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[Re-Run] Richard Reese – Designing Incentives at Iron Mountain – Ep.208

My guest on this episode is Richard Reese. Richard took over as CEO of Iron Mountain, a physical records management business, in 1981. He ran the business as CEO through going public in 1996 before retiring from the role in 2013.

Episode Description

My guest on this episode is Richard Reese. Richard took over as CEO of Iron Mountain, a physical records management business, in 1981. He ran the business as CEO through going public in 1996 before retiring from the role in 2013. Revenue over that period grew from around $3 million in 1981 to $3 billion in 2013.

Our discussion focuses on incentivizing teams with cash and stock, something Richard has thought deeply about over many decades, developing compensation plans, working with private and public investors, and a few stories from the early years of running Iron Mountain.

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(00:00:00) – Intro

(00:05:17) – Richard’s background, career, and time as CEO for Iron Mountain

(00:15:18) – What became easier when you went public? What became harder?

(00:18:44) – What did your management team look like when you stepped in and how did you look to evolve it?

(00:25:43) – When you started thinking about incentivizing the management team, what were some ways you got them to buy in?

(00:39:49) – What kind of challenges did you run into with equity compensations?

Alex Bridgeman: Yeah, thank you for sharing a little bit more of your time. I think many folks will probably be familiar with your background at Iron Mountain and your time as CEO. But for those who are less familiar, what’s kind of the- can you give us a five minute overview of your background and time as CEO?

