Compensation mistakes you can learn from

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T alk to any owner-manager who has been in business awhile and you'll get an earful on executive-compensation incentives that have backfired -- usually because of insufficient planning, excessive costs, or management blunders. These are some mistakes you'll want to avoid:

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* Building in performance disincentives. "We had a gain-sharing plan that was so complicated people here called it a pain-sharing plan," recalls Anthony Harnett, CEO of Bread & Circus, a $60-million whole-foods supermarket chain headquartered in Newton, Mass. The plan's basic concept seemed appealing: any department that exceeded its profitability goals would receive quarterly bonuses from the gain-sharing pool. "But people began complaining about their targets, and the result was that everyone negotiated for the lowest possible platform from which to be measured. It came down to who could negotiate best, not who would perform best. So we gave it up and switched to a 401(k) plan for everyone."

* Failing to monitor bottom-line results. "I didn't take a raise for five years because I brought in a very expensive VP of sales and I felt as though I was investing my money in our company's future," says Joe Schulman of Sentry Chemical Co. And for a while, the company's sales did rise. But because of the cost of the executive's salary, perks, and expense account charges, and the additional staff he required, overall profit margins dropped fast. "After a few years I figured out that I had to evaluate the overall cost of having him in the business. And the results showed he wasn't worth it. Once I let him go, our sales dropped off a little, but profitability increased tremendously."

* Giving away the store. "When I was starting out, I had this tendency to ignore the things that I was uniquely doing for my business -- like taking all the financial risk. So I would be very quick to give my top employees shares of the company," says Marshall Rafal, whose $1-million chemical software company, OLI Systems Inc., is based in Morris Plains, N.J. "As we grew larger and more profitable, I wanted to get those shares back under my control, but that meant spending a lot of the company's money to buy them back. And in some cases, I still haven't been able to afford it."

* Designing excessively complex plans. "We set up a profit-sharing plan because we wanted to reward longevity," says Carl Unrein, chief executive of Ambulance Service Co., a $6.8-million medical transportation company in Denver. Unfortunately, an insurance consultant suckered him into an administrative nightmare -- a plan that allowed employees to make savings contributions that they could withdraw on demand. "We were buried under all the back-and-forthing of their giving us their money and then requesting it back whenever they felt they needed it. It wound up costing us $1 in administration costs for every $3 worth of assets we had -- and we had $185,000 worth of assets the first year alone!" After three years of frustration Unrein canceled the plan, then switched to a plain-vanilla program offered by his banker. It permits profit-sharing contributions by the company only; it accomplishes the same corporate goals but costs just $2,000 a year to administer.

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As part of our survey, we asked CEOs to tell us their outlook for the coming year. Here's what they said:

Respondents' Expect a Expect Expect little
outlook for 1990 downturn improvement or no change
For the overall economy 29% 20% 50%
For their region 25 35 40
For their industry 23 40 37
For their company's sales 9 75 15
For their company's profits 14 66 20



Looking for clear, comprehensible information about executive-compensation strategies geared specifically to your needs as the owner of a growing business? There's not much available, but here are some places to start:

* Read Strategic Pay: Aligning Organizational Strategies and Pay Systems, by Edward E. Lawler III (Jossey-Bass Inc., 350 Sansome St., San Francisco CA 94104, $26.95). Here's a savvy, straightforward book that analyzes compensation strategies according to their financial and management results.

* Subscribe to Compensation & Benefits Manager's Report (Prentice Hall Professional Newsletters, 113 Sylvan Ave., Englewood Cliffs NJ 07632, $191.40 per year), an eight-page biweekly newsletter with quick tips on the latest strategies, analyzed down to their tax and legal implications. It's well worth the price, since articles are directed toward bottom-line savings.

* Attend seminars offered by the American Compensation Association, or ACA, (P.O. Box 29312, Phoenix AZ 85038-9312). Best suited for human resources staffers, with topics such as how to design executive-compensation programs and executive incentives.

* Computerize with the help of Software for Compensation Professionals: A Directory of Resources from the ACA (see above; $85, $75 for members). It'll show you software that can help you broaden your compensation program before you hire outside consultants.