While there are many companies that readily acknowledge the efficacy of imposing more structure on their compensation systems, there are also as many that steadfastly maintain that there is no need -- in fact, no place -- for salary ranges, bonus formulas, and incentive plans in small business. At least not in their small business.
"It becomes a game of numbers," says Philip W. Nace, founder and CEO of Nachem Inc., a Braintree, Mass., chemicals manufacturer. "If you devise an incentive plan that is strictly tied to performance against sales projections, the plan's going to be faulty to begin with. Remuneration is based on how much you go over budget, right? So, people lowball the estimates -- there's no way to get around it." What's more, he says, the plans tend to discourage enterprise -- whether the projections are met or not. "Once they've met them, they quit working. And if there's a downturn in the economy, and they know they're not going to get the incentive, you can bet they're not going to work."
"Maybe we're just too lazy to start measuring performance," says Edmund Taylor, CEO of Gas Inc., a 58-employee, $10-million propane-marketing company in Union City, Ga. He used to pay "pure, reach-up-in-the-sky-and-grab-it-down bonuses that either you earn or you don't," but gave it up, recognizing that they weren't motivating his employees. Believing that "nothing motivates like getting paid on Friday and having job security," he put all of the would-be bonus money into salaries. It may not be the most scientifically designed compensation system, he says, but it is honest: "Now we pay what the job is really worth, rather than underpaying [the employees] a little bit and then giving them a big fat check at the end of the year." Michael Keyes, too, rebels against management-by-mathematics. "With 26 employees, I just don't see that you have to be that structured," says the president and co-owner of Amsure Associates Inc., an $8.5-million insurance agency in Albany, N.Y. His bonus system, for example, has no ceiling, and no set pattern of size or frequency. "It's not that we're not goal-oriented; we just don't see the need to be so sophisticated, with bar graphs and bell curves. Any business under 50 employees is really run like a family. It has to be."
The owners and executives of small, closely held companies tend to have managerial environments that are indeed familylike, consultants say -- usually with one person at the top who is either very paternalistic or egalitarian in managerial style. While the two styles are widely divergent in many smaller ways, they are the same in one broad respect: In both cases, there is a reluctance to distinguish among employees on the basis of performance. The CEO-owners see all underlings either as children or as equals. They tend to see corporate progress as a team effort, even when there are some individuals who deserve more recognition than others. And they don't believe they need graph paper to figure out what is going on within their four walls.
"In a small company, the owners are the managers -- or they know the managers directly," says John McMillan, vice-president and director of compensation services with A. S. Hansen Inc., of Lake Bluff, Ill., "so they feel very competent in making equitable and fair reward decisions." Often, company performance and individual performance are seen as one and the same. This is particularly common in service-oriented companies, in which the efforts of people are the products of the company, but it is also true in very small manufacturing operations. At Saugerties Packaging Corp., a 25-employee, $3.6-million manufacturer of paper wrappers in Saugerties, N.Y., "everybody gets a bonus," says CEO Peter Garlock. "They run about 10% of salary, but they're based on profits, not performance. Everybody performs to their optimum every year, we feel."
And if they don't perform, they are likely to find themselves jobless. "If you can't give somebody a raise, then it's probably time to part ways," says Allen Guggenheim, president and chairman of Information Management lnternational Inc., a 225-employee, $11.5-million maker of data-processing systems and software in San Jose, Calif. "It isn't easy, but when you're at that point, you should probably make it comfortable for them to leave."
But the fact of the matter is that in a small, closely held company with just a handful of executives, friendships and alliances develop that prevent the ouster of all but the worst managers. What's more, their compensation packages often continue to march upward in value at the same rate as that of their more productive co-workers. The long-term result, consultants say, is apt to be an overgrown management layer, where additional people have been hired above or below those who aren't measuring up. It is costly, and it can create problems.
"When I first came here three years ago, as a consultant, there was a sense of inequity among the executives," recalls Jim Hillgren, vice-president for human resources at Intecom Inc., a $120-million telecommunications-switch manufacturing company in Dallas that has grown at an 80% to 100% rate per year since that time. "Salaries, bonuses, and benefits were being determined arbitrarily, and some of the folks who hadn't grown as fast as the company found themselves in positions with less responsibility, but still getting the executive package. There was a sense of a lack of direction as to how people were being rewarded."
