Best of CoBiz: Effective leaders make plan

(Editor’s note: Here is another valuable excerpt from the new success book by national business consultant Laurence B. Valant and partner Gayle W. Hustad, “Lead and Manage! The definitive guide for getting the results you want.”)

Don had never used residual income as a measure of core performance or as a means of compensating executives. With our encouragement, Don built his compensation strategy on incremental residual income over a five-year moving average of residual income. He had decided that he would make 50 percent of the annual incremental residual income available to him, his management team, and staff in the form of bonuses and stock options.

Because he had already established his success criteria, Don was well on his way to establishing clear expectations quantitatively. He had defined residual income targets for each business unit, which when summed provided the corporate targets for each of the next five years. With these targets in place, he was in a position to present the concept to his management team and the entire staff with specific numbers for each business unit. To illustrate what success would look like, Don provided an estimate of the bonus payouts based on business plans for each unit. The bonuses, which amounted to 50 percent of base pay, were inspiring incentives.

Don quickly saw the value of insisting on quantitative standards of performance for each business unit and each major operation within each business unit, and then by individual within each operation. Expectations all the way down to the individual level were established clearly and quantitatively in terms of revenues, gross profit, and operating costs (including capital budgets) which when netted contributed directly to each business unit’s residual income. Strict accountability for performance was established, and with monthly reporting, everyone understood exactly how they were doing. Don chose to use quarterly performance reviews by individual to track performance, and management was required to develop remediation plans with any direct report who was in danger of missing their numbers.

Specific performance measures were tied to planned levels of compensation on a percentage basis. Constrained only by the budget to which they had committed, Don left the recommendations for salary increases and their timing to each business unit manager. These decisions were presented and agreed upon at the corporate level, so while there was the opportunity for latitude between and among business units, there was consistency as well. Performance and morale improved. Plans were achieved on time and on budget.

By using residual income, the CEO had established the single metric against which performance would be measured by individual, by operating group, by business unit, and by the corporation. Interestingly enough, in this way, Don’s own performance and compensation were also appropriately driven by total RI (a simple, fair reward system for CEOs who should be paid for performance on the same basis as management and staff).

Don’s approach to setting goals, measuring performance against goal achievement, and rewarding that performance based on a single metric tying back to the goals of firm ownership was remarkably sophisticated, an approach that has been an important contributor to his firm’s ability to sustain high rates of profitable growth. And, increased pay for increased performance created an environment that made Don’s firm a highly desirable place to work.

Jim, one of Don’s project directors who had more than 45 years of industry experience, told Valant, “I have worked for many companies, but have never enjoyed working for anyone as much as I have enjoyed working for Don. Their method of rewarding performance based on overall company performance and individual performance is outstanding. This is the best work environment anyone could hope for.”

Don carefully applied the fundamentals of effective leadership. As a result, he made his numbers every year for the first five years of the plan. He will continue to do so. Effective leaders make plan.