Making Rain (Raines?)

“You have a real choice in life. You can make rain or get rained on. And there’s a lot of people who just make the choice to go through life with an umbrella.”

– Democratic political consultant James Carville

This quote surfaced in the Rochester Review a few days ago as I struggled with a local service company client to develop a compensation plan that would turn her fairly successful, somewhat complacent senior management team into a bunch of entrepreneurs. This group of six has been together for most of the past ten years, joined more recently by another half-dozen a notch or two below.

They’ve all done well, and their compensation has improved commensurately, to the point at which they now share a certain sense of entitlement, particularly the three of them who can point to their own profitable profit-centers as high-salary justification.

The problem is that most members of the group have their umbrellas firmly in hand now, even those who were once rain-makers. With their jobs, their salaries, and their lives, they have reached a comfort level at which security is now the leading value.

If making rain means risking getting rained on, and a sudden downpour could erode their secure foundation, they’ll take a pass on the opportunity.Someone else can be there with the bucket when the raindrops become dollar bills.

This company, occupying a well-defined consulting niche, is not in financial difficulty. The managers have a good understanding of their economic model. They price their services well, they compete effectively, and they deliver quality. But they have lost the sense of urgency that they all had at the start, twelve years ago.

“They’re just not hungry any more,” my client said. “They’re turning into a bunch of bureaucrats. And they still want big raises although the company has clearly lost momentum.”

The lack of a well-defined compensation plan had a lot to do with this. I suggested to my client and her partner that we develop a compensation vision for their company-more than just a policy statement -based on the following elements:

  1. Mark to Market: To be competitive, you will endeavor to pay the market rate for every employee, adjusted for any special qualitative benefits of working for your company. To verify this, you have to monitor compensation rates for similar positions in other companies on a regular basis and make market adjustments at least annually.
  1. A Big Carrot for All: To encourage and reward above-average performance, you need a reward big enough to create behavioral change: incentive compensation ranging from 5-25% above base salaries.And to avoid creating a second-class citizenry, the incentive plan should be available to all.
  1. We Can Do This: The incentives should be tied to meaningful, measurable, and realistic results -by individual, by work group, and by the whole company. Your company may also reward the achievement of subjective performance objectives. Employees should be encouraged to recommend measurement criteria at every level of the company.
  1. Keeping Score: Regular reporting is critical -again, by individual, by work group, and for the whole company-as is bringing everyone into the game, working together to improve performance and to develop more effective metrics.
  1. Celebrate-Dance to the Music:Rewards – most often (but not always) in the form of monetary compensation – should be widely recognized and distributed as earned, for short-, medium-, and long-term goals.

The process of developing the appropriate metrics will involve the whole staff, the receptionist as well as the senior managers. Certainly it places a premium on record-keeping, which is necessarily a responsibility shared by all, not just dumped on the accounting department.

The focus should be to identify and encourage opportunity for efficiency and economy – it’s not just a way of seeing how many invoices can be cranked out in a morning or of minimizing picking and packing errors.

Ultimately, the goal is to have everyone doing a rain dance, tossing aside their umbrellas, and getting their feet wet. A whole company of greater risk-seekers should combine for a greater reward.

For more about incentives and reward systems, refer to any of the following web pages: by Raj Khera and the Profit Advisors, Inc. by Larry Comp and Terry Lauter in The Orbiter, June/July 2003 by Lee Ann Obringer in How Stuff Works from Home page of Gainsharing, Inc.

Alligator Bites

“By now, everyone knows about the accounting problems at Fannie Mae… The market expects the pending restatement to snip a cool $9 billion out of past profits…Chairman, CEO, and political insider Franklin Delano Raines(“FDR”)… showing no remorse for the scandal that brought so much pain to investors, … insist[ed]that his early retirement be delayed so that he can receive an additional $600,000, [in addition to] the severance deal, which provides him $14.2 million in deferred compensation and stock and a penurious stipend of $114,000 per month for life. [Author’s emphasis] Although that last may seem to ensure a comfortable old age, it pales in comparison to Raines’s last annual paycheck of $20 million.”

– Jim Anderson, Chief Investment Officer, SVB Asset Management, writing in ISOnews.

Did Fannie Mae’s Board confuse “making rain” with”making Raines?”

(Investment Strategy Outlook, a weekly newsletter from Silicon Valley Bank, is available here.)

Draining the Swamp

According to Nick Cafardo, writing in The Boston Globe , lowering the fixed cost of an athlete’s compensation can produce great team benefits when combined with the right incentive package.

Cafardo reports ( Globe: 12/8/04and 12/30/04) that New England Patriot running back Corey Dillon restructured his contract when he was traded from the Cincinnati Bengals to the Patriots after the 2003season, walking away from $3.3 million in base salary and$250,000 in incentives.

“The Patriots…wanted to make sure that if Dillon didn’t perform up to expectations or if rumors of him being a problem to deal with were true, they wouldn’t have to pay him big dollars,” says Cafardo.

So Dillon accepted a $1.75 million base salary for2004 with a possible $2.25 million in incentives based on his rushing for a total of 1,600 yards , a mark which he passed in the final regular season game, the first finale in which he had ever rushed for 100 yards.

Who says incentives don’t motivate wealthy ballplayers?

Now if he can just stay hungry for that final team incentive in his contract: $250,000 if the Pats win Super Bowl XXXIX !!