Employee Pay in Focus: Transactional vs Strategic Pay Practices
Differences abound between transactional and strategic human resources, but even if the distinctions are clear to HR generalists, these terms get a little fuzzy when it comes to employee pay matters. Nonetheless, it’s important to understand the distinctions as these can be important to establishing the right pay practices and policies to keep your organization market-competitive. Let’s look at some critical differences between transactional and strategic approaches to employee pay, and answer some frequently asked questions that can help brings this subject into focus: Characteristics of Transactional Employee Pay Transactional employee pay practices tend to be short-term (or, for that matter, often shortsighted). They address situations but don’t address the “big picture.” They tend to be stop-gap in nature; interim solutions that might still need permanent strategic solutions down the road. Here are some common employee pay situations that are short-term and transactional in nature, rather than long-term and strategic: Hiring new employees just above what they are being paid with their current employer Bringing new employees into the organization at a pay rate above existing employees to make sure the position gets filled Awarding merit increases without performing any proactive analysis just because they fit in budget Utilizing loose descriptions of job functions Using free salary data or letting employees drive the pay narrative with potentially misleading or inaccurate data from the internet Characteristics of Strategic Employee Pay Strategic employee pay practices tend to be longer-term solutions. They take the big picture into account and take the long view toward continuing marketplace competitiveness. Here are some common employee pay situations that are longer-term and strategic in nature, rather than short-term and transactional: Placing new employees in a market-validated pay range and comparing their history to others in the same or similar position for proper pay placement Evaluating and adjusting pay for current employees as needed when new hires must be brought in at higher rates Conducting a discrimination analysis before approving merit increases and address related issues proactively Utilizing job descriptions with clear responsibilities and standards for minimum as well as desired experience levels and education requirements Securing third party published and scrubbed employer data or using a compensation consultant to secure salary data Answering Frequently Asked Questions to Clarify Transactional vs Strategic Employee Pay Practices Question: How can we bring new hires in using the prevailing market range when current employees are below market? Answer: First, think of your pay range in thirds: The lowest third of the pay range would apply to new and untested employees with little to no experience. The middle level would apply to fully proficient employees with several years of experience. The upper third is for seasoned employees with sustained performance over many years as well as a lot of experience. Obviously, you’ll need to have key information to properly place new employees into the appropriate pay range. For example, how much relevant experience will they bring to the job? Three years of experience? Four? None? You’ll then need to consider your current employees and align the new employee’s pay with other similarly situated employees. For instance, if a current employee has been in the job 4 years and came to you with no previous experience and the new employee brings 4 years of prior experience, you should pay these employees approximately the same. If you need to bring that new employee in higher than the existing employee because the market demands it, keep in mind when your merit awards will occur. If they are just a few months away, the current employee’s pay may exceed the new employee’s pay with their merit increase. If you just awarded merit increases, you may need to increase the existing employee’s pay to avoid creating discriminatory pay practices. You may also have to budget an increase for current employees and then execute the pay increases as soon as possible. You could also offer the new employee a sign-on bonus payable in various payments to keep the regular rates of current and new employees aligned. This leads us to the next question: Question: How can we realign existing compensation to market levels with minimal impact to financials? Answer: Tough question. It helps to budget for market-related increases each year. If that hasn’t been your practice and the pay ranges have fallen behind, you might provide increases every six months until you can get employee pay where needed. For employees below pay-range minimums, you can give merit increases first and then make a market adjustment if needed to help them reach the new minimum. Finally, you can use bonus programs, known as “variable pay,” in addition to base pay. Variable pay benchmarks must be re-earned each measurement period based on results. This enables you to hold merit increases in check; this can be important because merit increases permanently increase salary levels as well as benefits associated with base pay, such as life insurance, short-term disability, long-term disability, and sometimes retirement plans. Bonuses, on the other hand, are single pay-outs that do not normally increase base pay levels and related benefit costs for benefits (unless otherwise included per your benefit plan documents). Be sure to check your plan documents to clearly understand