On a table in the corner of Ken Swanson's neatly appointed Silicon Valley office sits a box with a $10,000 Rolex watch inside. It is a none-too-subtle reminder of the stakes that Swanson encourages his young managers to play for. Swanson's seven project managers know that if any of them brings $500,000 in gross profits to Swanson's $20-million construction company, he will wind up with a watch just like the one on the table.
The Rolex might seem a bit superfluous at a company where young managers in their mid-twenties can earn upward of $100,000 a year, but it is an example of the enticements that owners of fast-growing companies dangle in front of key employees. The incentives may differ from company to company -- a one-week, all-expense paid Caribbean cruise, a late-model BMW, a $100 bill, even a six-pack of beer-but the purpose is the same. When a company wants to spark sales, push profits to new highs, or reduce ever-escalating expenses, there is no surer way to get an employee's attention than to reward his performance with pay.
Unlike the world of big business, where regimented compensation schemes designed by well-paid consultants are the norm, the policies and practices followed by the 516 companies that answered INC.'s Executive Compensation Survey are as varied as they are original. At John Stack's $25-million Springfield Remanufacturing Center Corp., in Springfield, Mo., the keystone of the plan is an 82-page financial statement that is distributed monthly to the company's 200-plus employees. Each employee, from chief executive officer to broom pusher, has performance standards and incentive bonuses; with the monthly statement, each worker can measure how big his or her bonus will be. In Green Bay, Wis., Ryan Transfer Corp. president Bill Ryan follows a much simpler system: Every driver with more than a year's seniority at his trucking company gets paid a percentage of the weekly revenues.
Implicit in both of these approaches is an attempt to tailor compensation plans to fit the specific needs of each company. As the owners and managers of small to medium-size private companies will attest, there are no set formulas, no panaceas, no clear paths to follow when it comes to setting pay strategies for the employees who make their companies tick. "Like everybody, I'm constantly searching for the magical formula to keep them motivated," says Robert Clark, the owner of Fort Collins, Colo.-based Concept Systems Inc., a 15-employee producer of educational material for scuba-diving schools.
Many small companies find it especially hard to decide which employees should be singled out for special "executive" treatment, if only because the efforts of one group of workers are often hard to separate from those of another. In response, more and more are linking executive compensation to overall employee compensation and, in some cases, opting for a single compensation system rather than the traditional multitiered approach.
This is one trend suggested by the survey responses, and there are others. They include: tying incentives to specific performance goals, spreading ownership among more employees, and deemphasizing the role of fixed salaries in the overall pay package. It is, of course, difficult to discern how strong or potentially long-lasting any of these trends might be, but they do indicate some of the ways that small companies are thinking about executive compensation.
Trends aside, there are many similarities between the results of last year's and this year's executive compensation surveys, which were both carried out with the assistance of Peat, Marwick, Mitchell & Co., the accounting and management consulting firm. The respondents are overwhelmingly founders, owners, or operators of private companies that have average annual sales of about $4.5 million. The companies are new to the battlefield of American business -- two thirds did not exist 15 years ago. They average 49 employees and span the business spectrum from management consulting to steelmaking.
Total compensation for chief executive officers averages $82,494, up 19% from last year's $71,797. By comparison, the chief operating officer averages $61,044, the chief financial officer $48,426, and the chief marketing officer $52,124. The average CEO tends to be bullish on prospects for his business. Ninety percent of the companies expect to see their sales increase next year, with a little over a third anticipating revenue increases of more than 20%.
An overwhelming majority of the respondents, 86%, report a lack of any long-term incentive plans for their top people. Perhaps that is because many are young companies, where management is consumed with making ends meet rather than worrying about the distant future. Incentive stock options, popular among the nation's biggest industrial companies, are in place at only 6.5% of the respondents to the INC. survey, reflecting the traditional reluctance of owners of closely held companies to dilute their own holdings.
This doesn't mean, however, that companies have neglected forms of compensation other than straight salaries. Thirty-seven percent of the companies have taken steps to improve compensation other than salary during the past year, many adding such benefits as supplemental life and medical insurance or such perquisites as company cars and country-club dues and expenses. Often, these moves are in response to an outside threat -- a competitor's attempt to hire away a key manager, for example. In general, the companies have the same mix of benefits found at larger, more established enterprises. A great majority offer medical and life insurance, and more than a third have profit sharing. The company car is still the executive perk of choice, with supplemental life insurance a close second.
