Born: Irvington, N.J.
Education: Bachelor of science in economics, Fairleigh Dickinson University, Madison, N.J. MBA from Harvard Business School
Whom do you admire most in business and why?
Warren Buffett. (Note: MiTek is a Berkshire Hathaway company) He is just exceptionally analytical, very down to earth and unassuming. The beauty of being around Warren is, A, you wouldn’t think he had 5 cents, and, B, he is never, ever condescending and he listens and learns.
So a guy who has done all he has done, that’s a great role model for all of us. And lastly, despite his age, he would tell you he tap dances to work every day. That’s a direct quote from him to the world. His enthusiasm for business is contagious. Let’s be honest, you can’t be good at what you do unless you like what you do.
If you could sit down to dinner with any three people from history, whom would you pick and why?
Howard Hughes, Steve Jobs and Ronald Reagan. Hughes was a fascinating character. He’d be a great guy, and he’d be enjoyable if he’d open up and tell some stories.
Reagan, because I think he was the great communicator. He was a great CEO because I think, from what I heard, he took a nap every afternoon.
And with Steve Jobs, I know Bill Gates and he’s phenomenal and I’ve had dinner with Bill. So I think Jobs would be an interesting character. You saw what happened when he turned his business over to somebody. He was able to come back in. He’s a creative, innovative guy and, in my mind, probably a superb salesman.
When Rick Pogue came on board at Arrowhead Building Supply Inc., there were a lot of people in the wrong positions and some employees whom the company didn’t even want.
For the son of the building supply company owner, he quickly learned that if you don’t have the right people in the right positions, it’s going to hurt your company.
To better situate the company, Pogue devised a system to analyze each position and weed out those who didn’t fit the culture.
“We create the goals for the company, then we build the people around those goals,” Pogue says. “There’s a plethora of different things that have to work. You have to have the right attitudes, the right personalities, for each individual position.”
Getting the right 100 employees was the first step of many that has allowed the company to capitalize on the market. Arrowhead recorded record growth in 2009, reaching $30 million in sales revenue.
Smart Business spoke with Pogue about how to get the right people in the right positions.
Recognize needed changes. Ask yourself four questions about your employees: Do my people really care if my company grows? Are they overjoyed, giving each other high-fives when we get a new customer? Do they stay after work to finish projects, or is there a giant gust of wind through the front door at closing time? What motivates my salespeople money or success? Remember, success breeds money, but money breeds the desire for more money.
If achievement motivates your people, then you will all reap the monetary rewards from your accomplishments. If money is all that motivates your people, then that’s all they will focus on, and every 90 to 180 days, you’ll be talking about pay raises for no results.
Restaffing a company can be a scary concept. However, you have to be serious about change, and your people must believe in your willingness to replace them. Otherwise, in effect, your employees will be in charge of your company and you.
Assess each position. We look at every position individually and we come up with a set of goals for the position.
If it’s inside sales, what do we really want our inside salespeople to do. Do we want them just to sit there and wait for the phone to ring and then answer the phone and then take the order? Because that’s what I call an order taker, and you can pay those people about $9 an hour. We want inside salespeople to be salespeople.
What we do is we have very detailed job descriptions for them, and when we train them, we show them exactly what we want them to do. For the inside sales position, their job is to produce new sales via any avenue possible, cold calls, fax, landline, they all have cell phones.
(To assess the workload,) I put myself in the position and that helps me. I don’t ask anything from anybody that I wouldn’t do myself, so I put myself in that position and I say what I would expect out of myself if I were doing that job. That’s basically where I get the standards.
We have started in recent years, probably the last two years, we started testing. I can have a prospective employee or even an existing employee that might be in the wrong position (tested) they can take a personality test.
That has been very beneficial to us. That has helped us assess things that I can’t pick up on my own just by talking and observing. This test helps flush some of those weaknesses and strengths out.
Put weight on attitude. No. 1, for me, is attitude. Absolutely attitude is No. 1 for me because if the person has the right attitude, they’ll be successful.
I first look at their attitude, and then their skill set would come in second to me.
I’m not one who believes you have to have a four-year college education to be the best bookkeeper for a company. I don’t hold everybody to that standard because we have people here that never went to college that I wouldn’t trade for somebody with a doctorate.
