Biggs says that some entrepreneurs like Nowak identify too readily with their employees -- and become convinced they can make them rich. Biggs says, "The guy who owns a business wants to give his employees an incentive. He puts himself in their position and says, 'What do people want? They want equity.' We have found that that is not a positive incentive." He explains, "When you have stock, it doesn't mean a lot. There is generally never any dividend distribution. There are no voting rights." And, says Biggs, most important -- and something that's often overlooked -- is that most employees are not long-term thinkers, nor are they risk takers. "Otherwise, they'd be out starting their own companies."
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John Petillo
$500,000
Age: 48
Position: President, CareAdvantage Inc., Islen, N.J.
1994 financials: $4 million in revenues; operating at a loss
Equity ownership: 20%
Number of employees: 145
Business founded: 1994
Challenge: To attract top talent with big bucks
In a former life John Petillo was a Catholic priest. In this one he appears to have negotiated favorable terms with Mammon. If he meets his profitability targets this year, he could earn as much as $1 million. Petillo cautions, however, that that's a remote possibility. His 1995 revenues should come in at $15 million, but the company will be only at breakeven.
His company, CareAdvantage Inc., is coming fast out of the gate, and he took it public last June. Thus, like a lot of entrepreneurs looking to quickly build -- and maintain -- value in a company, Petillo uses compensation as an integral piece of his growth strategy. He believes the best way to build a company that will endure is to pay for top-notch talent -- including his own. "We pay a premium for executives," he says. "If they do what you want, you don't want them looking around to leave. If they don't, you always have a severance agreement to fall back on."
Petillo's journey has been a varied and eventful one. After leaving the priesthood and academia -- he was the chancellor of Seton Hall University -- he ventured into the private sector. He became the head of Blue Cross, Blue Shield of New Jersey. During his three-year tenure there the company went from having a deficit of $127 million to having $135 million in positive reserves. "At Blue Cross we were given heavy incentives to save money," says Petillo.
That is also the driving force at CareAdvantage, a medical-management-review company. CareAdvantage sells its information-intensive services to large employers or insurance companies. If one of their insured employees needs, say, bypass surgery, CareAdvantage will review its database of the 2.2 million people it already tracks for its customers and determine what in that case would constitute appropriate care and reasonable cost. Petillo says that in a good year, one-third of revenues can result directly from savings shared with customers.
CareAdvantage has instituted a highly structured compensation system -- modeled on the Blue Cross system -- which Petillo is convinced can grow with the company. "We wanted to be able to develop a structure that you don't have to demolish. You just raise the goals." Petillo earns $500,000 in base salary. In the future, if targets are met, that figure would be 50% of his total compensation. Another 25% -- for himself and his key executives -- would be a short-term bonus based on the company's hitting an operating-profit target. Petillo readily admits that his own compensation is "over and above what the market would pay." On the other hand, it is predicated on his belief in shelling out for people with "tremendous experience or great contacts." He maintains that because of his Blue Cross, Blue Shield tenure, he has both.
The long-term bonus for himself and his key managers, 25% of total compensation, is deferred for three years on a rolling basis and then converted into stock. Petillo says the long-term bonus, which, like the short-term bonus, is based on profits, may not amount to much for some time because CareAdvantage is still in a start-up phase and thus is not very profitable. "You may have to get to years 8 through 10 to have it really pay out."
That's just how Petillo wants it. He views the long-term bonus as little more than an alternative pension plan that will pay out only if the company takes off. "We want to really stretch out these incentives." Petillo has been able to lure 12 key executives with his compensation plan, but he needs to have those people in place for the long term. He adds that now that the company has gone public, long-term bonus money will convert to stock options, again keeping any big payoff amply deferred.
* * *
Bill Hamlin
$140,000
Age: 34
Position: President, Hamlin Power Reaves Ltd., Springfield, Ill.
1994 financials: $10 million in revenues; profitable
Equity ownership: 89%
Number of employees: 50
Business founded: 1989
Challenge: To bring in more sales and take out more money
To Bill Hamlin, building a business is a game -- one he plays with apparent gusto. His compensation is just one more way to keep score. He explains: "Whatever this company makes, I make sure my personal net worth goes up by at least that much." Hamlin Power Reaves Ltd. is actually two companies -- or maybe three, depending on how you count things. Hamlin's an entrepreneur with an entrepreneur's characteristically green thumb.
The core business does sales training and direct marketing for automobile dealers. Recently, it grew a new subsidiary, which Hamlin started a year ago: a dealership, complete with an eight-bay service facility, that sells low-mileage used cars as if they were new. At Hamlin's "superstore" you can walk in and buy a nearly new 1995 model for a good 25% less than a new one.