As for their general thoughts about compensation, more than half of the respondents, 52%, say that establishing pay levels is their primary concern. Last year, the chief worry was controlling the spiraling rise in benefit costs. Peter T. Chingos, who heads Peat Marwick's executive compensation and personnel consulting unit, suggests that this change reflects economic trends more than anything else. Inflation has cooled, relieving some of the pressure of the increasing cost of employee benefits. A stronger economy has also led some companies to worry about whether their pay scales are sufficient to retain valued employees.
That concern has also fueled the trend toward performance-based compensation systems. "I think that there's a movement much more toward the tying of the reward systems of the individuals to the results of the company," says Bill Ryan, owner of the trucking company. "I also perceive that there's a movement on the part of a lot of employees, a desire to participate, almost a demand to participate, in the results. I think that those two concepts are somewhat linked, that if we do good and I contribute to that, then I want to participate in that in relationship to my contribution."
There is another reason that more companies are turning to performance-oriented compensation plans: They work. Peat Marwick's Chingos says his firm took a slice of the data from this year's survey and found that of the 100 fastest-growing companies (during the past five years), 28 had short-term performance plans in place. None of the slowest-growing 100 companies had short-term performance plans.
At Ken Swanson's construction company, for example, managers set gross profit goals for the year. If those are met, Swanson then deducts twice the managers' annual salaries and awards a bonus equal to 10% of the remainder. For a good manager earning $50,000 a year with a profit goal of $400,000, this bonus would amount to $30,000.
Some owners see in all this a human need that goes beyond the desire to earn more money. "People want to belong," says Bill Ryan. "They're either going to belong to unions, or they're going to belong to churches, they're going to belong to something. . . . It's basic human weakness that goes through their fiber. You give them something to belong to and it goes a long way."
Getting employees to feel part of the team involves more than just talk, though. It may involve a major change in the compensation plan in one case, a minor tinkering in another. Take Jess Brand, president of $5-million Brands Inc., a Columbus, Ind., lumberyard, who changed his annual bonus to a semiannual one. Why? "To keep it on people's minds," he says. Now, he thinks it may be necessary to move away from a discretionary bonus system based on a person's job tasks to one tied to the achievement of specific company goals.
Or consider Lucille Flint, president of Derma Science Laboratories Inc., a Rockwall, Tex., cosmetics manufacturer. Rather than part with equity in the business she and her husband own, Flint set up separate sales organizations, and the management of those entities can then earn and purchase equity in those companies. "We have found that's the best way to reward them, and I don't see why a lot of the bigger companies can't do that instead," she says.
Likewise, Keith Blackely, president of Advanced Refractory Technologies Inc., in Buffalo, has had to confront the equity question. His company's investors include local businesspeople, New York venture capitalists, and large industrial companies that want a window on promising new materials technology. Blakely knew that they did not want to see their holdings diluted further. But when he had to lure a key employee away from a bigger company, one able to pay a higher salary and offer more perks, equity became a deciding factor.
Considered almost a birthright by employees in high-tech Silicon Valley or Massachusetts Route 128 companies, getting a piece of the company is becoming increasingly common in all industries. At K.O. Swanson & Co., project managers are offered a chance to buy 5% stakes in some of the buildings the company erects and manages. If the employees don't have the cash to do so, the company will lend them the money at favorable interest rates. "If we're lucky, a $5,000 investment will be worth $20,000," says Swanson, noting that his people can buy into a building at wholesale prices and sell out at retail.
In addition, there is a trend to include more and more employees in equity plans. "In the small organizations, it's not uncommon to see every employee participating," says Jerrold Bratkovich, partner and general manager of the Los Angeles office of Hay Management Consultants.
But such tactics are not for every company. For some, just meeting the weekly payroll is a challenge. For owners of cash-poor and low-margin businesses, the words of Bill Ryan may ring true: "There is a rule of survival for small business. There are things that you want to have and things you can afford. You had better go with what you can afford."
The Chief Executive
Total compensation $82,495
Base salary $62,080
Percent receiving bonus 59%
Bonus as a percentage
of base salary 45%
Percentage change in
total compensation +19%
Years in position 9
Years with company 11
Board member 80%
Average equity position 67%
Net revenues $4,481,526
Net pretax income $288,190
Payroll as a percentage
of revenues 22.3%
Projected revenue increase
for next fiscal year 15%
Age of company 9 years
Percentage private 95%
incentive plan 37% 1%
incentive plan 31 0
benefits 36 8
Perquisites 17 2
awards 19 0
appraisal system 24 0
CHARTS AND TABLES BY BERGMAN HAKE DESIGN