I don’t think that has enough of an effect on a person’s abilities to discount them as a quality employee.
Look for person/position mismatches. I look for efficiency in that position. Usually that will jump out at you.
When you look at everything, all aspects of the business, you can see where the weak spots are. Maybe the weak spots are in bookkeeping because credits are not being issued properly, whether they’re given too many credits or not enough credits, tickets aren’t being processed correctly.
Usually the inefficiencies jump out at me first. It’s like a red flag. Then I say, ‘OK, what’s going on here.’ Then I delve a little deeper in there.
Leave out personal convictions. You have to set feelings aside. I’m the nicest guy in the world and I want everybody to love me, especially my employees, but you have to set the feelings aside.
If you have a person that’s been working for you for 10 years but they’re the wrong person in that job for whatever reason maybe they have a bad attitude, maybe they don’t work well with others you have to set your emotions aside.
‘Oh, they’ve been here 10 years, just deal with it.’ I don’t believe in that. I don’t believe in telling my other employees, ‘I know they’re difficult to work with. … I know they have a bad attitude, just deal with it they’ve been here forever.’
When I say assess every position individually that’s what I’m talking about. Do I have the best person in that chair that I could possibly have? If not, then that position is a work in progress. That’s how I view it.
How to reach: Arrowhead Building Supply Inc., (636) 970-1976 or www.arrowheadbuildingsupply.com
“When you get married, you usually spend a lot of time with your future bride learning about her family and her beliefs and everything about her before you make up your mind that you’re going to spend the rest of your life with her,” Steinback says. “Getting married with partners is the same thing.”
Unfortunately for Steinback, he didn’t learn that lesson until after he and his partners had started CSI Leasing Inc. nearly 40 years ago.
“I didn’t do much due diligence on my partners,” says Steinback, the company’s co-founder and chairman. “I didn’t court them and figure out what they were all about and where they came from. I just knew they were people I worked with or people I just knew and I ended up going into business with them.”
Today, CSI Leasing is one of the largest independent IT leasing specialists in the world, with more than 650 employees and $367 million in fiscal 2008 revenue. Back in 1972, it was a brand-new operation with a team of leaders that couldn’t work together.
“We started the business as basically a partnership,” Steinback says. “Shortly thereafter, I realized you can’t run a business as a partnership unless you have leadership, especially when you’re all equal.
“I took over the leadership role early on because you couldn’t have four partners doing the same thing and duplicating each other’s efforts and stumbling over each other. That was quite honestly what happened the first couple years we were in business until I realized it doesn’t work that way. Equal partnerships just don’t work.”
Steinback feels like the lessons learned from his problems at the start of CSI have made him a better leader today. The experience has given him a better sense of how to build a strong and cohesive leadership team and how to get that team to work with him as the company’s leader.
“That is the reason why my entire management team has been with me for well over 20 years and we’ve had very little turnover within the company,” Steinback says.
Share the wealth
Steinback believes it’s one of the smartest things he’s ever done, and a key to his ability to develop his own leadership authority and keep everyone happy at the same time.
“It’s called ownership,” Steinback says. “The smartest thing I ever did was open up the ownership. A lot of people that started in this industry in the early days, some of them that were in and out of the business, the reason they left the business was because their bosses took all the money and ran.”
Steinback wanted to prove to his team that he wasn’t that type of individual and that he could be trusted as the leader. He also knew that the problem in the company’s early days was not with who owned what but with who was in charge.
So how do you convince people to follow you?
“Someone has to take the helm and create an organization and create an infrastructure and create a chain of command,” Steinback says. “Whatever your stock percentage is has nothing to do with your management responsibilities.”
Steinback decided to continue sharing the role of ownership of the company. He would fill the role of leader but share the role as owner of the business with his leadership team and other employees at CSI.
By sharing the profits or losses with those people who were putting in the hard work to make the company go, his goal was to put employees in a better position to respond to his authority as the leader of the organization.
“We have an infrastructure that says, ‘Here is the organization,’ and because there are 80 stockholders or whatever it is, that doesn’t mean they run the company,” Steinback says. “That just means if a dividend is paid, they get paid a dividend based on how many shares they own. They get a bonus based on what their job is. That’s the way it is run, which is the way any company should be run as far as I’m concerned.”