Richard Reese: Sure, I got out of the Harvard Business School and took a job, which I won’t go in great detail. And then that one, as many of the new MBAs, they change jobs fairly early, I stayed about a year and a half and then went to another job where I learned a lot quickly, but it was a poorly run company, which is a great opportunity to learn. And under stress, and when you’re under stress or duress, you have to learn or you get smashed. But at a point, I decided it was so poorly run that I probably could- I surely couldn’t do worse. So, I left and sort of launched what today is called a search. It was a self funded search; we didn’t have terms for it. But me and actually two other guys had worked together, we decided we’d move back to Boston. My wife was from here, she could get a job, and that was an important criteria. She had been a schoolteacher, and she was able to come back and do that. So, we lived on a Massachusetts school teacher salary for quite a while. And along that, I augmented it by doing some case writing at Harvard Business School. And frankly, eventually, they asked me to go into the class. But the whole time I was doing some consulting, but also looking for a search. The other two people that joined me eventually fell away because they didn’t- they had family obligations or other obligations and just couldn’t sustain it. But we did that for a few years. And I was introduced to a gentleman that owned a portfolio with this little company named Iron Mountain. It was about 3 million in revenue, losing about $600,00 in annual EBITDA cash flow, whatever you want to call it, just losing money. But it was an interesting business. Those days, maybe they were taught in business school, certainly taught better to analyze businesses and business models. And this one was more of a gut call. I went out to New York. He told me, suggested that I go out and look at it, which I did. And it was a front door of a giant cave with a big steel door on it. I went in the cave and found 14 acres of warehouses underground and trucks in and out and people moving around and boxes of paper storage, computer center data, a lot of computer tapes at the time, a lot of audio and video, and just a variety of corporate assets, information assets. And this was, frankly, we didn’t call them information assets at the time, we just stuffed the store. But it was a service in New York City primarily, about two, two and a half hour drive out of the city. And I looked around and saw the names on some of the buildings and some of the boxes and it was companies like IBM and Hartford Insurance, Connecticut General, a lot of stuff out of the insurance financial world and big corporations. And I looked at it and I said, this is pretty interesting, because I didn’t have a strong tech background. I figured just hard work and just maybe mainly hard work, I could do okay, so I cut a deal with him, much like a search structured deal. Turns out, it was for options. And in this case options and a cash bonus. And in the first year, we turned around the loss from 600,000, and we started making money. Thank goodness to the fact that the business was growing without a salesforce, little things that are nice to have in the early years. We had a lot of recurring revenue, high switching cost, it’s a great business, and our customers were arbitraging labor, mainly warehouse costs, storage costs between Manhattan real estate and upstate New York real estate, which gives you quite a bit of margin room, particularly if you store it in different ways and so forth. So, I cut the deal with him. And after the first year, I learned the difference between being profitable and having free cash flow. And it turned out that although we went from negative free cash flow to positive in the first year, we still didn’t have enough money to fund our growth because it’s a capital intensive business, and the faster you grow, the more capital you consume. And so, I very quickly learned that I better figure out something about finance, which by the way, I had never really taken a finance course in business school. Never thought I’d ever need it. Shows how smart I was. Because over the years, I have raised, I don’t know, $5, 10 billion. I’ve learned how to behave in the capital markets, but it was all on the job training. But we went from that and went through a variety of stages. I took over as CEO in December 1981, and I retired, and finally, I went through an episode where I retired temporarily and came back, but finally, in March of 2013. So I think that’s about 20 years, give or take, or 30 years give or take. And it was a long run. We went from that 3 million revenue, losing money to when I retired, we were north of 3 billion and had free cash flow of about a billion a year, a billion and a quarter. It was a very interesting run. And we raised capital in the private market. We raised capital in the debt markets. We raised any way we could. We eventually went public in 1996. So about half of my tenure as CEO, I learned how to operate in a public environment and learned a lot of lessons there about consistency of message, about- in fact, what I learned was that you hear a lot about people saying, you got to take care of all your constituents, your shareholders, your employees, your community. Well, most people don’t really understand what that means, particularly when it comes to shareholders. They actually believe it just means make them the most money. And of course, sometimes that’s all you need. But the truth is, what I learned is you can build a great business, and we did, but you also have to build a great security. And you have to find a market for it. And you have to communicate with that market. And you have to consistently deliver what that market wants. And if you change that element of your business, you will pay mightily, particularly if you’re public because your original- those shareholders who bought you for one reason see you moving into a different strategy for a different reason, they run for the hills, your stock goes way down, it’ll take years to accumulate another shareholder base. And many CEOs make the mistake of just constantly changing their message. They’re wandering around in the woods acting like they’re lost, and they have trouble attracting good shareholders. As Warren Buffett said, public company CEOs get the shareholders they deserve. And it turned out through my tenure, one of our biggest shareholders for quite a while was one of Buffett’s companies, Geico, the head of- two guys there, but one Lou Simpson, who was quoting the Warren Buffett, was a better investor than he was and was a very sage investor. I’d meet him once a year, and we’d talk about return on capital, we’d talk about investing money, the CEO being an investor as well as an operator. And that’s sort of the balance. When you are in a capital driven business, particularly, that’s the balance that you have to manage. But I’ll never forget him one day, he said, “What’s your return on capital?” And I said, “We can do 15% all day, before we lever it,” which we could. And he just looked at me and says, “Then I’ll be your shareholder forever.” And they were. So anyway, it’s a long story, but it was a great run. And we went through a lot of different stages over those 30 years from being a small regional business. We did one seminal acquisition in 1988 when we bought a company that had a footprint up and down the West Coast. We were only in New York, Rhode Island, New Hampshire, and Massachusetts, as a footprint, but there was a company that Bill Howel owned that had most of California and had opened operations in six or eight other cities. And we went after that. We didn’t have the capital, but we scraped it together one way or the other. It was a $75 million dollar acquisition. I tell people we borrowed 76 million of it because we had to pay the closing cost. But it basically was an interesting ride. It was a market in which, if you catch the capital markets right, which debt was readily available and fairly cheap, and we were able to pull it off, and the capital markets collapsed within two, three months of us closing, we couldn’t have closed it three months later. And we adjusted and went through it and ran privately that way for a while. And then in 1996, we saw that our industry was ripe for consolidation, and we had a foreign buyer coming in to try to consolidate and then they were getting basically a foot race started among the players to who was going to be the leading consolidator. And my partners and I sat around and we actually hired a banker to give us some advice, and it came down to do we want to raise money and try to race with them to consolidate, be a leading consolidator or do we want to sit in the woods and wait at the right time and sell to them. And we decided to go for it and raise the money and kind of the rest is history. We raised, I don’t know, $35, 36 million of primary equity, which wasn’t much at the time. And some years later, we’d spent $5, 10 billion buying companies. We built an engine that bought an acquisition. Eventually, once it got up to speed, it ran about 15 years at a pace of a deal every three weeks somewhere in the world on four continents. And it was a race. We outran that particular company, and actually my successor, after I retired, eventually bought that company out of Australia. So it was a long, hard race, and we had a really good time doing it. I couldn’t ask for better.

Alex Bridgeman: Once you went public, what became easier and what became harder?

