Growth and Compensation for
Privately-Held Companies

What is more important, having the right people work for your company or compensating your staff properly?

Most employers understand that you can’t have one without the other, so let’s discuss a recent engagement that gets at the dilemmas many closely-held companies face at a certain point in their growth cycle.

A family business needed to replace a family member who was Vice President of Sales. The family chose to pay itself less than market value. Non-family managers in the company were paid even less. Management found some excellent candidates for VP of Sales. They believed these candidates had the skills to help them take the company to a higher level. However, all of these candidates were asking for a compensation package that would make them the highest paid person in the company. What should be done?

This is a very common issue. The root cause has to do with the nature and history of many privately-held businesses. They tend to be more cash flow driven than corporations. This reflects itself in employment practices. They often have a strategy of minimizing payroll and employing compatible people rather than those at the highest skill levels.

This is neither good nor bad in itself. The strategy can work for as long as the company has the staff to provide valued products and services. However, at a certain point that strategy runs out of steam. Then, the company has to ask whether it is time to consider changing the way it thinks about organizing and hiring and its related compensation strategies.

Often compensation issues like the one in the example are the first indication that things might be changing for a company. Therefore, it is constructive to begin dialogue about potential changes to compensation programs by asking big picture questions, before getting into the meat and potatoes compensation issues. You shouldn’t expect a final answer to any of these questions simply because they are asked. However, if companies are not prepared to address the issues in this way, they will evaluate new employees in terms of what they cost, and not how they add value or facilitate change and growth. The questions include:

• What is your vision of what the company could become?
• What changes do you need to make in order to provide higher value to your customers?
• How will these changes impact the skills needed to move the company to a higher level?

If management can step back and look at their organization with these fresh eyes, then they tackle the meat and potatoes issues most successfully.

When companies start to recruit people with skills to help them grow, they are entering a New World. These candidates tend to have benefited from experiences and training in larger companies, and from their higher salary structures. The first people recruited, because they have the skills to help a company grow, are likely to stretch the companies pay scale.

Thinking about issues in this way leads to the opportunity to rethink organization and staffing and to make other adjustments that might accelerate change. However, the fact of looking at issues this way doesn’t mean that a company will need to break the bank. Changes do not dramatically adjust their pay scales on day one. Rather, they lead to evolutionary change and the opportunity for old employees to grow professionally and benefit from the changes that may take place. Adjusting compensation levels will lead to better retention, a more talented pool of job candidates and improve overall morale.

To give another example from recent experience, a company that promoted its VP of marketing to GM asked how much they had to increase its compensation. The conclusion was not much, until that person showed that he could do the job. However, further analysis of the salary structure showed that there was a hole in the compensation pattern. The new GM’s pay was low, but “in the range.” The next level, called the “management team” was not paid like VPs but like managers. There appeared to be a missing level. Further analysis showed that most of the performance problems in the company could be traced to the lack of people with the skills and experience you would expect at the missing level.

No company can prosper and grow without good talent in the right places. Coming to grips with the deficiencies in your company’s compensation program can be the first step in growth and a new level of success. Creating a new compensation program will reward employees who increase the value of your company and help it move to a higher level.

For more information, contact Cheryl A. Jones, Manager of Corporate Placement Services for Alpern Rosenthal. She can be reached at 412.281.7692, ext. 319 or at caj@alpern.com

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