State of the Art
Jeffrey Banks's company is living proof that innovative compensation strategies aren't just for the Fortune 500* * *
Many owners of fast-growing companies complain that they don't have the time or the money to put together a comprehensive executive-compensation plan. Jeffrey Banks knows otherwise. The 44-year-old founder and chief executive of Metropolitan Outdoor Advertising Corp., one of the country's largest billboard advertising firms, built a $30-million company using one management principle. "I wanted to run a business that was responsible to my employees as well as my shareholders," he says.
In an industry in which competition for both billboard locations and customers is fierce, Banks needs to be able to recruit and retain top marketing and management talent. He founded Metropolitan 12 years ago with $500,000 in profits from a small billboard company he had owned and sold.
At first Banks and his wife, Karen, were Metropolitan's sole employees, but from the time his first billboard on the San Francisco Bay Bridge netted him Qantas Airways as a client, he used cash flow to finance some additional leases and hire a small sales force. Thanks to the couple's good eye for properties and tight fist when it came to controlling operating expenses, the company was in the black by the end of its first year. Then Karen, a former banker, negotiated a line of credit that helped finance the acquisition of a tiny company whose chief assets were some undervalued billboards with high-glitz potential. But, says Jeffrey Banks, "I knew if I wanted to hold on to the people I was hiring, I would have to share the benefits of my success with them."
So Banks, a former middle linebacker with the Cincinnati Bengals and the New York Jets, read up on executive compensation. Quickly he realized that the best executive-compensation plans operated like jigsaw puzzles, with various pieces that could be divvied up among the key players in a company. Some pieces could be designed according to an individual executive's -- or the owner's -- needs; others could be shared among all employees. As companies grew larger and more profitable, additional pieces could be added to the puzzle. And as long as the overall plan was well designed, pieces could be subtracted during capital-intensive or difficult business phases.
The first piece of Metropolitan's executive-compensation puzzle was a profit-sharing plan Banks instituted in 1980 for the company's 12 employees, including himself and his wife. It was a particularly golden year for Metropolitan, and Banks realized the company was generating more cash flow than it needed to support the next year's growth plan. So he allocated a share of profits to each employee, based on his or her salary. The funds were deposited in a retirement account in each employee's name.
Flexibility was the byword of that early plan: Banks made no guarantees about the level or even the frequency of contributions. But he made contributions during 7 of the next 11 years, and as the staff grew he also maintained his original goal of keeping what is often used solely as an executive benefit as a company-wide program.
The question arose of what to do with all those dollars once they were segregated into the individual retirement plans. Banks wanted his employees' retirement money to be managed conservatively and profitably, so he brought in Steve Adams, a managing director at Van Kasper & Co., a regional brokerage firm in San Francisco, to direct an investment program that divides assets 50-50 between growth-oriented stocks and bonds. The program has averaged a 13.5% annual rate of return.
By the mid-1980s Banks felt he had to come up with other ways of binding his top employees to the company. Metropolitan had expanded into billboard markets in southern California, Texas, Idaho, and elsewhere, which meant he needed to rely on his regional managers for much of the company's site selection, marketing development, and day-to-day office supervision.
So in 1985 he divided his company into seven corporations, drawn up according to regional markets, with stock that was wholly owned by his holding company, Metropolitan Outdoor Advertising. That gave Banks the stock of eight companies (including the holding company) to play with when he devised incentive packages that would motivate his key employees.
The next year he brought in a new regional manager with an incentive package that included the potential to earn a stake of up to 5% in his local division. Eventually three other regional managers came on board with the same plan. But while it was appealing as a way of locking each executive's financial future in to his division's growth and profitability, the method had its drawbacks. "As the divisions kept growing, it became increasingly difficult to keep tracking the different stocks' values," says Banks. He remained convinced about the benefits of stock ownership as a way to motivate managers, but he was willing to consider alternative incentive methods.
Banks investigated a phantom stock plan. "At first I didn't get it," he says. "If executives didn't actually receive stock, where were the benefits and performance incentives?" But he was willing to give it a try. After all, his employees would be able to earn the same capital-gains profits (as long as the company's market value kept rising) that they would have gotten from true stock ownership. But because no shares of stock changed hands, there would be no tax bill for employees until the phantom stock payouts occurred.
The new plan was a success. "One type of phantom stock is so much easier to administer than the stock of seven divisions," Banks says, "and it still works great as a way to motivate executives."
But Banks didn't stop there. He set up a pool containing 8% of his holding company's stock, to be awarded on a discretionary basis to Metropolitan's most valuable executives and regional managers. "I'll always maintain majority control of our board, but this is another way of tying our top performers to the company's future," he says. So far, he has distributed just under half of the pool's stock.