Richard Reese: Once you go public, first is you spend much more of your time communicating with shareholders than you do as private. And second, you have to become much more guarded with what you do say in public to anybody. You just, if you’re private, you can talk about your business, you can tell people lots of things. It doesn’t matter because your security is not tradable. But if you’re sitting on top of a tradable security, you have to be very careful. And that really changes who you can talk to about what and a lot of things. That and the fact that the public markets have an extreme drive for quarterly performance. And that’s a double edged sword. That drive for quarterly performance sharpened us in terms of just more precise execution, paying much more attention to deadlines and timeframes of things we’re doing so that if we’re investing money, we continue to keep the quarterly earnings growing or at least on target to so called expectations. After a while, it becomes a real treadmill though and for many businesses and one of the reasons private equities can be so successful is they- if a business needs to be fixed, you just can’t do it in the public markets anymore. There’s just no patience to wait on you to fix a business. If you’re growing, it’s a great place. And if you’re growing and you need capital, a lot of capital, it’s about the only place. And that’s what we were; we were growing well, we needed a lot of capital. So I learned how to build a good security. We did well. And we got good multiples, traded well. We had our bad times, we made our mistakes, we missed our quarters occasionally. But by and large, we did pretty well. And we were rewarded for it. So there’s a lot of good and bad about being public. More and more, I will tell you, it’s getting harder as a public company, just the amount of regulation. I know everybody talks about it. But until you have lived it, you really don’t understand the amount of bureaucratic things that the government has thrown at public companies in the last 10 or 15 years. Well intended most of it, but as typical with a lot of laws, poorly designed, because there were too many cooks in the kitchen pushing and pulling in different directions. And you come up with just strange answers that you do a lot of time, energy, and work to try to meet what they are doing, not just the spirit of the law, but the precision of the law, the requirements. And that stifles growth and increases overhead and cost of doing business. And on a competitive worldwide competitive basis, it hurts us as a country. But that’s a trend that’s been going for quite a while now. And I don’t see anything but it getting worse as our politics are so separated, and people are just- What’s really happening in US, in my opinion, is the pie is not growing as well as it once was. And everybody in all places is fighting over their share, rather than everybody pulling together to make the pie grow bigger. And that’s not a recipe for long term success. And it’s a little bit of what Europe and the rest of the world, the non emerging part of the world looks like. If you go over to that part of the world, it’s slow growth. It’s a very different way of doing business, so forth. So, a lot of pros and cons. I’m glad we did it. We couldn’t have raised as much capital privately or as easily as we did and being so much more in our own control. But like I say, it has its pros and cons.

Alex Bridgeman: Yeah, that makes sense. I want to- I know one topic you’ve thought a lot about is management incentives and getting folks to, to our podcast title, think like owners within your company. But before getting to that, I want to hear a little bit more about what your management team looked like when you first stepped into the business and then kind of how you evaluated gaps and roles you would eventually need to add to the team and maybe like give us a kind of snapshot of what it looked like when you first arrived in five year increments. How did you evolve your management team?

Richard Reese: Well, I don’t know precisely five year increments, but when I first arrived, I had a head of operations who was a great person and a great head of operations, rock solid human being, never been to college but didn’t matter. He was as smart as anybody else and smarter than most. I had a bookkeeper. Well, I had a controller that I fired in the first week. It’s a funny story, but I won’t bother you, we don’t have time to go through it. But I fired him in the first week because he wasn’t doing anything. He was there because the owner, prior management was upset because prior management couldn’t provide good financial data and reports. And so, they made him go hire a controller, and the guy they hired didn’t know what he was doing either and didn’t do any work. So I just cut expenses and went on. But I found in there a bookkeeper who did know what was going on, and these are the days before computers. Some of this was all manual bookkeeping and green sheet accounting and ledgers and so forth. And I had- that was it when I walked in. I had a legacy head of operations that stayed with me about a year and a legacy president that stayed with me about a few months. And they were helpful in transition, but they moved on. It just sort of