the definition of compensation before using bonus plans. Which naturally begs this question: Question: Why is a properly designed strategic pay program important to an organization? Answer: Among the many reasons are that a well-designed strategic employee pay program: Provides appropriate pay ranges for recruitment Promotes accurate job descriptions Provides a basis for determining the external value of jobs to market Provides baselines for reviewing employee performance and rewarding desired behaviors Ensures costs are maintained and managed appropriately Helps reduce turnover through improved employee morale and engagement when pay is not a dissatisfier and there are no pay equity issues The Bottom Line: It’s important to strategically plan your employee pay programs so you can attract and retain your top talent. Recognize that your employees are an investment and not an expense. The time and money it takes
Internal Leaders Affect the Value of Your Business
Internal leaders may not be obvious. They may not even have a “leadership” title. Make no mistake, however; internal leaders are critical to value and attractiveness when it comes to selling your business. In Super Bowl 55 we saw the impact of an internal leader. Tom Brady has the highest winning percentage of any single athlete in major professional sports. The Tampa Bay Buccaneers have (or at least did up until this season,) the worst win/loss record over their entire existence of any major professional sports team. Yet one man changed the culture of the organization almost overnight. Remember, for all the accolades being heaped on Brady, he is an employee. He doesn’t own the Buccaneer enterprise or negotiates any contracts other than his own. He didn’t choose the team’s logo, uniforms, location, or coaches. Tom Brady is paid to fill only one of 53 player positions in the organization. There are also 31 coaches on the team, whose jobs are to teach and give direction to those 53 players. Although every player will acknowledge that winning is a team effort, none will argue the impact of one strong internal leader on his 83 coworkers. Internal leaders can be good or bad When I was a very young business owner, I hired an experienced salesman. He was an alcoholic and began inviting other employees to his house for a cocktail after work. It took me some time (too long) to realize that he was plying his coworkers with free booze while he ranted daily about how poorly the company was being run. I couldn’t understand why there was so much resentment among my team. They seemed to resist any direction I gave them. Finally, one person was kind enough to explain to me what was happening. Because this salesman was my top producer, I was afraid of the impact on revenues if I fired him. He didn’t want my job. In fact, he didn’t want any of the responsibility that should go with leading. He had merely discovered one of the biggest truths about leadership. It’s easier to tear something down than build it up. People love to hear that things could be better. It’s making them better that is the tough part. Tom Brady made the Tampa Bay Buccaneers better. Like any good internal leader, he didn’t limit his contribution to his job description as Quarterback. He helped recruit and train the people around him to build a better team. Identify your internal leaders An army dispatches its troops under the leadership of its lieutenants, but it succeeds on the ability of its sergeants. As a business owner, you can inspire with core values and set great goals. Whether you reach them, however, will be determined by your internal leaders. When it comes time for your transition, they are more important than ever. If you are selling to family or employees, they may not expect to be included in equity, but they will determine the acceptance of those who are. If you are selling to a third party, his or her achievements following the sale are conditional on the support of your internal leaders. They can prop up an inexperienced owner, or sink him without a trace. If any part of your proceeds from exiting depend on the continued success of the business, you would be wise to identify your internal leaders and make some provision for their continued loyalty after you are gone. If they don’t buy-in, you could see the value of your enterprise (and your payout) decline substantially. John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio, Texas. He is the publisher of Awake at 2 o’clock and has authored three books on business ownership. The single largest transaction and transition of your life deserve special attention. Are you planning to exit and sell your business? Business Exit planning is quickly becoming a buzzword in the legal and financial communities. Your professional advisors position themselves to provide tax, risk management, wealth management, and contract preparation services. BEST Exit Plan Advisor has been trained to manage your team of tax, legal, business, and financial planners to navigate your exit strategy. Click here for our Special Section on Exit Planning for more details and a video on how to get started. If you want to see how prepared you are for transition, take the 15-minute Assessment at no charge: There is one indisputable fact – 100% of owners will eventually exit their business. The Assessment is a multiple-choice questionnaire that does not ask for confidential or financial information. Nevertheless, it is a critical first step in starting the discussion and planning process. Click here for FAQs and more information concerning our free, no-obligation exit planning assessment.
