Why is our business so volatile?

November 2011

"I've hired first-class managers, we have well-crafted performance incentives in place, and our market is pretty stable. Yet our year-to-year results fluctuate wildly. Why is this happening (and how can we fix the problem)"

Mike: It sounds like you've adopted a "paint by the numbers" approach to running your company. It's fine to adopt smart management practices and hire top-notch people, but--as you've discovered--that's not a guarantee of success or even consistent results.

Often, the biggest challenges a CEO faces are outside the company. For instance, your market share may suddenly shrink because a competitor has popped up with a much better technology, a lower price, or a new distribution channel. A new government regulation may scare away loyal customers because you're now "not compliant". Industry gossip may hint at executive turnover, financial troubles, or disgruntled customers. You don't control these things: At best, you can only react quickly and smartly.

You'll notice that world-class CEOs almost always spend much of their time on the road, talking to customers face-to-face rather than tinkering with internal org charts. That's because good CEOs know it's essential to hear unfiltered feedback about what customers want and what's going on in the marketplace. They may still get caught by surprise, but it doesn't happen often.

What happens if my CEO is too injured to work?

March 2011

"Our CEO is kind of a lunatic daredevil type, and recently he ended up in the hospital for a week after a bad skiing accident. We have key man insurance on him in case he gets killed, but it occurs to me that we have no plan in place if he's simply unable to work for a long period of time. Your advice?"

Mike:The most direct solution is simply for your board to prohibit the CEO's dangerous activities. When I worked for Arthur Andersen, the big public accounting firms routinely discouraged (prohibited, really) skiing and other high-risk sports that might reduce our billable hours. (The company also didn't want its auditors to show up at a client's offices on crutches.) It was a sensible policy.

If your CEO won't listen to the board, then your only alternative is for the company to take out an insurance policy that will fund the cost of hiring a temporary executive if the CEO gets too banged up to work. And maybe the cost of that policy should be deducted from the CEO's pay.

How can I hang onto full-vested employees?

November 2010

"I have three key executives--co-founders, really--whose options are now fully vested. However, it looks like we face at least another three or four years of hard work and small paychecks before we get to a liquidity event, and I'm concerned they'll leave before then. What incentives can I offer to keep them on board?"

Mike:This has become a very common problem lately, largely due to the sluggish market for acquisitions and IPOs. Your best bet is to work with your top managers to reduce the stress level of day-to-day operations. Even if your key people don't burn out, their spouses are bound to start lobbying for a saner home life. Who do you think is going to win that battle?

However, you do have some leverage beyond incentives: Almost certainly, you have the right to buy back the shares of any vested employee who leaves the company. If someone insists on being bribed to stick around for another few years, you might be better off cleaning house and starting fresh with a manager who has a better attitude.

What's a 'Day's Work'?

May 2010

"We have a rule that says employees have to work the day before and after a holiday to get paid for the day off. So now a bunch of people come in Friday morning, put in a few hours, and leave at lunchtime. I know I'm being picky, but is there a formal definition of a 'working day'?"

Mike: Small, early stage companies typically have unwritten, ill-defined HR policies and practices. Once you add a few employees, issues like this begin to pop up. You need to address this problem--and others like it--with a formal employee handbook. It's not really an accounting issue.

But rules are only part of the solution. You also need to make sure your employees feel a sense of responsibility for the company's success.

Many years ago, I happened to drop in to the office late Saturday evening to pick up some papers. I saw lights on in the clerical area, and found one of our admins typing a big document. When I asked, she said she was working on a proposal, and if the proposal was successful there would be a good chunk of work for all of us. She was the lowest paid person at the company, but she absolutely had the best attitude. If you have highly-motivated employees like her, you won't have to worry about when they punch the time clock.

Should I run a credit check on veteran employees?

November 2009

"My new CFO thinks we should run a credit check on all our employees, even ones who have worked here for several years. Can you give me a reality check on this idea?"

Mike: Don't go there. The Fair Credit Reporting Act permits businesses to obtain credit reports for a “permissible purpose,” which typically means taking out a loan or making a large consumer purchase on extended terms. You can usually justify a credit check for someone you're considering hiring, but the Act requires you to get permission from the applicant (or any current employees) before soliciting this information.

Since your employees will have to agree to let you run credit checks, you should be ready with a good explanation of why you're invading their privacy. If there's nothing you plan to do with their credit scores, you'll be creating a mini-crisis for no good reason. Why bother?

Should we bother with performance reviews?

November 2009

"We've decided to freeze all salaries for next year, and my employees are now asking if there's any point to performance reviews in this situation. I don't have a good answer."

Mike: Ideally, a performance review should be a discussion about an employee's performance, not about raises and bonuses. Go ahead and talk with your employees about their strengths and weaknesses, emphasizing that the company needs everyone to be extra effective during tough economic times. Their payoff will come when the company returns to profitability.

Of course, there will always be a few employees who feel entitled to goof off if there's no gold at the end of the rainbow. Use your performance reviews as a tool to identify who should be at the top of the list if you go through a round of layoffs. These days, just having a job is its own reward.