wound up with me and the fellow I told you first about, named Don Hughes, and Don and Patty Septicy, who was- we made her the controller, eventually she was the bookkeeper. And then I hired a head of sales. And that was it. That was the team. And we ran that way for a reasonable period of time. And then over time, my first job when I got in there was to figure out, I went to the first staff meeting, and we had a facilities manager. I was telling them, I was the new guy, and we were going to do all kinds of great things, like everybody else who gets in this situation, for motivation. And I could see a little skepticism in their eyes. And finally, this one guy says, “Well, you’re not the first guy to ever come in and tell us that.” So basically, called BS on me and sort of said, so how are you going to do it? And I said, “What do you mean?” And he said, “Well, we got so much deferred maintenance, we need to fix this thing and that thing, and we going to need money.” And I just said, “Okay, I’ll go figure it out, and I’ll get back to you.” And I did and went back to them. And we found ways to fund and fix and so forth. But that’s when I realized that I had to be- I had to learn finance real quick. And in fact, within the first week of joining the company, we had a $600,000 demand loan line of credit with a local bank. And the banker called me and said, “I understand you’ve taken over as CEO of Iron Mountain.” I said, “Yes.” And they said, “Well, we have a line of credit extended to you, and we don’t really understand your business. And so, we want you to pay us back.” And so, I had a demand or call of my loan within a week of being on board. So I had to go over to see him and suggest a couple of things. One, we don’t have the money to pay you back, so let’s talk about a schedule, and give me some time to go finance you out. So between the internal people telling me you got to find some capital for us if you’re going to do something with this business and my banker telling me this, he wanted all of our earning power back overnight, I figured out I had to go learn finance, and I did. I went out and lots of different things, lots of different tricks of beating the bushes and finding lenders, building spreadsheets, which I’d never done before, learning accounting, which I’d never had a class in, so I could do a forecast, and basically understanding the business enough to go sell it to a bank in terms of why we could pay them back and building some confidence in doing that, that’s what you do. And I think it’s indicative of my experience, at least, for searchers joining smaller companies is you got to get hands on some time in the most important details just to learn them. And one of the things I tell searchers is that one of the key roles of a CEO that I’ve learned over time is the CEO, ideally, and nobody ever hits this ideal, but always should be thinking about where their time is spent. And their time should be, in the way I describe it, at the tip of the spear of value creation. In other words, whatever creates the most value is where the CEO’s interest should be okay. And the second place, by the way, is whatever could destroy the most value if it blew up on you. Those are the two places the CEO should put their time. And if you think about it that way, I didn’t think about it that way at the time. I did it out of the necessity of the two data points I’ve told you about. But in the early days, and for a long time for Iron Mountain, value creation was really working the capital markets and raising capital to drive a growth engine. And so, I learned it. And then eventually I hired people who were good at it and then eventually got better at it than I ever could be. And then I pulled myself out. And there was a pattern over time of which, in the early days, I did not get heavily involved in operations because I had a guy who could do it. I got heavily involved in computers because we were at the point at which we needed to computerize inventory. It was all manual. And the cost of computer systems at that time was exorbitantly high. And we didn’t have the money for them. And we had one computer running that was running out of disk space, and the disk was $350,000. Yet, IBM had just announced a PC, Tandy had come out with a Unix multi unit promising processor in the $2 to 3,000 range. And I could see the handwriting on the wall that if I bought a $350,000 disk pack that I couldn’t afford, that within two years, it would be obsolete. And I couldn’t afford to do that. So we figured out how to make some of this new technology work, me and my bookkeeper, she went to school at night and learned the program. And we figured it out, we put it over, one piece of software we had because it was about to collapse. And from then on, we started hiring people to build stuff. And it’s just- and I’ll give you that, that’s what the early days are like for a CEO in a smaller company. You go where the value creation is, or you go where the problems are going to kill you. And you stick your neck in. Otherwise, you put other people to run it, and then you eventually learn it well enough to know what good enough is and learn it well enough to know what somebody better than you look like, so when you hire them, you can get the right person.

