In Search Of The Retentive Incentive

Hardly a month goes by that Chuck Bond doesn't get a telephone call from yet another executive search firm trying to woo him with job leads. "My name must be on every bathroom wall in Silicon Valley," quips the veteran software-development engineer. But he says it will take more than some headhunter whispering sweet perquisites in his ear to get him to leave Data Encore Inc. -- a software-duplication company formed in October 1982 as a wholly-owned subsidiary of Verbatim Corp., in Sunnyvale, Calif. "Other companies may pay bigger salaries or have the saunas and spas and the flashy parties," Bond says, "but being able to take part in a company's growth is what really matters to me -- and I can do that here."

Bond participates in an unusual stock-option plan that allows selected employees of Data Encore to purchase shares from Verbatim, its American Stock Exchange-listed parent. Unlike other plans that are open only to an elite corps of managers, this one includes all 27 of the original personnel that launched the now 90-employee operation -- even the assemblers and the receptionists. And, while the traditional stock-option plan carries 5- or even 10-year vesting provisions, Data Encore employees will be fully able to exercise their options as soon as the company clears two predetermined profit hurdles -- which could happen as soon as early 1985 if sales continue to click away at the current $1-million-a-month rate. This would mean option-holders could become stockholders within 3 years of the plan's inception. "Our plan is less remote than the other stock and junior-stock programs you hear about," Bond says, "and yes, I'd have to say it plays an important role in keeping me around."

Jim Dietz is equally determined to stay put. As engineering vice-president of Wilson Laboratories Inc., a $5-million manufacturer of test equipment for computer peripherals in Orange, Calif. (#389 on the 1983 INC. 500 list of the America), he has turned down employment opportunities that would have hiked his pay by 25% -- and little wonder. Through a homegrown royalty program in which the company pays him and his fellow engineers up to $25,000 on the sales of each new product they design, Dietz is already boosting his base salary by 50%. "To keep a guy coming to work for a small private company where you can't get stock, you need a strong financial incentive -- like knowing you're going to make money on every unit the company sells. That's one of the reasons why I'm still here."

Where these men come from, job-hopping is a fact of life. Such skilled professionals as engineers enjoy a seller's market in many parts of the nation, and the average manager of any growing company -- whether high-tech or low-tech -- has become resigned to the knowledge that many a good hire will be gone in two years or less. But Data Encore and Wilson Laboratories are of the opinion that any turnover is too much turnover. Believing that their long-term ability to expand and compete depends in no small way on the stability of their work forces, these companies have resolved to do all they can to make each employee see his or her position as more than just a stepping-stone to another job in another company. Most of their employees laud the effort. As Bond says of Data Encore, "A company like this has unique continuity needs. There are relatively few people here who understand all that's going on, and if we were to have people breaking ranks, we'd be in a world of hurt."

Data Encore managing director Doug Kenny says retention starts with good recruitment. Too many companies forget, he says, that the launch of a successful company requires more than the mere ability to make and sell a product. "You've got to be able to attract and retain people who are willing to work 60 or even 80 hours, week in, week out. And to do that, you've got to develop the right kind of corporate culture and offer good compensation."

Data Encore and Wilson Laboratories have taken it as a matter of faith that money is the most effective incentive, particularly when employees are being asked to devote more than a normal workday to the company. Then again, "you can't pay people $45,000 for a $25,000 job just because they're working long hours -- it only distorts your salary structure " says Kenny. Besides, adds Wilson president and chief executive officer Randall R. Wilson, "ordinary income is not enough for an employee who wants to feel that he's at least partially in business for himself." And that, Wilson points out, is the highly motivated, ambitious yet responsible "key" employee that companies value most -- and often find hardest to hold.

Whether it is the royalty program or the stock-option plan, each man is convinced that he has hit upon the solution most suitable for his employees, his company, and his growth strategy. Not that either idea is flawless; each, in fact, has created problems that otherwise might not have arisen. There will no doubt be changes over time. But the worth of the effort is apparent in the statistics. Turnover rates among skilled employees of both companies are, as Kenny describes them for Data Encore, "just about zilch."

Data Encore is in and of itself something of a retention vehicle. When members of Verbatim's management committee approved the original business plan for the subsidiary, they were, of course, primarily recognizing the potential market for copying and packaging computer software disks. But Verbatim's future expansion plans were never far out of mind. If the $120-million company were to entertain any serious thoughts of establishing and acquiring new subsidiaries, there would be a need for better bench strength in the management ranks. The quandary, however, wasn't so much how to get it as how to nurture and keep it.

"We assume that the average Silicon Valley company loses 20% of its exempt [salaried employees], and 60% of its nonexempt and hourly employees per year," Kenny says. "And because a certain percentage of people seems to prefer not to work for larger companies, Verbatim [which has more than tripled its revenues in the past five years] has always seemed particularly vulnerable to startups trying to pick off key people." It seemed only logical to funnel some of these employees into a start-up of Verbatim's own. "It was a de facto way of hanging onto people who we knew would be considering a move," he continues, "while giving them the opportunities they need to mature. And, believe me, one of the best ways to mature is to be thrown into a start-up."

Verbatim employees, it turned out, needed no pushing. Competition for jobs in many Data Encore departments was surprisingly stiff -- 20 applicants for a single position was not uncommon -- even in the absence of substantial promotions or salary increases. Nor was the stockoption plan used as a come-on. It took Kenny months to convince Verbatim's management committee of the benefits of such a plan, and by the time such details as the profit-oriented vesting provision were added, the original Data Encore crew was already on the job. Most employees, he says, were "flabbergasted" when he called them into his office individually to tell them of the equity opportunity. "Not all of these people even knew what a stock option was," he says. "It wasn't at all expected."

Kenny sees the creation of the stockoption plan as an "interesting and successful experiment" whose results have far exceeded mere retention. "People here work hard, and I believe the stock options have played a big part in motivating them. These first 27 employees have become the core of the company -- they are the corporate culture. They've set the work ethic, and the other people who have come on board have, almost without exception, adopted it as well."