Exit Planning: Attracting Buyers and Investors
Is it time to sell? Use this checklist to see if you’re ready to put your nursery on the market. Uncertain economic conditions in the past several months have created new opportunities for owners of businesses who are able to produce cash flow. They can cash out now. The time has not been this pregnant with opportunity for years. Why? It’s all about rates and returns. A key number considered when placing a value on a business is the interest rates available in the open market. Many times, the Treasury Bill, or T-Bill rate, is referenced. The lower the interest rate, the higher the value of a business. For some time to come, it will be hard to achieve more than 1% return from interest even in the long term. The Federal Reserve has telegraphed that for the next two years, they will keep interest rates near zero. Investors are seeking better and more reliable returns on their money. They are dissatisfied, keeping it on the sideline, earning almost nothing in interest. Right now, there is enormous liquidity in bank accounts looking for a home. Warren Buffet is reported to have two major holdings — one is Apple, and the other is cash. This legendary investor can’t seem to find a suitable place to park his money for a return. Many horticultural businesses have reliably generated predictable positive cash flow over the years. The ability to generate significant repeatable positive cash flow year in and year out is highly desired when looking at any business to buy or invest in. If you own one of these companies, it might be high time to sell. For many, it has been a great year, while others have suffered losses. In horticulture, there is a skill level a buyer or investor must have to own and operate a green-industry business, or at least be able to hire qualified expertise. That is also true in pharmacology, technology, and finance. All those hot categories are driven by superior expertise and innovation. Good people are like gold in this market. Some company owners have visions of their children taking over. Historically, it is unusual for a second generation and even less for a third generation to do as well as the founder did. The old adage “rags to riches to rags in three generations” is still true in many cases. It might be better to find a buyer and leave your grandchildren with cash and not a business to run. There are exceptions, but few. See How You Measure Up Deciding you want to sell your business or attract an investor is the first step. Once that decision is made, you need to get the company ready for a sale. A careful evaluation of the things that add or subtract from/to your business value will need review. Investors know what they are looking for in buying a business. BUSINESS CHECKLIST On a scale of 1-10, these are the key issues an investor considers in buying or putting money into a horticultural business. How does your company measure up? Score yourself: A: Size of business (compared to others in the space): 1 – Small, not a big player in the market. 10 – We are one of the largest and most successful in our space. B. Quality of the financial records: 1 – Pretty scattered and fragmented, a bit better than a shoebox full of receipt slips. 10 – All our records are computerized, complete, and reviewed; our CFO keeps us well informed. C. Positive cash flow and potential increases: 1 – Not generating significant cash flow or profit. 10 – We are a cash cow; lots of room to grow and even double our net revenues. D. Need for capital investment: 1 – Will need significant upgrades; will need capital soon. 10 – All our equipment and infrastructure are up to date and paid off; no needs on the horizon. E. Credit line requirements: 1 – We use a large credit line and sometimes have difficulty paying it back sometimes. 10 – We don’t need a credit line, and have significant cash resources to back up. F. Owner centric – management team: 1 – This company can’t exist without me there every day; only I know how it works. I don’t have anyone to back me up when I am sick. If I died, this company would die. 10 – If I never showed up again, it will work just fine. This is nearly a passive investment. I have great people. If I retired tomorrow, I have a team who can pick up where I left off and maybe make it better. G. Workforce quality and access to labor as needed: 1 – We just can’t find anyone who wants to work anymore. 10 – There are a lot of good people in our area. Hiring is easy because people want to work for a company like ours. H. Customer concentration and loyalty: 1 – The bulk of our business comes from a handful of steady customers. There are a few that buy once and never come back again. 10 – Our top 10 customers only make upon 5% of our total revenue. Losing a customer is not a death sentence. Our customers see us as an essential primary vendor. They come back again and again. I. Competition in the market for the dollar: 1 – Lots of aggressive competition; we have to discount deep to make deals. 10 – We are the competition. In our space, we make the rules. J. Compliance with environmental, labor, immigration, OSHA, and EPA regulations: 1 – We fly under the radar and keep the feds at bay. 10 – We try to make sure we are never vulnerable to the violation of any regulations that could shut us down. Obviously, no company on the planet can score a 10 in every category, but the closer to 100% in each of these important areas, the more valuable your company will be in the eyes of a buyer. You
Your Exit Plan: The 3 Inarguable Reasons to Start NOW