For all of Banks's best intentions, executive compensation has occasionally taken a hit at Metropolitan. The most recent dates back to last year's $27-million acquisition of a billboard firm, which was financed primarily through bank loans. "We've got covenants tied to our current leverage that will make it difficult for us to do very much in the way of executive compensation for the next 18 to 24 months," he acknowledges.
The profit-sharing plan is bearing the brunt of that. Banks doesn't anticipate being able to make any new contributions in the near future. The money in the retirement plan continues to grow, however. Most Metropolitan executives also continue to build long-term rewards through the performance of their phantom stock shares, whose value is tied to the company's overall performance.
Executives and other employees also receive annual cash bonuses, set at levels appropriate for the current austerity. Banks doesn't, however. "The way our bonuses are set up, I don't receive anything till we hit our top numbers -- which we haven't made yet."
Banks has found a way to improve his employees' compensation despite his current financial restrictions. Last year he created a 401(k) plan that he merged with a 401(k) that already existed at one of the companies he had recently acquired. The plan's low administrative cost made it simple for Metropolitan's bankers to live with, just as long as Banks promised not to match employee contributions until he met his various operating goals. Twenty-five percent of his employees joined -- not bad for the first year -- and now defer about $2,000 worth of salary each month.
What's the payoff from all the personal attention to compensation matters? A work force that, in Banks's eyes, "understands that we're all a family working toward a common goal, toward rewards we're all going to share." That may sound like California dreaming. But Metropolitan's record of success is pure reality.
THE TAKE AT THE TOP
How CEOs set their own compensation
If there are no easy answers in executive compensation, that's particularly true when company owners have to decide how much to take out of their businesses for themselves, and when. Take out too much too soon and they risk crippling their growing businesses; yet if they fail to diversify their finances beyond the business as soon as that's feasible, they risk sacrificing their family's financial future to the company. What's a CEO to do?
"Since there's no real formula to rely on, it's a matter of conscience," says Joe Schulman, president of Sentry Chemical Co., an Atlanta manufacturer of cleaning compounds with annual sales of about $7 million. "I develop a number based on my productivity and the company's profitability, and then ask myself what people in my shop would say if they knew what I earned." Among the companies surveyed, the average base salary for CEOs was nearly $80,000. The bigger the company, the likelier it was that the chief executive took home a good bit more: CEOs at companies with sales of $1 million to $4.9 million had an average total compensation of $107,461; when sales topped $10 million, the CEO's total pay averaged a much more generous $194,089.
Those numbers sound positively utopian to many struggling business owners who continue to make financial sacrifices long after their companies pass beyond the initial, precarious phase of operations. "We live moderately and have few financial needs," says Gregory Turner, whose Saginaw, Mich., business, Turner Business Forms Inc., is eight years old. Although his revenues top $1 million annually, Turner still takes home a salary that's a small fraction of the survey average. "I'm not one for the yachts and big cars. I tell my wife the equity we're building for ourselves in the business is the big thing."
Generally speaking, it's more the size of one's ambitions than the size of one's company that determines how much an owner takes out of the business. "I'm 41, and I have virtually no assets outside of this company," admits Mike Slataper, whose Mansfield, Tex., construction business, Ramtech Modular Design Inc., has grown to $12.8 million in sales. "That's because I have goals that go far beyond our being a $15-million company. And you're not going to grow like that if you're raping your business of its capital." Nor are you going to survive hard times and achieve those larger ambitions, most CEOs agree, if you're not willing to cut your own compensation when it's in the company's best interests. "In hard times, I've cut my salary down to grocery money," says A. J. Adolph, whose Automotive Casualty Insurance Co., in Kenner, La., now boasts double-digit profit margins and $50 million in sales. "Hell, I've sold my car when times were bad."
Not surprisingly, those kinds of sacrifices instill a zest for enjoying the good times when entrepreneurs think their businesses can finally support them. "For the first 20 years, I worked 18 hours a day, seven days a week, and didn't take a big salary because I was building up inventory, buying machinery, and accumulating retained earnings. But now my son and son-in-law can earn more than $240,000 a year and I earn far more than that," says Leonard Silverstein, founder of $5-million Terrace Paper Co., of Cicero, Ill. "If I were the head of General Motors, I'd have to answer to my shareholders. But I work for myself and my family. When I think I have enough money retained in the business, it's stupid not to take it out."
Most of the survey respondents are still committed to sharing the rewards of success with their top executives. Respondents paid an average of $65,497 in base salary and $19,749 in bonuses (when paid) to their COOs. Chief sales officers averaged $54,794 in salary and another $15,550 in bonuses for those who got them. In fact, quite a few CEOs were quicker to reward their executives than themselves. Robert A. Funk of Express Services Temporary & Permanent Personnel, in Oklahoma City, sounds almost wistful as he comments, "Our bonus system has always been one of our company's biggest strengths in attracting and retaining top people. And once the company finally reaches a certain level of profitability, my partner and I are definitely going to start taking bonuses ourselves."