Your Key Group Holds The Key To Your Success! But! You Need To Listen To Them!
This was an interesting case we worked on. There were a few educational moments that I would like to share with you.
Scenario: Three brothers owned a successful manufacturing company. The company had several government contracts over the years and built an exceptionally good reputation with the government agency. These contracts were very profitable and kept the company busy. The company took pride in its work, delivery of the projects, and having the staff to accommodate the project, which lead to ongoing contracts. Over time, it became clear that doing work for the government and a few other companies was all the manufacturing company needed to be profitable and grow.
So, what is the problem? On the outside, nothing, but inside there were some disturbing situations brewing.
This scenario set up the problem we had to deal with. The key person in the firm developed a strong relationship with the agency head who awarded the contracts. He did an excellent job enhancing the relationship over the years. Through his efforts, the owners were able to be very profitable and to take sizable salaries each year.
Because the key person ran the business like he was the owner, the three owners were able to take a lot of time off. They usually spend about two days in the business a week and took long vacations.
The problem started when the owners decided to give the key person a large bonus the past year for doing a fantastic job. However, the key person assumed this would be the norm each year. A good salary and a fabulous bonus, which the key person was looking for each year. So, when a new year rolled around, there was anticipation by the key person to receive the bonus. When he approached the owners about the bonus, there was a clear disconnect between their vision and the employees.
The owners felt that the bonus was based on performance of a particular year and did not think the key person would be looking for this substantial bonus each year. In a way, the owners felt they were being held hostage by the key person. “Once a luxury, it became the necessity”
However, when we broke it down for them, they realized the key person had the relationship with the government agency, not the owners (they did not even know the contact). The government contract represented about 40-50% of their sales. The keyman also had a great relationship with the private companies. We suggested to the owners that key person was more than a key person, he was their middle management!
PROBLEM: The key person wants to receive a bonus as if it was part of his salary each year. Owners did not want to pay it! Also, the company had 40% or more of its revenue in one basket (the government agency).
Our part: We communicated to the owners that based on the relationship the key person has with the vendors and customers, there would be a potential disaster if the key person were to leave. A few things which would happen:
- He would take the business to a new employer.
- He could take employees with him.
- He could stay but put less of an effort in building the business.
After looking at all the facts, the owners realized they had a great deal and what they were receiving from the efforts of the key person was certainly more than what the keyperson wanted.
Educational moment: We suggested the following.
- Owners communicate to the key person that he is a part of the growth of the company, and not only give him a bonus, but include an incentive of a % of business growth, or some metric that was measurable.
- Create a “graded-vested benefit,” which would be hard for the key person to walk away from.
- Execute a non-compete clause and a non-disclosure agreement concurrently with the implementation of a selected benefit for the key person. “This is what we would like to give you, but for this we want you to agree to this.
- We discussed the disproportionate revenue from the government and discussed ways to increase their customer base. We suggested that no more than 10-15% of revenue should be coming from one source.
These were only a few of the steps we suggested.
It is common for owners to reevaluate their middle management; however, compensation is only part of the equation. Creating a middle management culture takes time, loyalty, along with compensation and benefits. Your key person(s), may be one of the most valuable assets of your company. Certainly, it is one of the value drivers which increase the value of your company.