What is Your Business Exit Plan? If you’ve ever done a business plan for the purpose of raising capital, one of the key questions is “What is your exit plan?” Many business owners think that question is self-serving, intended merely to let the venture capitalists figure when and how they will get their return on investment. In truth, however, that question is far more important. A business exit plan is a strategic plan with an end date. Putting a time frame on your plan, and defining the goals to be achieved by that date, creates a future-focused mindset for the owner. It controls and reduces your tendency to prioritize daily firefighting over long term thinking. It provides you with a yardstick to measure progress. Most importantly, it affects your thinking about almost everything in your business. Here are the 3 inarguable reasons why you should start your exit plan now. Reason 1: It’s Never Too Soon In my years of working with business owners, I’ve helped many transfer their businesses to family and employees. I’ve worked with others who sold their companies to a third party for tens of millions of dollars. Surveys show that many owners have regrets afterward. Others happily move into the next phase of their lives or careers. A few have seller’s remorse. On the other end of the spectrum, some come to the realization that they hated their business owner lives for years. The majority feel that they received a reasonable reward for monetizing their work of decades. None of them. NOT ONE of them has ever said “I spent too much time planning.” It’s likely that the sale of your business will be the most important financial event of your life. There are a few lucky owners who have wealth outside or beyond the value of their businesses, but for most of us monetizing those decades of effort is the culmination of our working careers. If your exit plan is to transfer to family, you can choose vehicles like Grantor Retained Annuity Trusts (GRAT) or Self Cancelling Installment Notes (SCIN). These may have to be in place for years to substantially reduce or eliminate taxable proceeds for you and/or your heirs. In a sale to employees, developing the documentation that shows their assumption of managerial responsibilities over time is a basic qualification for SBA loan approval. That, plus developing their “down payment” equity, punches the ticket for you to walk away with your proceeds in pocket on the same day that you cede control of the company. In a sale to third parties, the condition of the financial markets at your time of exit will decide the size of your multiple. Preparing your business with due diligence in mind, and understanding the different classes of buyers, allows you to better choose the time, method, and proceeds of your transition. Although it is difficult to time the stock market, shifts in acquisition multiples take much longer to develop. Being prepared allows you to enter the market while prices are at a peak. Five years is reasonable planning time. Ten years is better. There is no time frame that’s “too far out” to be thinking about your exit. Reason 2: It Changes Your Thinking It’s difficult to run a business without being reactive. Employee issues, customer problems, and vendor policies can shift your priorities on a daily basis. When your exit plan is in place, you have a broader perspective. Every decision you make is now in the context of “Does this support my bigger picture?” There are numerous examples. Hiring: If your exit plan is to pass the business on to your children, then hiring becomes a support function. You look for employees who can fill in areas where your offspring lack the necessary skills or don’t have an interest. If you plan to sell to employees, then you are looking for a Successor in Training (SIT). That is someone who shares many characteristics with you. If you are selling to a third party, you want a Second in Command (SIC). That is someone who compliments your strengths, and who can be contractually incented to stay on the job with a new owner. Securing a management team adds considerable value to any company. Lease vs. Buy: If your plan calls for selling to someone who is likely to relocate the company, or who already has your production capabilities, you may want capital equipment to be easily disposable. A competitor or much larger acquirer may want to leave the equipment out of the transaction. In a Main Street business, you may choose to have a strong tangible asset base for an entrepreneurial owner to use when obtaining acquisition financing. Real Estate: Should you own your building? Some buyers (say a publicly-traded acquirer) prefer to lease space. In that case, owning your building could provide a post-transition income stream in your retirement. On the other hand, a relocated company could stick the owner/landlord with a special purpose building that requires significant remodeling to be rentable. These are just a few of the decisions that are better made in the context of your long term plan. The decisions you are making in your business today all have lasting implications. Reason 3: A Plan is not an Action If you are taking a long trip, you likely determine the route before you start out. If it is complex, you may print out the directions. Nonetheless, you are still likely to use a navigation app to alert you to problems along the way, like traffic jams or construction. But everyone understands that printing out the directions isn’t the same as beginning the journey. You might take that step days or even weeks before actually getting into your car. It’s the same with your exit plan. Choosing your time frame and preferred method of transition isn’t the same as making it happen. Writing it down is a key component of preparation, but it shouldn’t be confused with implementation. Starting Your
The Importance of a 13-Week Cash Flow Forecast