Alex Bridgeman: And so, when you started to think about how do we incentivize your management team to behave and make decisions as if they were the owner or as if they were in your position, perhaps, what were some ways that you figured out how to get folks to be incentivized that way? And then any kind of high level lessons over time from management incentives?

Richard Reese: Well, we didn’t start that way. When I first came in, the only incentive program the company had was a Christmas turkey. And I joined in December, and I almost cut out the Christmas turkey. But I was told that you can’t do that because everybody’s counting on that turkey. And they don’t really all have the money to go buy it, and I let it go. But what I did do was I said next year, there won’t be a Christmas turkey. But instead of that, everybody in the company is going to get a bonus. Or you’ve got the ability to earn a bonus. And it was just the philosophy I had about if we’re doing well, we’re going to share it with everybody, with other people. And I speak of that because when you go to think about compensation, you actually have to have a compensation philosophy. And everybody that I’ve run into, including some public CEO people, they think of compensation as programs and metrics and this and that and the other. But if you look at them, they’re philosophically inconsistent. And the philosophy really comes down to you can build a program that rewards pure performance. But it’s very hard to measure pure performance. You can build a program that is more like profit sharing, everybody’s in this together, everybody gets a slice of the good, of what we do better. And you can build a program that is mixed, that for certain levels of your organization, it’s more like profit sharing and it’s certain levels of your organization where you can really measure performance. It’s you can drive it on performance. And at certain levels of the organization, it’s just pure and simple a key risk based component of compensation, the higher you go, it is, look, I want to hire you at the middle of the market on base salary, but if you and the team that you’re on, if we really overperform this year, you can make not the market, you can make 120, 150% of the market. And then you got to think about what that philosophy means. And then you got to overlay that with how you budget because if you build a program that people’s targets are tied to your performance, your budget for the year, do you build a stretch budget, just really hard to achieve because you want to pull everybody hard, or do you build a layup budget? If you do, that’s just, that’s not highly motivating in some respect, but actually is in others.  How do you find the right middle ground for doing those things? And again, I see people philosophically talking about one kind of plan and building a plan in one way and then budgeting that doesn’t match. Where I’ve settled down over the years is that I’m more in the camp of I want to pay the bonus more times than not. I want to- I’ve learned, particularly in salesforce, that uncapped bonuses are okay or very high cap bonuses. I’ve learned that every now and then people should get- there’s a such a thing as what we call the lucky stick club, again, particularly in sales compensation, that somebody might make a lot of money in a year just because a client fell in their lap, and they didn’t work very hard to get it, then you can’t take it away from them. I used to try to do that. I used to try to go, well, we’re going to measure this, that and the other, and you got to earn it and then you get paid. That doesn’t work. It demotivates. It does a lot of things. You just have to allow the lucky stick to hit people occasionally. And that motivates everybody else hoping they have a chance to get tapped by the lucky stick occasionally. But you’ll learn those sorts of things. But it comes down to what’s your philosophy, how are you going to budget and measure against that philosophy. And then you build programs that pay differently at different levels. And it’s all about how much, what- And then the last thing about compensation, all the compensation starts with not thinking about a bonus plan independent. You think about what is the total compensation for the job? And what do you believe is the market compensation for this particular job? A lot of jobs, you can get market benchmark data that’ll tell you that, a lot of jobs you can’t. But if you can benchmark enough of your senior people, then philosophically I approach the problem of internal equity. If it’s fair to pay an EVP a certain target compensation, then what’s it fair to pay one level down, two levels down, three levels down? You want some parity, not equality, but consistency there. But all of that goes to saying what’s the total compensation, which is usually made up of one out of three components. The first one is base salary. The second one is cash bonus. And the third one for some jobs is equity. And I can talk about equity in a second. But you put a number on it, or a range of numbers generally for a job and you say, alright, if we hit the performance we want to hit, what is this person’s target total compensation? Once you know that, you figure out what’s my mix, how much is base, how much is cash bonus, and how much is equity. And the higher you go, philosophically, I believe I want people to earn- have more leverage in their compensation. They should get a base salary that will cover the standard of living that’s reasonable for a person at that level. And that should get a cash bonus that if we’re hitting a home run, they can increase it by 20 to 100%, depends on the job and level. And if we- and then the higher levels, you might even wind up being that half of your compensation is based and the other half is split between a cash bonus potential and equity, the annual value of the equity accretion of the stock going up. But that’s how you think about it. You can change all those percentages, you can move around everything else. But you start with that and then you go okay, now here’s the base salary for the job, here’s the amount. I want to pay them half of the upside, or whatever the upside is, I want to pay that in cash. You build a cash bonus plan to do that. And then the rest is equity. And if the equity is zero, it’s pretty easy. You got a base, you got a cash bonus. So the logic is philosophically decide how you want to pay, is it more of a profit sharing group thing, or is it heavily individual performance? And by the way, all the discussion, I’m excluding salesforce. That’s a whole nother game. It’s got a lot of the same underpinnings but think about that separately and very different. But you philosophically start with that, and then you work your way through how we’re going to bonus, if we’re going to stretch or not. And you have to overlay something else. If you under stretch a bonus, I mean a budget, and you make it too easy, then you’re paying- overpaying and what will set in is a sense of entitlement. And it’s hard to