How Do I Get My Employees Focused on What’s Most Important to My Company’s Growth
If you're a business owner or other shareholder, there are presumably certain issues that you have identified as key to your company's future success. Presumably, you see a future company that is bigger and better than the present company. Although the specific outcomes you seek to achieve might be unique to your organization, there are usually some common denominators in the "what's important?" category.
Fulfilling the business plan is important. Your strategy and its associated business plan was presumably built on the foundation of a mission, values and vision for your company that defines who you are, why you exist and what you want to become. Your business plan probably identifies key initiatives for operations, product development, marketing, distribution, customer service, capital and human resources. In all likelihood it articulates roles and expectations for key people in the organization. These things are of critical importance to any business wishing to become something greater than it is today.
Sustainable growth is important. Such a pattern emerges in organizations that are superior in executing their business plan and can maintain a compounding positive trajectory in their revenue development. Organizations that are so oriented build success patterns that breed a culture of confidence and a competitive advantage. This is how growth becomes sustainable. Such a pattern is of primary importance to any growth-oriented company.
Appropriate return on capital for shareholders is important. Business ownership involves decisions about capital investments that need to be made if a future company that is bigger than the present is to be realized. Capital, therefore, that is expended - invested - in any aspect of the business must translate to a positive economic result for the shareholders. This is a comparative analysis. What return must one achieve in the business relative to other potential applications (investment) of that capital to make it a superior use of those resources? In short, a return on capital invested int he business must be rewarded with a superior return - otherwise, why not withdraw that capital and invest it in the market at potentially less risk. Measuring and achieving an appropriate return on capital investments within the business is a crucial issue for companies wishing to grow.
Assuming we agree that these can be defined as issues that are important to shareholders, then what is it that we desire of employees? Although a long list could be developed in this regard, all could be categorized under the three following outcomes or results:
- Daily behavior that is designed to fulfill the business plan
- Accountable decision making that reflects employees' awareness of their impact on the business plan and the economic outcomes the business needs fulfilled
- A dedicated and committed effort fueled by passion and focused on the execution of key performance initiatives
If we look at the issues just described in the context of the title being considered here - "How Do I Get My Employees Focused on What's Most Important to My Company's Growth?" - one must conclude that the answer is to engender an ownership mentality within the workforce. If I'm a business owner, I need my employees to draw the same conclusion as I do about "what's important." They need to behave in a way that reflects that understanding and commitment.
An ownership mentality, however, does not just occur because employees come to understand better what company ownership wants to achieve. This is an assumption too many business leaders make. "I have told my employees about my vision and what I expect of them - why are they not more focused? Why am I not seeing the results I anticipated?"
Employees invest their talents in helping a business achieve its growth goals because the following factors have been properly aligned in their engagement with that company:
- "I understand the company's goals." This means employees understand all of the implications of that vision and its potential fulfillment in much the same way described above. They understand "what's important."
- "Achievement of the company's goals is important to me." This now turns understanding into importance. Until this occurs, there is no engagement on the part of the employee and, therefore, no ownership mentality develops.
- "I see how I can make a contribution to the goals of the company." At this stage, an employee's passion begins to be unleashed because he sees the relationship between what he understands, why it's important to him and how he can contribute to the targeted outcomes. This occurs when an employee recognized the unique abilities he has and is given the opportunity to have them not just utilized by the business but magnified.
- "I see the connection between the company's goals and the achievement of my own goals." When this occurs, an employee finds meaning in what he is doing. Because that application of his time, effort and talents is fulfilling ends he wants to achieve, he is willing to commit and engage. The more meaning he finds, the more passion he applies to his work.
Understanding, importance, contribution and connection. When these four things are at work in an employee's mind and heart, there is a different thought process in which he engages as he comes to work each day. His daily decision making follows a pattern that might best be described by these questions:
- "What has to happen?"
- "What can be enhanced?"
- "What might be hindered?"
In other words, an employee that is engaged in this way has developed an ownership mentality.
The question then, to be considered next is "how can a company's rewards strategies be engineered to create the outcomes just described?"
From Rewards to Results
Sustained growth in a business comes about primarily because key employees are focused on performance factors they can impact - and they feel motivated to do so. That focus leads to execution. When sustained, that pattern brings about the results and success the business plan calls for.
If the beginning point then is focus, then the role of an rewards strategy should be to create that focus. At a minimum, that is a GOOD outcome. A BETTER outcome is that the rewards strategy leads to greater execution. Ultimately, the BEST outcome is that it creates and then sustains the desired results.