Give employees a stake in the economics of your business and they’ll have a better feel for how the company is doing and how their role contributes to that outcome. Spell out very clearly what the parameters are of their ownership so that there is no confusion.
“They all participate in the ups and downs and they like that,” Steinback says. “That wasn’t given to them. They bought in to it. Every key employee has a stock ownership in the firm.”
There are obviously other things that contribute to an employee’s level of satisfaction with an employer. But giving them a chance to own even a small part of the business is a good place to start toward earning some of that contentment.
“We built an infrastructure and built a foundation of good people that all participate in the wealth of this company,” Steinback says. “I haven’t, as the largest stockholder, raped this company and taken everything out of it. Now they are the ones that are going to sit around along with me and reap the rewards.”
Get people involved
Steinback knew buy-in from employees wouldn’t come strictly because they owned stock. He needed to show them that he could create a team that could work together for the betterment of the business and that those on the team would be valued for their efforts.
“If you respect and believe that the person on your management team is qualified and good and is someone you want to retain, you have to support them and challenge them and work with them,” Steinback says. “Give them responsibility. We engage them in what we want to do and we make sure they do it.”
You have a leadership team for a reason, to help you run the business. And while you may position yourself as the leader, you still need to use your team to help you guide your business.
“Involve the entire leadership team in all the operational and strategic meetings that the company has,” Steinback says. “When we talk about planning, monthly planning, semiannual planning, long-range planning, they are part of that. When it’s new product development or new plans or new marketing approaches, they are part of it. You have to have buy-in and everybody has to understand it.”
So how do you avoid the problems that Steinback had previously, where there was bickering about the direction of the company?
“The difference was none of my employees are equal partners or equal stockholders,” Steinback says. “They don’t have a say.”
While they don’t have a say in ultimately making decisions, they do, and should, have the ability to contribute their thoughts to how those decisions should be made.
“Keep on challenging these people and keep giving them responsibility,” Steinback says. “You just have to do it. You have to give up a little bit of that day-to-day responsibility of your own and just have a little more oversight on them.”
If you operate with authority that isn’t cloaked in secrecy, you’ll stand a better chance of gaining support.
“We have them buy in to everything and have them understand what the hell is going on,” Steinback says. “That’s what it’s all about. There’s
a lot of employees that don’t disclose anything to their employees and half the employees don’t know what the hell to do. We don’t do it that way.”
Leave some room
Steinback is happy to attend a ballgame or some other leisurely activity with any one of his employees. He says there’s no problem with doing this, as long as you maintain a certain level of distance in your relationship.
“If you’re the guy signing this guy’s paycheck, you have to be careful,” Steinback says. “You have to separate most of your personal life from your business life.”
That doesn’t mean you should be afraid to talk with other employees when you’re away from the office. Just don’t get into the hot-button issues of politics and religion.
“If you’re a Republican and I’m a Democrat or vice versa and you start the conversation by saying, ‘What do you think of the health care plan?’ before you know it, you can be at odds over what we each think,’” Steinback says. “We don’t talk about that. We leave that out of the business, which eliminates a lot of the issues. I don’t tell you how to believe. You can believe whatever you want. Everybody is entitled to their own thoughts.”
What you’re trying to do as the leader is to leave yourself an opening to provide criticism of an employee, if it is ever needed. If you become too close personally, that becomes more difficult.
“I’m out on a sales call with one of our salesmen that’s worked for me for 25 years,” Steinback says. “I know his wife. I’ve been on incentive trips. I know them very well. … I went on a sales call, and I didn’t like what I heard. Either he didn’t handle the call well or he said some things I didn’t like or I thought he had a bad attitude. I always position myself so that I can sit there and say, ‘You know what Mr. Salesman, I didn’t like this, and here’s what I didn’t like.’ It’s constructive criticism. I’m not screaming at him. I’m upset because he might have misrepresented me.”
It’s just a matter of making sure you keep the roles of boss and friend separate.
“I always leave myself enough room so that I can talk to those people and tell them what I think,” Steinback says. “If they don’t like it, that’s the aspect of my job.”
