E-ZINE ARTICLE, FEBRUARY 2006
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by Dr Graeme Codrington
At TomorrowToday, we are very interested in what companies need to do in order to attract and retain talented staff. We spend a lot of our time working with clients to help them devise plans and processes to ensure that they find and keep the best minds in their industries – thereby greatly enhancing the potential to be the best amongst their competitors.
When we talk about attracting and retaining talent, we often talk (to ourselves and our a clients) of corporate culture, of policies and procedures, of providing space for personal growth and for expressions of creativity, of leadership styles and team dynamics, and of the working environment. We assume, of course, that companies will offer the talented staff at least market-related remuneration packages. There are many clever things that can be done with remuneration, and where our clients need assistance, we refer them to the experts in the field (we have a number of strategic alliances with remuneration consultancies). However, we have not often touched on the issue of ownership, shareholding and high-level, long-term financial incentives.
Balancing the Paradox
The problem with trying to attract talent is that the type of people the company wants are exactly the type of people who don’t want to work for anyone. Talented people want independence, and, given the choice, would rather not line someone else’s pocket. The more that a talented individual doesn’t want to work for you (or anyone else), the more you should try and create a way for them to do so.
Since its inception, TomorrowToday.biz has tried to have the best of both worlds. We have attempted to create an entrepreneurial environment, where “Bright Young Thingsâ€? (BYTs – this is an attitude indicator, not a biological age category) are able to work in their own businesses, and get all the benefits and freedoms of being their “own bossâ€?. At the same time, we’ve also tried to create systems that provide the best of a corporate structure to these BYTs – centralised costs to get economies of scale (specifically around admin costs), a joint sales team (resulting in greater capacity being made available to individual entities), PR and brand advantages, and access to the Group intellectual property. This year, we may add a central hub office to the list of fixed costs.
Trying to balance these two imperatives is tricky at best. Trying to ensure that everyone in the group feels that the system is fair, and does not favour one or other grouping, is a constant juggling act, and relies as much on relationships as it does on mathematics. (It seems that everytime we talk about BYTs, we stress the importance of relationships and ongoing, personal interaction. The danger with BYTs is that they don’t appear to need management, and can be left alone – big mistake!)
The Problem of Profit
Many incentives in companies are aimed at profit-sharing. The problem with this is that anyone who is not both an owner (who benefits from profitability) and an employee (who benefits by way of remuneration for services rendered) will not be properly incentivised to generate the greatest value for the company. If the person benefits from being an employee, but not from profitability, then there is a great temptation to load the business with costs and spend unnecessarily. If the person benefits from profitability (either in profit share or increases in share price), but does not benefit from actual work in the company, there will be the temptation to put the squeeze on management and possibly force the business into making short term decisions which increase (short-term) profit but might decrease the company’s competitive advantage in the future.
At TomorrowToday.biz, we therefore share income based on top line revenue, rather than be concerned with profit share. Every invoice that is generated is split between various interests (sales commission, admin fee, contribution to central costs, presenter fees, IP royalties, etc). The split is completely transparent, so everyone knows what everyone else earns.
The Needs of Owners
Having said all this, it is also important to have profit centers within the business – but not for shareholder wealth purposes. There are only two ways to increase profit: increase turnover, or cut costs. Having incentivised talent to do the former, we must also focus their minds on the second as well, in terms of reasonable and appropriate cost cutting. Profit can be earned when costs are controlled and the percentage allocated to costs is not fully spent at the end of an accounting period. These excess amounts can then be distributed along the lines of a “profit share� according to “share holding� in the profit centre. These payments are purely “bonus� payments, and no pressure can be put on different business units to maximise these payments. The incentive works if staff are able to share in increased profits due to diligent cost cutting. However, the incentive must always be greater to increase turnover and long-term profitability, rather than short-term returns.
This model works mainly in a service-based firm, where intellectual property is the primary asset. In this type of environment, the only saleable asset is the brand name, and this is not as saleable as is often thought. Just ask any of the partners from Andersen how much their brand was worth after the Enron fallout destroyed their company. In IP-based companies, the brand value and the saleable asset is actually the people – if they leave, there is nothing left to sell besides a bit of office furniture and some buildings. (As an aside, it seems ludicrous then that accounting systems allow for the Balance Sheet valuation of intangible assets such as goodwill, brand equity and intellectual property rights, but not for people or skills).
Values and Generosity
Finally, I think it goes without saying that where individuals act in greedy self-interest, with a focus on short-term returns, the whole system will suffer. Of course, being generous can backfire. BYTs can take what you offer, and then do a runner, leaving you with a massive unpaid bill in terms of investment of time, training, energy, development, emotions and money. It was Jack Welch, legendary CEO of GE who once said, “The hardest people to consider removing from your company are those people who bring in the numbers, but don’t share the values. But these are the first people that should go.� You can develop skills, you can help people grow in confidence, and even enhance their abilities. But you cannot give people a value system or teach them character. Where people do not match the values, they need to be asked to leave. Generosity and long-term thinking are two values that should be evident in talented people.
Ensuring that the values are firmly established is not a matter of putting them up on the wall outside the MD’s office. Entrenching values is about living them out, consciously referring to them when making decisions, and it is about relationships – real relationships that cut beyond just performance and measurement, and get to the heart of what makes each person really tick. How you remunerate and reward your BYTs says as much about your values as anything else you can do. So do wisely what you do.
Divide the Income, Not the Profits: A Financial Manifesto for the TomorrowGroup