Likewise, for an ownership thought process to be cultivated, employees must be able to draw a straight line in their minds between the vision of the company (goals and outcomes), the strategy for its achievement (key performance initiatives and indicators), their role in that strategy (expectations) and how the will be rewarded for achieving those expectations (meaning). When this "line of sight" is achieved, certain passion measures have been met and engagement occurs. An employee then moves from commitment to engagement to accountability - with the latter ultimately becoming self imposed.
Can properly engineered rewards really create such an effect? In fact, the can.
The Role of Incentives
The outcomes discussed in this article are not achieved because a company pays a salary, has a group medical plan and/or allows its employees to contribute to a 401(k) plan. Rather, they are achieved when an employee feels "invested" in the results the company seeks to fulfill. Being invested means the employee recognizes he will be devoting his mind, heart and talent to the business in anticipation of a return on that commitment - and that the return is measurable, attainable and meaningful.
Man of VisionLink's clients have some kind of incentive plan when the engage us to work with them. However, those incentives do not typically match the return criteria just mentioned - measurable, attainable and meaningful. In many cases, none of the three criteria are met.
If the incentive is regularly and universally attainable, it often is because it has become an entitlement, in which case it doesn't pass the "ownership" test. For an employee to be invested, he must also be at risk. And he is willing to take that risk if the payoff is measurable, attainable and meaningful.
Incentive plans by their very nature create a direct correlation between performance and results. Just as a business will not receive a payoff from the market unless it creates sufficient value, and employee participating in an incentive plan only realizes that part of his remuneration if he has helped create it through his performance.
An incentive plan is a conditional payment to an employee for having met certain performance criteria. That criteria is determined by the role he has in the organization and the key performance initiatives, indicators and factors for which he has stewardship. Incentive payments may be short-term or long-term - again depending on the focus and outcomes needed. They may be made in cash, stock or phantom equity. They may be fixed (e.g. percent of salary) or undetermined (e.g. percent of profits).
For purposes of this article, we will break incentives into two broad categories - short-term incentives and long-term incentives. An exhaustive treatment of the range of plan designs possible under these two categories is not the purpose of this article. However, we should discuss some general rules of thumb and considerations that are applied in this regard by companies that want to engender an ownership mentality.
Conditional payments made to an eligible employee for performance measured, and payment made, in 12 months or less is considered a short-term incentive. Customarily, short-term incentives are based upon either clearing certain KPI hurdles/objectives or on the overall results of the organization.
Plans that focus on the achievement of certain KPIs typically break them down into categories of performance. Part of one's incentive is earned based upon the achievement of certain departmental goals - such as revenue growth and customer service standards. Another part is earned by the company achieving a certain profitability threshold or other defined financial metrics. Finally, part of an employee's annual incentive is achieved by the achievement of certain personal milestones.
Typically, companies that adopt this approach will "weight" the department, company and individual components of an employee's incentive based upon a tier system. Tiers are set up for different classes of employees based upon their impact on various performance measures. Tier 1 for example may be top level management whose incentive is primarily determined b company performance, with small attribution given to department and individual achievements. Conversely, a Tier 3 or 4 employee might be heavily weighted on department and individual achievement. The intent is to create focus and tie incentives to those functions and execution points that the company most needs that employee or set of employees to focus on - and upon which, he or they are best positioned to have an impact.
The other approach for building a short-term incentive is to base the payout on a more global result. We call this an "overall results focus." Such a plan still involves goal and target setting for employees as well as performance management systems to reinforce the same. However, under this kind of plan design, the bonus is going to be based upon the achievement of a company financial threshold such as profits or net income.
The determination here is how much of the profits (or other measure) will be shared with those that helped create it - and how much will represent return to shareholders. The intent of this approach is that it communicates to all that participate what the company focus is going to be and what has to be achieved for a payout to occur. Employees are then educated about how their role and function can and should impact that outcome.
Whether the plan is based on targeted KPIs or an overall result, the intent is to tie an employee's day to day focus to issues consistent with what ownership considers "important." Presumably, such a focus will fuel the execution needed for success patterns to be established. It is the repetition of those patterns that ultimately leads to the achievement of the company's growth goals.
You have probably figured out that if short-term incentives deal with a 12 month period, then long-term incentives are paid out at some interval beyond one ear and are based on performance metrics that are not short-term in their function or purpose. Long-term incentive are intended to achieve each of the following objectives:
- Create a focus on the achievement of long-term company financial goals
- Create a sense of "investment" in those goals and an opportunity to build wealth that is tied to company performance
- Create an incentive for top talent to stay with the organization, because of that which they will forfeit if they leave the company prior to the full realization of their rewards potential
- Create an incentive for top talent to join the organization, because of the upside potential they will gain by the application of their unique ability
With regard to this topic, it is not uncommon for us to have a conversation with a potential client that goes something like this:
VisionLink: "Tell me a little about your growth goals for the next three years. If we're sitting here three years from now, what has to have happened for you to be satisfied with the progress your company has experienced?"