And Steinback believes it’s his ability to relate both personally and professionally that has enabled CSI to succeed.
“We respect each other’s turf and what everybody is responsible for,” Steinback says. “We give everybody the opportunity to interact and be social. … I don’t think people would stay around and be as participatory as they have been for 20-plus years if they weren’t happy campers. It’s their whole life.”
Steinback says he has changed as a leader since those early days when he had problems with his partners.
“I’m probably much more tolerant today,” Steinback says. “Probably in the early years, I was much more of a micromanager than I am today. There’s a time and a place for both of those. I’m not suggesting those are bad. But when I was more aggressive in terms of my management style, I could be very irritating and intimidating to people and I don’t think that gets you as much as behaving courteously and letting people know where they stand.”
How to reach: CSI Leasing Inc., (800) 955-0960 or www.csileasing.com
Craig Kephart learned the hard way that being CEO does not mean you don’t answer to someone.
In his first position as CEO, his notion was squashed while trying to manage relationships with the board of directors and investors.
“Being an entrepreneur, my bias coming into this was simply support me, get out of the way and let’s grow,” says Kephart, co-founder, president and CEO of Centric Health Resources. “What I’ve learned to do is bring a lot more thought to the process and particularly communication.”
To strengthen board relationships and, ultimately, the company, you have to seek out how members want to converse. Communicating effectively also means being prepared and actively listening.
It took Kephart, who has 80 employees at the health management organization, 18 months to tweak the process. His board members include a pharmaceutical company CEO, a former U.S. Food and Drug Administration director and private company executives, all of which communicate differently based on their job experience.
Smart Business spoke with Kephart about how to effectively work with your board.
Strike a balance with communication. You have to find that balance between too frequent of communication, which leads to a management board. In other words, if you’re calling them constantly and sending them information constantly, you tend to invite more oversight, and scrutiny and involvement in your day-to-day business.
Most CEOs, most entrepreneurs, would really like to have their board be supportive, have their board there to help them grow, but not to get into the day-to-day management. It’s striking that balance.
For me, that has been (doing) a fairly comprehensive business report every month talking about financial results. One of the things I have found that is extremely key is keep them aware of business development opportunities, so I always try to include those types of things.
My first year or so I always felt like I was on the defensive at board meetings and rightly so. The board just simply didn’t have enough information. Finding that balance really had to do with reading my board members and understanding who they were, what their backgrounds were, what sort of world do they come from, and then trying to apply that to our schedule.
I spent some time just looking at and talking to (board members about) what were they used to getting in their organization. Spending a little bit of time and trying to understand how they receive information in their organizations then helps you to give them information in the style in which they’re accustom.
The first place it starts is always financials. ‘I’m used to seeing financials in this kind of format, or I’m used to seeing this kind of view. I’m used to looking at it this way.’
That was really where we started in how they wanted to see the financial information. Then, it kind of went back to how they were most comfortable in seeing you lay out a strategic plan.
Your strategic plan obviously reflects your thinking and your knowledge, but there are ways in which certain people want to see that start from whatever your assumption is to how you support that assumption to where your conclusion is. There’s a process that they need to go through. If you recognize it, and acknowledge that process, then it’s a lot smoother sailing.
Prepare for meetings. Being prepared for board meetings is absolutely critical. Again, I learned that the hard way.
Being totally prepared at the board meetings to answer questions, to lay out your strategies, to articulate them well, pays off.
I usually start about 45 days ahead of the board meeting with a straw-man agenda at least of things I think the board is interested in, and then solicit their input on the agenda ahead of time. That way you make sure people aren’t coming with things they want to talk about that you’re not prepared for.
I try to get an agreement on an agenda probably 45 days in advance to the board meeting. Then, start building my support materials and presentation. A lot of it is financial in nature, so work with your CFO to make sure you’re telling the story you need to tell and make sure you’re highlighting all of the risks and rewards.
Typically, a week before the board meeting, send out a pre-read packet. Getting into a board meeting and trying to dive into a great deal of detail oftentimes leads you down rabbit trails that aren’t productive or places you don’t want to go.
