INC.: Do you do a lot of selling?
WHITTLE: Three days a week I'm out talking with our customers, and I don't mean, "Hey, let's go have lunch." I mean, "Hey, let's do a deal." I don't schmooze. I sell. And maybe that's what it really gets down to -- finding high-level, experienced players who are still willing to do what makes business work in the world: sell.
INC.: Isn't there a built-in problem here? Suppose you do find the people you're looking for, people who are capable of going out and doing multimillion-dollar deals on their own. Why would they choose to work for you? Why wouldn't they go into business for themselves?
WHITTLE: That's a good question, and one we've spent a lot of time thinking about. This gets into the area of our internal financial structure -- how we distribute equity. We've worked very hard on that. We've asked ourselves, "What kind of financial reward does it take to attract and keep entrepreneurial talent?" Because we do view our company as a kind of gathering of entrepreneurs, and our success is directly related to our ability to attract and keep them. So we've developed what we call entrepreneurial reward levels.
INC.: Wait a minute. I don't understand what you mean when you say your company is a gathering of entrepreneurs. You have 1,000 employees.
WHITTLE: In this context, I'm really talking about 15 or 20 people. These are high-level people who could leave and start their own businesses tomorrow and be successful at it -- and, by the way, have probably thought about it at one time or another, either before they joined us or since. We need a relationship that produces the kind of results we want for the company and the kind of results these entrepreneurial people want for themselves. And what do entrepreneurs want? For one thing, they want to take a relatively small amount of capital and turn it into a fortune of some sort. So we've structured both our compensation system and our equity system to let them do that.
INC.: I'm not sure I understand what you mean.
WHITTLE: Let's say an entrepreneur has $50,000 that he can beg, borrow, or steal. If you say, "OK, entrepreneur, we're going to increase that fivefold to $250,000 over the next 10 years," any good entrepreneur will laugh at you. They'll say, "So what? That's not a whole lot better than I can do in a bank. It's certainly not meaningful relative to what I want and think I can achieve."
INC.: I don't know. That sounds like a pretty good growth rate to me.
WHITTLE: From one point of view, it is. Once a company gets to a certain size, it really can't grow much faster than that. A fivefold increase in 10 years? I'll bet that's about a 20% compounded annual growth rate, which isn't bad. If you could put in a million a year, it would produce an absolute dollar return that would be OK. But entrepreneurs don't have that kind of capital to invest. So if you want to attract and keep those people, you have to figure out a way to dramatically increase the rate of return. You have to offer them a potential payoff comparable to what they'd get if they were starting their own company from scratch.
INC.: How can you do that without screwing up your capital structure?
WHITTLE: To begin with, you create two classes of equity. You have entrepreneurial equity and investor equity.
INC.: Do you mean two classes of stock?
WHITTLE: Not stock, equity. We're a partnership, not a corporation. We couldn't find a way to do this within the corporate form, so we switched to a partnership form three years ago.
INC.: You'd better explain how this works.
WHITTLE: Let's say this is day one of the plan, and the business is worth $100 million. You have your original equity holders, and you let your entrepreneur partners put up, say, $1 million. Suppose the business is worth $300 million five years later. Its value has grown $200 million. You split that. Half the increase goes to the original investors, so they make $100 million on their original $100 million -- they've doubled their money. The other half of the increase goes to the entrepreneurs, who started out with almost nothing. They're looking at returns of 100 times their original investment.
INC.: Are you exaggerating?
WHITTLE: No, not at all. That's just a hypothetical example, but it's almost exactly what we've done. We've set up systems whereby $10,000 to $20,000 investments by the entrepreneurs can yield $500,000 to $1 million returns over five to seven years.
INC.: Let me get this straight. The entrepreneurs are investing in Whittle Communications -- not just in their particular businesses, say, Special Reports or Channel One.
WHITTLE: That's right. Now we also have a compensation system that's tied to the performance of the particular business units. The heads of the business units get a base salary and a straight cut of the unit revenues with no caps. We have five business units, and each has a group of products. There are also the generalists and nonbusinesspeople who provide services to these groups, and they get a cut of the corporate profits. But this equity system is separate from that.
INC.: And the entrepreneurs have to buy into it. . . .
WHITTLE: Right. We don't ever give equity away. We think it's an important part of our culture that you always have to buy your equity. It's an investment. You're investing in the future growth of the company. In effect, we're splitting the growth between the original investors and the entrepreneurs. The original investors keep the base.
INC.: You're creating a new base, aren't you? You're saying, "OK, the old game is over. Now, we're going back to zero and starting a new game."
WHITTLE: That's exactly right. And we keep recalibrating it from time to time.
INC.: Do you require the entrepreneur partners to buy back in?
WHITTLE: No, we just readjust the systems so that the new entrants can have situations similar to the old entrants. That's really where the large companies have failed. I think it's one of the key reasons they've lost entrepreneurial talent. With the equity systems they have, there is no way for new people to get the big percentage returns. We recruit heavily out of those companies, so I know their equity deals don't work. We have a very low attrition rate, so I know ours does.