It is no secret that the recent pandemic has wreaked havoc on the global economy, pressuring businesses across all industries to take severe measures to “weather the storm” to ensure their survival. As businesses, both large and small, are forced to rapidly address their liquidity positions, we increasingly hear about actions aimed at preserving cash that has included asset sales, drawdowns of revolving lines of credit, site closures, employee layoffs, vendor negotiations, employee compensation adjustments, and furloughs. Given that cash is the “lifeblood” of any business, measures such as these are often necessary. However, through times of business expansion and contraction, we have witnessed organizations expending substantial time and resources developing tactics around either/or cash generation and cash preservation. As a result, we strongly recommend to our clients that they invest the time and resources towards developing a basic but often overlooked management tool: a 13-week cash flow forecast model (the “cash flow forecast”). In this summary, we will talk about the key components of a cash flow forecast as well as a few of its key benefits, namely in empowering organizations to make thoughtful, informed decisions that are data-driven in nature. The Forecast and Key Components The cash flow forecast is a real-time model that breaks down the cash inflows and outflows of a business into discrete parts, and it provides the most accurate depiction of a business’s financial health (or lack thereof) as well as valuable insight into the drivers of that health. It is important to note that the development of this model should incorporate the involvement of senior leadership that provides input into the underlying assumptions and is willing to provide potential ownership regarding the development and reporting of specific categories and/or line items. These owners need to change their mindset to one of “cash in and cash out” rather than “what hits the P/L” (example: sales mean nothing if they can’t be converted to cash). While the high-level components of a cash flow forecast are shown below, each of the key component buckets should be segmented into specific line item components labeled with sufficient detail in order to create period by period comparisons (for example, “Leases” may be a line item within Cash Disbursements). Key component buckets include: Beginning Cash Balance: Recommend calculating on a Book Cash basis and will require a Bank to Book cash reconciliation. Cash Receipts: Typically consists of both the collection (both amount and timing) of existing A/R as well as future sales and their associated collection (both amount and timing); segmentation by a key customer with appropriate DSO assumptions. Include miscellaneous sources of cash as well. Cash Disbursements: Break out into operating cash, investing cash, and financing cash disbursements (subtotals). Operating cash disbursements can be thought of as normal course payments for items such as payroll, supplies, rent, etc. Investing cash disbursements can consist of several different things, but the main line items we typically see needing attribution are capital expenditures. Financing disbursements relate to debt, equity, dividends. The most common relates to interest expense or principal payments on loans. The beginning cash balance adding forecasted weekly cash receipts less forecasted weekly cash disbursements can provide a real-time view of the organization’s liquidity. The analysis should then be rolled forward each week. While opinions differ on the appropriate time period, 13 weeks is generally considered a reasonable midpoint period; short enough to provide real-time visibility and accuracy (one calendar quarter) but long enough to give the business insights that can be strategic in nature. The Benefits of Visibility in Decision-Making We subscribe to the theory that enhanced visibility into the go-forward liquidity position of an organization can be empowering and can result in thoughtful, informed, and data-driven decisions. Among the numerous benefits of a cash flow forecast are the following: Allow the business to identify and enhance cash systems and controls – numerous issues can be identified and addressed such as how cash disbursements are administered (process), how the business can understand the amount and timing of financing requirements, how sales are forecast with associated cash receipts and when the business may hit roadblocks that don’t allow it to fund key operating costs such as payroll. These are just a few of the benefits. Allows the business to address its sales and collection process – perhaps certain key customers (or profiles) don’t pay as timely as others, the business may not be invoicing correctly or in a timely manner, appropriate mechanisms, systems may not be set up to accurately record sales, discounts and importantly capture cash receipts. We have found on numerous occasions that businesses don’t actively monitor and aggressively follow-up on delinquent A/R or offer incentives (assuming make economic sense) to accelerate collections. Sales don’t mean anything if they cannot be collected. Allows the business to identify non-core assets and create asset disposition plans – in these circumstances, businesses are forced to address assets that are non-core in nature to key business operations. These may be real estate, inventory, certain business lines that may be unprofitable, etc. If assets are non-core to operations and they can be monetized, they should be, or at least there should be some consideration of this possibility. Not only does this allow a business to generate cash, but it also removes management distraction and time from administering these assets. Allows the business to address its vendors in a critical manner – with a cash flow forecast, the theoretical becomes actual, and a light can be shone on vendors regardless of the type that is bleeding cash from the business but may not be generating significant ROI. With a forecast, the amount, timing, magnitude of these disbursements can be readily understood, and this can lead to better processes on the front end in terms of identifying and approving vendors and vendor relationships. We have found on numerous occasions that businesses, regardless of whether they are in expansion or contraction mode, have seen the benefits of a cash flow forecast to be significant as it
