Tag Archive: start up

Launching a New Business Requires Something Special

Published by

Innovation has long been critical to a company’s sustained success. Yet many companies fail to innovate meaningfully and consistently—and compensation programs may be partly to blame for many firms’ failures.

Seymour Burchman

In our experience, the compensation programs within larger corporations are typically not structured to appropriately reward entrepreneurial teams that are starting innovative ventures.  For example, metrics are often wrong, measurement periods are frequently too short, and the size of the rewards are rarely commensurate with the incremental value they create. We know of three executives who were instrumental in launching $100 million-plus businesses. Despite the huge incremental value all three created for their corporations, their compensation plans failed to adequately reward them for creating such explosive growth. Although they received large bonuses and public recognition, they and their teams received only a tiny fraction of the value that they created. Sadly, all three of these executives left their companies to work in smaller, more entrepreneurial firms.

Barry Sullivan

Well-considered special incentives can be helpful—even mission-critical—in launching new businesses. These incentives can be tailored to fit the specific facts, circumstances, and expectations for a new business much more naturally than the regular, ongoing incentive programs of the parent company.

These special incentive plans—designed to help launch new businesses—are generally guided by five key principles:

  1. Provide appropriate motivation and reward for a successful launch.
  2. Ensure a fair allocation of the value created between the new business team and the company.
  3. Reflect the “real” economics of the business. For example, business financials should include:
    • All costs of the new incentive plans;
    • Parent company overhead costs attributable to the new business, where feasible; and
    • All capital requirements of the new business.
  4. Deliver an appropriate risk and reward tradeoff for participants to provide upside opportunity beyond traditional caps (perhaps even allowing uncapped rewards), balanced with no incentive payout if the new business fails.
  5. Ensure an adequate time horizon to gauge business success or failure.

Such incentives have three key benefits:

  1. Greater ability to attract outside talent to new startups, which can carry significant career risk
  2. Improved likelihood of retaining key talent after a successful launch
  3. More incentive to advance the ideas for startups in the first place

One such approach is illustrated by the design of a new business compensation plan for a startup within an established direct marketing company. The plan was requested by the company’s board in response to a proposal by a group of managers who wanted to launch a new line of business. Importantly, the board wanted a compensation plan that provided significant upside to the entrepreneurial manager group, and, at the same time, protected the broader business. The final design had the following features:

  • To recognize the increased risk and to give the plan an entrepreneurial character, a risk premium was added to the compensation package that was also provided to company executives of a similar pay grade, and the long-term incentive opportunity was left uncapped. However, on the downside, if the launch was not successful, payouts were essentially limited to salary and a small short-term bonus.
  • Part of the compensation was paid along the way through a short-term bonus with payments based on the achievement of key financial and nonfinancial milestones that were critical to a successful launch. Given the difficulty in predicting the exact timing of things, incentive payments were milestone-based, rather than tied to finite time periods. But, all milestones had to be achieved within a three-year period – a negotiated test period, balancing expectations for the new business and the board’s risk tolerance. Additionally, milestone bonuses were back-end loaded, with no more than 50% of the total opportunity paid within the three-year launch window.
  • The bulk of the compensation was delivered through a long-term incentive that was specific to the business unit and was tied to the value created by the business unit over a seven-year period, less all costs incurred by the parent company including capital invested, corporate overhead attributable to business, and all compensation costs. Importantly, this approach ensured the incentive program was self-funded —an important protection for the board. Value was determined using a multiple of earnings derived from the parent’s historical financials.The upshot: the business had a promising start, but it faltered against latter-stage milestones and was shuttered in its first three years. The payout to the entrepreneurs was limited to salary and a single milestone-based bonus payment. Although there was a big upside opportunity, the company’s ultimate compensation exposure was very limited. Importantly, failure was not rewarded, as had been the case with prior plans.