I have taken to trying to provide a lot of detail in the pre-read packet that then I can just reference so we don’t have to go through 900 slides. I can do a quick executive overview in about 10 or 15 slides, reference the materials that were sent out to them in the pre-read packet, and then have a much more productive discussion.
Another key point would be to make sure when you go into your board meetings to know what it is that you want from your board. I always try and go in with two or three key things I would like to get accomplished and specific questions I would like the board to help me answer.
Actively show you’re listening. No. 1, I do take keynotes during the board meetings and there’s always some suggestion of, ‘Oh, next time I’d really appreciate seeing this.’ I just take unofficial notes, and then I review those as I’m putting the agenda together and make sure I include them back in so that they can see, ‘Oh yea, he didn’t forget; he was listening.’
It would be easy to say, ‘Well, that’s not that important; these are the things I want to talk about.’ When you do that, they feel less involved and less satisfied.
A lot of us who are entrepreneurs I think are always in a sales mode because we’re always trying to convince people that our ideas are better.
What I’ve had to learn to do is to really kind of bite my tongue sometimes and sit and listen, and make sure I understand what they’re really trying to say and what they’re telling me.
And, again, that pays off.
How to reach: Centric Health Resources, (636) 519-2400 or www.centrichealthresources.com
Joanne Volovar saw a lot of hard work being done at Molina Healthcare of Missouri. Employees were giving great effort to make sure clients were helped and that peers had what they needed to effectively do their jobs.
“But they were so overwhelmed with helping out and performing operations that were not necessarily under their purview to keep the business running,” says Volovar, the company’s president.
When the $3.1 billion Molina Healthcare Inc. purchased the health care provider in 2007, it brought about some changes in the way things were done.
“You were taking a company that had been operating in one way and then converting it and transitioning it into the way Molina operates their plan,” Volovar says. “What was missing was a vision that was being worked on day to day. Whatever was on fire, whatever was screaming the loudest, that was what you worked on. That’s typically what you see in organizations if they don’t have the staffing that’s necessary to perform all the operational functions. All you have time to do is put out the fires.”
Despite the hard work and commitment to putting out those fires, Volovar says the situation could not be allowed to continue.
“You really need to have individuals focusing on specific areas to keep the operations of the health plan running smoothly so you can be proactive and not reactive,” Volovar says. “If you’re in the office doing operational processes, it’s because you’re lacking leadership in middle management. You really don’t get to focus on your core competencies to do those to the best of your abilities.”
Volovar needed to take all the jobs that needed to be done and get them assigned to specific individuals at the 89-employee company, which itself took in $225.3 million in 2008 revenue. She needed to stop the firefighting and give everyone a clear set of duties that he or she would be responsible for.Provide a chance to win
It wasn’t just the company that was threatened by the lack of order and structure to get things done. It was hard for employees to feel a sense of accomplishment when there was constantly another crisis to deal with.
So Volovar, who had seen scorecards work in other parts of the Molina organization, decided it was time for the Missouri unit to give them a shot.
“The whole purpose of that is every day, people can walk away from here understanding if they won today,” Volovar says. “We identify three of their top priorities or goals. We have them tally, track and trend those on a daily, weekly and monthly basis. We post those scorecards so that we can all see how each other is performing and how we are working together to meet our organizational goals.
“We also use that as a tool for mentoring as well as celebrating everybody’s successes. And it provides a very quick way to be able to tell if there is an area that we need to focus attention on to improve performance.”
The key to making a scorecard system work is to make it meaningful. It needs to be thought out and planned so that it accomplishes your goal of being able to better track when tasks are being completed.
“It has to be applicative to the individual that is developing it,” Volovar says. “In our network development area, we have staff that are responsible for obtaining contracts with new providers or renegotiating existing contracts. If there are 30 contracts that they need to either renew or develop during a particular month, every day, you can do a tick mark, or tally, for how many you were able to complete on a given day. So every day, that person is going to be able to see, did I win today? Did I meet my goal toward my overall goal of the 30 during that month?”
Determining what to track for each individual comes down to figuring out what the primary objective is for that individual’s position in the organization. This was another key point for Molina, being able to follow a job back to a specific individual, rather than trying to figure out who had a little extra time to chip in and get it done last week and who might be doing it this week.
