Frank Louchheim had a pretty clear idea of the kind of company he wanted when he and three others set up Right Associates five years ago. He knew that most of the business for the fledgling outplacement firm would flow from Fortune 500 companies, and that, to serve their needs, he would quickly have to build a national network of offices. But he didn't want to go deeply into debt to do it and risk strangling the young company's cash flow with interest payments.
Louchheim's answer was to set up each office as a separate profit center, headed by a manager with the authority to run the business as he or she saw fit. Each office would be expected to break into the black in its first year and provide a constant stream of start-up cash for new offices thereafter.To make the system work, Louchheim knew that he would have to attract experienced, entrepreneurial managers who would thrive on independence. The lure would be a compensation system that treats each manager as an entrepreneur: The higher the office's profit, the higher the manager's pay.
This was familiar territory to Louchheim. Before starting Right, he and his three co-founders had been independent consultants, and had worked together doing outplacement counseling for other organizations. Each operated in a different city and received straight commissions. "When we started, we didn't have enough volume to pay a salary," says Louchheim. "So we lived or died by what we did in our own offices."
Working from his own experience, he developed the strategy that has allowed Right Associates to set up 28 offices throughout the United States, with no long-term debt. In the next five years, the company plans to add 15 to 25 more offices in this country and some overseas, all largely financed internally, although there may be a need for a private placement or a public offering.
The key to the Right system is the company's corps of office managers, paid under a compensation plan that was designed to attract and keep the best talent. To start, each manager receives an "extremely modest" base salary for managing the office. The manager gets another salary for time spent actually counseling clients, plus a commission on the office's sales. In addition, the manager has an operating profit target. If the target is hit, he or she gets 10%. For every point over, the manager receives an extra percentage point of bonus, with a maximum of 20%. If the target is missed, there is a half-point deduction, with a 5% floor. "An office manager," says chief financial officer Stan Tilton, "can earn from 50% to 100% or more over and above his or her salary in bonuses. We have one person at 600%."
In addition, after a year, every office manager who meets goals receives stock options "commensurate with the size of the office and its contribution to the size of the company," adds Tilton.
Office managers report to Louchheim or to the director of regional offices with "dotted line" responsibility to Tilton for administrative and financial duties. "We've attempted to create 28 entrepreneurs," says Tilton. "And that's a very difficult thing to do as we grow. We went from 13 offices to 28 in less than three years. We have some systems and procedures in place, but not enough to tie ropes around our managers' necks."
"No ropes" means that Right has only a skeleton corporate staff at headquarters, and their compensation is geared toward helping the offices reach their goals. The staff is headed by Louchheim, who receives a salary and graduated bonus based on predetermined, tiered sales goals. Another bonus is based on a goal of net income before taxes. Tilton receives a salary plus one bonus based on net operating profit goals, and another bonus based on a cost-reduction program.
Another officer, in charge of training, product development, and maintenance, receives a salary and two bonuses, one based on the number of weeks he reduces "landing time" -- the time it takes a candidate to land a new job -- and a second bonus that is a percentage of sales on new products he develops and brings to market.
A third officer, the director of regional offices, receives a salary and a percentage of a predetermined sales goal. If he exceeds that target, he receives a graduated percentage of the excess.
To reduce the temptation of corporate officers to put too much pressure on office managers, the system has some buffers. "I get an incentive based on the aggregate operating incomes of all of the offices," explains Tilton. "If 26 make it and 2 don't, for example, our compensation committee, which is made up of officers and members of our board, will look at the total effort rather than just the bottom line. I have a 'fail-safe bonus' which has a limit of 20% of my annual salary if I don't make my goals. Otherwise, the pressure would short-circuit the incentives."
Right's incentive program is also a useful performance indicator that sends up a red flag in the event of trouble. Says Tilton: "If two offices don't make the goal, then we know where to concentrate our efforts."
Whether Right Associates can remain decentralized and keep its entrepreneurial style as it continues to expand is a matter of some disagreement between Louchheim and Tilton. It reflects a healthy tug-of-war between CEO and CFO. "What'll probably happen is that another tier [of management] will come in, an eastern region and a western region," says Tilton. "I hope not," says Louchheim from across the conference table. "I think when people can't talk to you, you lose something. I don't care if people call me at six in the morning. I'd rather spend the time on the phone talking the problem through."