Client: "Well, among other things, the company would like to grow from a $50 million to an $80 million business."
VisionLink: "What is it that makes you confident that kind of growth is achievable?"
Client: "We have the right products, we have secured a good reputation in the marketplace, we have just made a key acquisition and we have great people."
VisionLink: "Fair enough. Now help me understand this. If your vision is to grow from a $50 to an $80 million business, which part of your overall compensation plan communicates that goal to your key employees?"
Client: "Um...Good question. I don't know that any part of it does."
A long-term incentive is the most common missing ingredient in most businesses' rewards framework. And yet, it is quite possible the most critical ingredient for any company that wants to attract and retain employees that will think like owners. Why? Because it is the compensation component that most closely mirrors how owners get paid for their investment of time, capital and energy to build the business. It is also the ingredient that will best demonstrate to an employee what it can mean to him form a wealth building standpoint if he helps the company achieve its growth potential.
Ultimately, there are nine different types of long-term incentives. In choosing which is right for your organization, a series of considerations need to be made. Do you want to share equity? If so, do you want to reward based on current value or future value that is created? If you don't want to give stock, do you still want the reward based on company value, or do you want it tied to some other performance metric? If something other than company value, what financial performance standards do you want to measure and how do you want the results shared?
Companies that go through this kind of "decision tree" process arrive at usually one or more of the following alternatives for creating the long-term focus they hope to achieve.
- Stock Option
- Restricted Stock
- SAR (Stock Appreciation Right)
- Phantom Stock
- Performance Unit Plan
- Profit Pool
- EVA Pool (Economic Value Added)
- Incentive Deferred Compensation
Each of these can have some variation to it, but ultimately the intent is the same. The purpose is to create a daily vision of the part of employees that is as close to that of the owners as possible. When employees understand how the combination of their long-term incentive and the rest of their rewards package help to fulfill their cash flow/standard of living requirements, their security needs, and their wealth accumulation targets, they become "invested" in the company's success. An ownership mentality is in large part an outgrowth of this confluence of factors.
What, then, is it that creates alignment between the company's vision and the employees' vision resulting in a unified financial vision for growing the business?
In summary, three things create this alignment:
- A clear statement of short and long-term corporate strategies
- Well-defined job responsibilities and accountabilities
- Incentive plans that link both
Measuring Employee Ownership
Ultimately, companies begin the process of charting a course towards the development of an ownership mentality by assessing where employees currently stand in this regard. This is not done by simply observing nor can it be achieved by just asking employees, "do you think you have an ownership mentality?"
What ultimately has to be measured relates to the criteria set forth at the beginning of this article relative to an ownership mentality. Employees need to be assessed relative to how well they fulfill the following:
- I understand the company's goals
- Achievement of the company's goals is important to me
- I see how I can make a contribution to the goals
- I see the connection between the company's goals and the achievement of my own goals
VisionLink helps companies examine this by computing something called a Net Ownership Score (NOS). This survey and scoring system measures four employee responses: understanding, importance, contribution and connection. Employees rate themselves on a scale of 1 to 10 on a series of statements that relate to those four components. Scores are compiled and placed in three categories - clear, unsure and not clear. The highest average ranking is then subtracted from the lowest to arrive at the "net sore."
Such a study can assist a company is determining where it stands right now relative to the ownership mentality issue. Whether one performs this kind of study or does something else, is not as important as the business realizing that this is a matter that can't be ignored if the company is going to experience breakthrough growth.
As indicated in the graphic below, breakthrough growth occurs in a company when the rewards philosophy and structure are created within the framework of the organization's mission/values, vision and strategy. When this kind of framework is built, employee understand their roles and are focused on the execution required of them. Once this occurs consistently, a pattern of success emerges and a culture of confidence is achieved. Ultimately, this is how a competitive advantage is realized.
Ultimately, the fulfillment of your business strategy is in the hands of your employees. Their day to day behavior is influenced by many things, but chief among them is the degree to which they possess an ownership mentality. Is what they think is important the same thing that you, the owner, thinks is important? The compensation structure you engineer for employees clarifies and reinforces the rewards associated with making the correct decisions - the decisions you want them to make. An ownership mentality can be measured simply and improvements can be planned accordingly. Ultimately, this will lead to the superior return on your compensation investment that you seek.