change. And it’s hard to make the organization grow faster and do things faster. If you overstretch the bonus, and they don’t win, not every year, but maybe three out of four years, if they don’t win three out of four years, win meaning get some bonus, and maybe two out of the four years get 100% or more, you sort of think about it that way and you got to look at your plans and adjust them if that’s not what’s happening. People get demotivated because regardless of money, people want to be winners. And the mistake a lot of people make is they overstretch the plan, people work hard, they don’t earn much money, then they have to raise their pay or make it up somehow. And you get a double whammy. You told them that the bonus plan really wasn’t relevant, that they’re going to pay you anyway. And second is but we lost. We’re not winners. And that’s where you’ll get your organization to come apart. So it’s a pretty complex subject between motivation, what is really winning, being stretched enough but not too much, and not overpaying but not underpaying, paying perfectly well. And last but not least is another philosophical thing that I did while I was public, and I’ll be candid with you, I didn’t think about it as clinical as I’m going to talk about it, it just kind of happened. In fact, most of what I’m telling you is law learned over the job over the years. It wasn’t I sat down one day and the light bulb came on. I had equity from the time we were private. I had a substantial piece of equity and when we went public. As a public CEO, I could have probably doubled my equity. But I always felt like I had plenty of earnings power, which I did, turned out to be true. So what I felt like is any stock that we took from the shareholders through dilution should go to my team and my employees, not to me. So never when I was the person making the decision to give stock, to take stock and allocate it to people, which was most of the time we were public, did I ever take any more equity. And I told the markets I was- I’m not taking equity. I actually had shareholders call me up and say you’re under paying yourself, you should take more money. I said, thank you, but I like the way I’m doing it. And I felt good about that because you have a pool of equity, and this is relevant to searchers, too, you have a pool of equity, and you’ve got to decide how to allocate it to individuals and to jobs in a fair way that rewards performance, keeps people motivated, and that you wake up, if you’re successful in 5 to 10 years, and you sell the business and you take home the kind of money you’re hoping to take home, that the people that got you there and helped you do all this are also appropriately rewarded. And if it’s looked at as a zero sum game, anything I give to you, I don’t get to keep for myself, you round up the conflict of interest position that I will tell you, you will never work your way out. But it served me well because when people did come in my office, and people would, and say, “Look, I don’t think you’re paying me well enough, I’d like more-” I could listen, but I could have a free conscious, and I’ve never had anybody say, but you’re taking too much, give me more, in effect, because I didn’t take any. Just to put a fine point on it, at a certain point, I gave up the CEO title and stayed around as chairman for a while, executive chairman, and the board basically said, then if you’re going to do that, you got to take some equity, and so I did. But that wasn’t- I was no longer making the decisions effectively of who got what. So there’s a whole lot of philosophical thinking that a CEO’s got to do, and I’ve kind of outlined the things I’ve learned. I’ve seen people run really good companies with different philosophies. If you look at some of the tech companies, some of those CEOs out there are just, they’re taking a ton of value out of the company in stock options and stuff, away from shareholders, and they can get away with it. But they don’t need it. They’re already billionaires; they don’t need it. One could argue they should give more to their employees. Now, I’m starting to sound like a socialist, and I am not. But I do think there’s such thing as a fair balance. And by the way, a CEOs job, I told you one of the key things of CEOs is to be at the tip of the spear of value creation or destruction. I think another CEO’s- one of the hardest things about CEOs is balancing all your constituents. And as I told you, that’s easy to say and hard to do. But you do have community constituents, you have employees, you got shareholders, you got customers. And my philosophy has always been if we work to take care of our customers, they’ll pay us better, and we can take care of everybody else. But what a CEO has to do is balance that. And you do see companies going way too far one way or the other, generating too big of returns for shareholders on the backs of employees. That’s how you get unions. That’s how you get lots of outside pressure. Today, you get outside pressure regardless, though. There are a lot of good companies getting pressured that are not doing that, that actually are well rewarding their employees and their community. So the world has gotten a little out of balance. But the hard- one of the hard jobs of a CEO is just watching that balance all the time. Because your shareholders in the short run can jerk you around. They can get in your face and demand things. Like I’ve been in shareholder meetings where you go and you give these presentations. And I’ve had shareholders- I told you we were free cash flow negative. We were free cash flow negative for maybe 15, 20 years as we were growing so fast, raising capital all the time. And shareholders have always asked me, when are you going to give us any free cash flow? And my answer always was I’m going to make the biggest cow I can build before I start to milk it. And I’d just sort of wrote it off that way. But as we got to the point where we weren’t gushing cash, I’d have shareholders stand up and say, when are you going to start paying a dividend? And then I’d have another shareholder stand up in the same room and almost scream at him and say, if he pays a dividend, I’m selling the stock because they’re better investors than I am. I mean, then you go- And that’s the other lesson I’ll mention. You listen to all your shareholders, but don’t do what any of them tell you, any one of them. You have to have a vision of where you’re going, you have to communicate it consistently to your customers, your shareholders, your employees, and you just got to drive there and you got to be right. But if you do, you can fend off all the rest. But if you let one or two shareholders influence you and you turn on a dime and do something, you’re going to run off the other half. And that’s the hard part about being a CEO is you’re in the middle of all this, you have to take it all in, and you have to stand up for what you believe, and you have to communicate it and drive it and just take your lumps for what happens. It’s your responsibility.

