As Charlie Munger is often quoted for, “Show me the incentive and I will show you the outcome”, but there is an even more Charlie-esque quote of, “If you have a dumb incentive system, you get dumb outcomes.”
Incentive systems are unique to each situation and the people within that system.
If you have an hourly employee, they are incentivized to either work more hours and get paid more per hour. If you reward profits, portfolio companies might not seek new ventures that take away from profits.
Building a compensation plan for your small business is crucial in attracting and retaining top talent, as well as ensuring fairness and alignment with your company goals. You can be very creative with it and adapt to the individual. Some employees may prefer cash over equity and vice versa. The goal with incentives is to align employees to the overall goals of the business. A well-designed compensation plan should consider factors such as market rate, job responsibilities, and company finances.
- Market research – Market research: Research market rates for similar positions in your industry to determine a fair and competitive salary range. This will help you attract and retain top talent, and prevent overpaying or underpaying employees.
- Job responsibilities – Consider the skills, experience, and responsibilities of each role when determining compensation. How much of an impact will this role have on the business compared to another?
- Company finances – Consider the financial health of your company and what you can afford to offer. Be transparent with employees about the company’s financial situation and how it may impact compensation. Someone on twitter mentioned recently that you should make sure to test different scenarios. What if revenue is down but all employees reach their bonus?
- Incentive plans – Offer performance-based incentives such as bonuses or stock options to reward employees for meeting or exceeding company goals. This can also align employee goals with company objectives.
- Benefits – Offer a comprehensive benefits package, including health insurance, retirement plans, and paid time off. I’ve even seen pet daycare stipends. This can be a valuable component of overall compensation and help attract and retain top talent.
- Transparency – Communicate compensation plans clearly and transparently to employees. Ensure that all employees understand their compensation and how it is determined. If things outside their control change how they will be compensated, take time to talk it through with employees.
Building a compensation plan can be challenging, but it’s an important investment in your company’s future. By taking the time to understand the business and incentives that will move it forward, you can transparently set up benchmarks for employees and the business to be successful.
Thanks to Everest Brady for his help, writing, and research in assembling this week’s newsletter.
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This Week on Think Like an Owner
Our guest on this episode is Sandy Paige. Sandy has been an operator several times over his career, including being a general manager at a Maine paper mill, a director of The Jackson Laboratory, and others which gave him a wide range of experience to use in growing the company he acquired as a searcher, Explora BioLabs.
He’s also an outlier in being one of, if not the, oldest searchers. But his results speak for themselves: Sandy grew Explora BioLabs over the course of 4 years starting in May 2018 to sell for $295 million in April 2022.
Sandy and Alex talk about the importance of communication as a CEO and his philosophy behind it, how he sought and hired managers who could grow with the company, early career CEO mistakes to avoid, communicating with your board, and his priorities and focus in the CEO role.
This episode’s sponsored Q&A features Hood and Strong, partner Jerry Zhou answers, “At what size of acquisition does a quality of earnings actually make sense?” Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners, Jerry Zhou, at [email protected].
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Think Like an Owner is sponsored by:
Ravix Group – Ravix Group isa fraction CFO, outsourced accounting, and HR consulting firm serving small and large businesses alike. Whether you or someone you know is getting started, searching to buy a business, or building out an organization, Ravix will help on the journey. To learn more about Ravix Group, head to their website and tell them Think Like An Owner sent you.
Hood & Strong, LLP – Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected].
Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and Employee benefits programs. If you are under LOI, please reach out to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to the CEO, August Felker, directly at [email protected].