“So if you manufacture widgets, how many widgets do you want to be able to manufacture in a month?” Volovar says. “In the manufacturing of the widgets, you would look at each component of the widget. Break it down into components and individual responsibilities. Here you have a widget and that widget is made up of five different components. There are 10 individuals responsible for the manufacturing of each one of those five components. You could have a scorecard for each individual that shows on a daily basis how many components of that widget did I manufacture on a given day?”
The idea behind the scorecarding method is to develop a coach-player rapport between the employee and the manager. In the case of Molina, it also created regular dialogue about each employee’s duties and how they could be best accomplished.
“During that coaching, you would review the three performance levels, which would be the performance standard, the end and the goal,” Volovar says. “You develop what is called an expectations and deliverable agreement for each player. You write up what your expectation is of their responsibility and accountability. You know and they know. You work with them to develop the scorecard, and we ask that our staff have 3 scorecards each. Then on a very regular basis, you review the scorecards. It’s important that you provide feedback and you share successes and celebrate with the team.”
When you see someone falling behind, you can work with the individual to develop a plan to get back on track and figure out what steps would help accomplish that.
“You agree on what the next steps are going to be to achieve,” Volovar says. “It’s important that you have very positive reviews. The scorecards really are a tool for management to change behavior and to provide regular feedback and goal setting. The most important thing is to coach and provide feedback. If you develop these scorecards based on what you hope to get from your staff, it really provides a great meaningful tool to review their business objectives and how they are moving toward achieving the business objectives on a regular basis. You could do it for anything. It takes a little time to think through it, but once you get into the habit of doing it, it just comes across easily.”Lead by example
You need to show your employees that they are not the only ones who are being measured on their performance. When you maintain a scorecard, it shows that you’re holding yourself to the same standards.
“We have scorecards for president on down through the organization,” Volovar says. “One of mine would have to do with the administrative expenses. I have a goal for out of our dollars, how much we can spend on administrative expenses. On a monthly basis, that is tracked so that I and everyone else can see, how did we do as far as meeting our goal for the administrative expenses for the month?”
Volovar says she’s the first one to point out if she didn’t meet her goal or one of the other goals on her scorecard.
“I talk about what action steps we are taking to improve that,” Volovar says. “I get input from the team so that they can see nobody is perfect. You’re not always going to be 100 percent successful and that’s really OK. We learn by making mistakes. You have to lead by example. You have to be willing to stand up in front of the entire team and say, ‘This is my goal. I didn’t make my go al. These are the things I’m doing to try to improve to meet my goal.’ Even as a leader, you need to be able to do what you expect from your staff.”
When you strike a collaborative tone about making improvements when the scorecards are discussed, you’ll have a lot more success getting employees to support the scorecards.
“This is meant to benefit everybody and to help everybody see how we’re improving our performance,” Volovar says. “It’s not meant to intimidate or be punitive. That would take away the whole value of doing this. You have to keep it fun.”
When you talk about your scorecard in meetings, encourage your direct reports and others on down the line to openly talk about their scorecards and follow your example.
You want to create a friendly sense of rivalry and competition to help spur employees to do better. When you keep it friendly, you keep the goal on making the organization better through individual effort, not seeing who can vanquish each of their peers.
“By reviewing them and making a commitment to review the scorecards at our operations committee, that too keeps it alive,” Volovar says. “That’s where the fun comes in when we review them in a group setting. If we see one of our team members struggling, everybody attending that meeting is there to offer suggestions on how we could collaborate to improve our performance. It’s up to the leaders to keep this moving.”
Promote the scorecards as an objective way of helping everyone to perform better, not as a punitive system to figure out who’s the weak link.
“You need to communicate your expectations and how you believe that by using these scorecards, it’s going to provide a fair method for evaluation,” Volovar says. “If it’s documented there in the scorecard and it’s what that staff person documented, it’s fair and objective. Then you provide constant and consistent feedback.”
If someone does not feel comfortable being open about his or her performance on the scorecard, don’t put that person in a position where he or she will feel embarrassed.