Alex Bridgeman: What kind of challenges did you run into with equity compensation, specifically with giving that to management teams?

Richard Reese: Well, the challenge is, there’s a couple of challenges, one is you need to manage dilution on behalf of your shareholders. You are a representative, the representative of the shareholders. And so that is a zero sum game of returns between your shareholders and your employees. So there’s a limited amount that you can work with, and there are ranges in that, and you can rework it over time. But there’s a limited amount. Then there’s the how do you decide to allocate it, how deep within your organization, and I think of equity in that vein as there’s really two types of equity. There’s giving people a small amount of equity that sends a message, and the message is we value you and you’re on the team. And then there’s- and that you can distribute reasonably broadly, not necessarily 100% of all employees, but pretty broadly in management ranks, if you so choose. And then there’s equity that is truly part of your compensation package. And remember when I talked about first you got to think about total compensation? Well, when you distribute equity as, and I don’t mean to denigrate it, but as a tip, so to speak, just a touch on the shoulder that says we value you, you don’t nick their cash compensation because you gave them some equity that might turn into something big, you just hope one day they wake up, and they’ve made money that’s beyond their wildest dreams. But it’s still not millions of dollars because their dreams are not there. But for your senior management team, it has to be a key part of the compensation. So the challenge is how much and attracting people who are attracted to that, that are willing to take that risk. And that’s a key part. If you’re philosophically sound and you can communicate it when you’re hiring people, you will hire people that are comfortable with, I’ll take more upside opportunity if I believe in what you’re saying and I believe where you’re going, the mountain you’re trying to climb is worth climbing and that you’re the right people to be with. And we wanted to attract those kinds of people, that were hungry, that were risk takers, and so forth. So you do that. And then last, the other challenge is the average person does not know how to value equity. And in fairness to them, you have to be careful how you communicate it. But if you don’t communicate what it could be worth, and if you’re not rational and fair about it, you are giving away- you’re wasting money. You would be better off just to give them the cash, and so forth. The trouble I have with that is, at least in our case, if I’d have given people cash and held the equity, the shareholders would have made more money and my fellow employees would have actually made less. And I felt that I was willing to take that risk. So I spent a lot of time, energy thinking about how to communicate it because the whole concept, the Black Scholes value and capital asset pricing models and all this stuff is way over their head and not even that relevant to a particular private company, some could argue not a public company, because the way they value options for public accounting purposes will drive you crazy. I’ll not even begin to go into that. So I got down to basically conceptualizing. I’ve done a spreadsheet for all the key people. And I would- my concept was, if you think about equity, if I’m giving you stock today that’s, I can show you particularly when you’re public, I’m giving you the option to buy stock today at $100, let’s say, and I’m giving you $100,000 worth, 1000 shares option, and it’s got a 10 year life. You can Black Scholes value that, and Black Scholes will tell you that’s worth somewhere between 50, what’d I say, $100 shares, worth between $50 and $55 a share. But you can’t turn it into cash for that. But that’s what they would tell you it’s worth. What I would tell you it’s worth because you have the average employee or manager has a different discount rate, alternative earnings rate, then the company and then the market would have, what I can tell you is, it’s like me giving you a free loan with no interest and no recourse. And so, I’m loaning you $100,000 to put in the market into our stock. I never want the interest back, and there’s no recourse. I get back to my principal because that’s the strike price. What’s that worth? I don’t know. But I can do math that says we kept 5 year future forecast, and then you haircut them. I can do math that says these ranges of outcomes. If you hold that option for a full 10 years, and we come anywhere near our plans, plus or minus 20, 30%, or plus 10 and minus 30, this is the ballpark of what the stocks would be worth, assuming there’s no multiple accretion. And I can also argue that as long as the capital markets are reasonably stable, if you hit the targets you have on the table, you’ll get multiple accretion. So you can start to put numbers that show people. And I would tend to run those numbers on a 5, 7 year basis and look at that as a ratio of their cash comp. And that’s just the way I tend to look at sort of saying, if somebody could equal- if they had a chance to double their cash comp per year over the next 7 years, that’s a pretty good ride for a lot of people. And the lower you go, that’s too big a ride, and the higher you go, maybe it’s two times or three times. But I’d start to build frameworks that helped me understand the fairness of it, people in similar jobs. And then final, not last, but in every organization, and this is another thing I haven’t talked about, but I’ve talked about where the CEO should put their time and value creation, in the final analysis in your organization, not all people equal, not all functions are equal. Some functions are driving value, and some functions are there to support the value driving engine. Generally, the support functions are very important but they’re not as valuable. And you pay for those places where if their actions are driving harder, faster, quicker, will increase the value of the company, the present value of the company, you pay for those people at higher numbers. It’s that simple. Most of the time, that’s revenue, but not all companies. It’s oftentimes tech and revenue, product. Some companies, its manufacturing efficiency. It depends on how you- what’s the real value drivers of your business. But in our case, in our case a lot of that was capital too, finance. When you got multi billions of dollars on your balance sheet and borrowed money, if you knock a quarter point off of a $500 million dollar bond, you made some real money pretty fast of a 10, 12 year cycle. But those are all the things that go into it. That’s what a CEO’s got to think about. And last but not least is, I’ve seen a lot of CEOs go okay, I got the compensation set, and I’m done. No. If you philosophically got it aligned, how to think about it, and