jonovic, compensation is not a tool for motivation, but rather a way to achieve your key corporate goals. One of his favorite strategies is to tie compensation to specific achievements. Eliminate glass ceilings! "Let them make as much as they can by making more money for you. [Tell them] When our boat floats, yours does too."

Replace the traditional "distasteful, demotivating" performance review with meetings focused on future goals. "We're assuming you're good and you're going to help everyone else." Examine the financials every week or every month, and not just at quarterly or annual reviews. You spot the problems before they become trends and can correct them-and you won't have to struggle to remember the employee's achievements at a performance review, because you've set objective criteria that either were or weren't met.

Bringing the whole company along may seem to be at odds with Jonovic's objection to "socialism" for the undeserving. But actually, he says, it creates a climate of employee self-monitoring in which the employees themselves will either rise to higher performance standards or be forced out by other employees who see them bringing down the whole (and thus jeopardizing everyone else's achievement bonuses). "Show your numbers to your managers; then they'll see the need to perform." If there are big pay discrepancies, fix them first and then show the numbers.

The managers themselves should determine how many levels down to profit share, and they will find incentives to include a lot of people-because then their underlings are inspired to perform for them. And without a cap, the better the company does, the more money is spread around, even if 85% of it stays in the core and is not distributed as bonuses.

Merit and rank also come into play because the bonuses are based on percentage, and thus those with higher base salaries make larger bonuses.

The Christmas bonus system doesn't make any sense to Jonovic, because not only is it not tied to performance, but its timing doesn't bear any relation to the achievement. Just as you reward or discipline a pet immediately after the action, so Jonovic believes that the most effective bonuses come as soon as possible after the goal is achieved. So instead of the Christmas bonus, how about celebration parties that begin to build an association with the workplace as a place to have fun.

If, after the specified time, the goals are met, the employees know they'll get a certain specified bonus. And it isn't necessarily tied to specific individuals. A whole department, a whole company can share in the benefit if the company exceeds is goals.

Jonovic emphasized over and over that the specific plans will vary depending on the business' situation-and that of its employees. Since each business and each employee will have different goals, there needs to be quite a bit of flexibility. Experts such as Epstein can help design plans that will, for instance, defer income for those employees who are now in a high tax bracket but will be retiring, or provide death or disability benefits.

Ultimately, the point is to think long-term about the strategic needs of your company, it owners, and its employees.

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