 

Seymour Burchman  is a retired managing director at Semler Brossy. Burchman, who has been an executive compensation consultant for over 30 years, has consulted on executive pay and leadership performance for over 40 S&P 500 companies. He may be contacted at sburchman@semlerbrossy.com.

Barry Sullivan is a managing director at Semler Brossy.  Sullivan supports boards and management teams on issues of executive pay and company performance. He may be contacted at bsullivan@semlerbrossy.com. 

Keynote Address: Carlos Watson, Tales From a Silicon Valley Start Up

Published by

Carlos Watson is coming off a good week. Last Monday, it was announced that Ozy, Watson’s news and culture website, received a $20 million investment from German media company Axel Springer. Ozy–which just turned one-year old–previously had raised a few million dollars.

Carlos Watson at NACD Annual Conference

Named after Percy Bysshe Shelly’s sonnet “Ozymandias,” Ozy is attempting to take the world of digital media by storm. With the hope of bridging the gap between seemingly disparate pieces of information, Watson has created an online news source aimed at the millennial generation. According to Watson, the goal was to “be the daily digital brief that could catch people up and vault them ahead.” During his keynote address to NACD’s 2014 Board Leadership Conference, Watson shared his views on this year’s theme–conducting business “beyond borders”–and his “lessons learned” from his start up, or as he put it: “The good, the bad, the ugly, and the really ugly.”  These lessons include:

  1. Design. Watson believes in the aesthetic hypothesis set by Apple, Nest Thermostats, Vogue magazine, and others: Design matters. According to Watson, good design is more than a “nice to have,” it is essential in the value proposition and is exemplified on Ozy’s site.
  1. Importance of good partners. A game-changer for Ozy was when “old media” companies realized that change was happening, and needed to partner with “new media.”
  1. How global the opportunity is. At its inception, Watson’s goal for Ozy was to have one million viewers at the end of its first year. Today, Ozy has five million viewers in one month–from around the world. “The interest from non-U.S. players is significant and exciting.”
  1. Not good, but great people. Watson interviewed 400 people to hire Ozy’s first 50 employees across all the continents. Hiring and retaining the very best employees is a challenge for both mature companies and young start ups.
  1. What it means to work hard. Watson’s mother told him: “I never want to hear that someone outworked my kids.” According to Watson: “In a world of Uber and Lyft, Square and Dropbox, start ups have become sexy. People miss how hard you have to work in order to make those companies come alive.” In fact, one of Watson’s greatest struggles is communicating to people that Ozy will not become Facebook overnight– it will take time.
  1. The Importance of Being Relentlessly Well-Organized. Mountain View, California–the location of Ozy’s headquarters–is the new capital of Silicon Valley. Surrounded by companies such as Google, LinkedIn, and Whatsapp, Watson is able to observe what creates success in start ups. For founders of young start ups it may not come easily, but being well-organized is a great differentiator in those who are successful.
  1. Supersize your dreams. Watson believes “every month, you have to think about how you are going to put yourself out of business.” By doing so at Ozy, it  ensures that the editorial work gets stronger every day, that the product gets better, that marketing improves.
  1. Importance of good “vibes” and chemistry. You hear so much about hard skills and talent, but would I actually enjoy being here with this person 5-6 days straight?” Watson encouraged companies to look for not just talent and skills, but also “good vibes.”
  1. Have the “Luck of the Irish.” Neither Watson nor his partner are of Irish descent. While they have worked incredibly hard, Watson recognizes and appreciates that he has benefitted from luck, good fortune, and serendipity.
  1. Have the right concept. With Ozy, Watson believed he had the right idea, even if news was struggling. When pitching his idea to investors, evening news programs were failing, and native digital media properties were not attractive to Silicon Valley investors. With conviction in his concept, Watson was able to attract initial investors.
  1. Hire a (great) CFO and head of human resources (HR) earlier. The biggest thing Watson would have done differently is hire a terrific CFO and HR director earlier in Ozy’s lifecycle. Ozy grew so quickly that they needed the support. “I think HR is sexy again,” said Watson.