you communicate it well, and your budgeting and management processes are aligned with it, it is a key motivation tool. It’s a key hiring tool. And it’s a key tool for just letting the thing run with you being hands off. Because the last but not least component is you want to make your incentives align – you win, they win. Pretty simple formula. You’ve got to analyze to do it. Now, a key way of doing that is how do you build your compensation? Where’s the value driver? I’ll tell you, in a lot of businesses I know, the value driver- I know one business where the value driver’s right on the front line. So, we start by building a compensation plan for the frontline and work our way all the way up to the CEO. Our business, Iron Mountain, the value driver we’re in and goes back to your question about how to think like an owner, we had city managers, think about branch managers all over the world, and we wanted them- We went through cycles. In the early years of growth, we wanted them to think like managers. So, we built a plan tied to their program, how they did against their budget, and their budgets were hotly negotiated. I mean, city by city, line item by line item negotiated. It was a long arduous process of building a budget. But once we locked it down, if they hit that budget, they made good money. And if they seeded it, they did a lot better. And we then tried to give them the power to make the decisions that would influence that. It does you no good to give them a budget and agree on a budget if you don’t give them the authority to actually implement that budget. And that’s the mistake a lot of people make. They’ll build a budget and not actually give people the power to implement it. We did that for a lot of years. And then somewhere along the line we decided, by the way, in my opinion incorrectly, although I participated in the decision, it is one of the many mistakes I made, and a little bit pushed by customers, at one time we would have three business units because we had three lines of business in the city. And we were confusing the market because we would come at a customer from three different places with sometimes three different logos. But we were running pretty well, but less efficient. We were growing well. And we decided we would consolidate into one business unit per market and bring together all three business lines. And then things change, and they lose control of all their pieces. And what you get out of that is lower cost of operation, more efficiency, but we got lower growth. And then eventually, we’ve gone back and reinstituted the other, the centralizing. And I’ve seen companies do that, we did it. You decentralize, you centralize. Look, you’ve got to know what you’re going for. If you’re going for growth, put the decision as close to the customer as you can. Do not consolidate away from the customer anything that’s important, anything that slows down the speed of decision or the delivery of service or responding to customer. Put it right in front of them. If you are going for efficiency, centralize as much as you can. But don’t mix it. Figure out what you’re trying to do and do that. And that factors back into compensation. It has to- it changes if you change what your organization’s authority and structure’s like, you’ve got to change your comp plans. So, being a CEO and building compensation is a complicated thing. And I have covered very quickly a deep textbook in thinking about it. But the principles are simple. But the implementation takes a lot of work. And I would submit to you, the big mistake is, unless you have a really true professional compensation person, which none of you will, you’ve got to get real big and be spending real money on a big time HR group to be able to find that talent. And even then, the CEO needs to weigh in pretty heavily in the design of the program and how it’s implemented and everything else because it is the foundation of the CEO being able to be hands off of a lot of stuff. You get compensation right, you get the right people in seats, you get incentives aligned, leave them alone. Go off and build value somewhere else. Let them run, and then monitor it. And then if you feel like you got the wrong person, change it. Then if your compensation system is not working right for that part of the business, change it. Don’t just keep going along and scratch your head going I don’t know, it’s not working. That’s how you can get your hands out of the businesses as CEO. And then the role of CEO, in my opinion, at that stage when you’re there, is to walk around and smell problems. And even then don’t solve them. Jump in, and you’ll find that most problems are a logjam among people in the company. They’re butting heads over who’s responsible and fixing it, or they have a different view of where they should be going. And they discuss it and they argue, but they don’t make decisions, so nothing ever happens. I used to walk around looking for those, join meetings, try not to problem solve, though oftentimes I did. But what you typically say is, okay, I get it, you guys go fix it. And the problem is you don’t have money, I’ll find you the money, but you guys agree on what you would do if I get you the money, and you let them fix it. Why don’t you make the decision? Because if you take the stick out of their hands, they won’t be accountable. The other thing I learned is if you let people make decisions, you’ll get more accountability. And one of the things you really want to build in an organization is one that is accountable. A lot of big public companies are not- they lose accountability a lot. We struggled with that as we got bigger a lot. And you got to be careful in a smaller company hiring from a big company because they might be knowledgeable in subject matter, they might be a lot of things, but they’re not likely to be accountable leaders and managers. And that’s what you’re looking for. You can learn the technical stuff. Give me good accountable people all day. And you asked me at the beginning of this, what I had, I mentioned the name of Don Hughes, he’s unfortunately no longer with us on this earth, but he was a great guy. But of all things, he understood accountability, he understood leadership, he understood people. You are looking for that talent. If you find one or two good ones, you can just go all over the place. I mean, it’s amazing what you can do. And if you don’t, you’re the one going to be always doing it and you’re going to be the bottleneck. And you’re not going anywhere. Because you can only do so much; one person can only do so much.

Alex Bridgeman: Yeah, absolutely. Well, Richard, thank you so much for sharing your time today. I really appreciate it. Always enjoy hearing lessons you’ve learned and different stories from your time as CEO. Thank you for sharing a little bit extra today.

Richard Reese: Well, I hope it was helpful. Take care.

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