“If there was a staff person that was intimidated by scorecards, we would expect the leader to work with that individual,” Volovar says. “If it was intimidating and hurtful, we would certainly not require that person to post their scorecard. You have to be sensitive. You can’t take a cookie-cutter approach with individuals. If some are not being successful and they don’t want their scorecard posted, that’s something you have to be sensitive to.”
By giving employees a supportive means of tracking their individual performance, Molina has actually opened the door to healthier collaboration, maintaining the spirit of selflessness that existed before the scorecards. The only difference is now, employees can help out without worrying about what they have or haven’t done with regard to their own responsibilities.
“It’s provided a tool for leadership to coach and mentor their teams,” Volovar says. “They are meant to help the staff be able to say, ‘How do I win and did I win today? Was I successful in what I am trying to do for the organization that I work for?’”
The scorecards have given Molina a foundation to build upon. Instead of living one emergency at a time and just working to keep up, tasks are now clearly delegated and long-term plans and projects can be implemented.
“By developing these scorecards, we’re saying, ‘This is what I want the company to achieve in a given year,’” Volovar says. “It’s broken down into individual components that will bring the company to achieving those goals. … This is meant to benefit everybody and to help everybody see how we’re improving our performance.”
How to reach: Molina Healthcare of Missouri, (562) 951-1523 or www.molinahealthcare.com
Although the Internal Revenue Code Sections 409A and 162(m) rules are not new, they continue to raise important issues that companies and their employees must be aware of.
Section 409A imposes limits upon plans and agreements of public or private companies that include deferred compensation that ensure “participating employees do not have complete control over determining when income will be recognized for income tax purposes,” says Daniel N. Janich, an officer in the employee benefits practice group in the Chicago office of Greensfelder, Hemker & Gale, PC.
Section 162(m) limits the deductibility of compensation for a public company’s CEO or three other most highly compensated officers (other than the principal financial officer) for a given taxable year to $1 million. Janich says that Section 162(m) “essentially caps the total amount of compensation guaranteed to be paid to the public company’s top executives.”
Recently, the IRS ruled that employment agreements, equity and other incentive plans that permit payments when such officers terminate “without cause” or “for good reason,” or who retire, may no longer be considered “performance-based compensation” that is excluded from Section 162(m)’s limitations.
Smart Business spoke with Janich about what you need to know about these rules and how to make sure your company is following them.
What key things do business owners need to understand about these rules?
With regard to Section 409A, business owners and employees must understand this rule applies in a broad set of factual circumstances. The penalties for a violation will impact the employee, not the company; therefore, it is the employee who must be certain that his or her deferred compensation benefit fully complies with 409A. A 409A violation results in tax penalties, accelerated recognition of income and interest charges.
Section 162(m) is more limited in scope than Section 409A, applying only to a handful of top paid executives of public companies. Unlike in the past, when terminating executives were permitted to waive their performance goals and still receive their incentive compensation benefit as performance-based compensation excluded from Section 162(m)’s deduction limits, the IRS has recently pronounced that such payments will no longer be treated as performance-based compensation if triggered solely by an involuntary termination or retirement.
This position has caused many public companies to restructure their plans and agreements to comply with this interpretation of Section 162(m).
What are the risks and benefits of these rules?
The main risk is posed by a failure to understand how and when these rules apply, which will lead to costly violations. The principal benefit of Section 409A is that it provides a bright line on the operation of deferrals in such plans. The major benefit of the IRS position on Section 162(m)’s application to equity and incentive awards is greater clarity as to how and when such compensation will be deemed performance-based.
These benefits may be outweighed by the added layer of complexity and administrative expense associated with compliance with these rules.
How can a company make changes to comply with these rules?
Any company providing a form of deferred compensation or incentive plan benefit should work with competent legal counsel who is familiar with these rules and their application. Experienced legal counsel should be routinely consulted before new deferred compensation plans or agreements are implemented to confirm compliance with these rules, insofar as the failure to comply will most certainly result in unhappy employees.
Although the consequences of violating Section 409A will generally be felt by the employee, the company may also be subject to a tax penalty arising from a failure to withhold income due to the acceleration of income recognition that a violation entails.
Under Section 162(m), the company is the one that would suffer the most significant consequences of a violation. The restructuring of plans and agreements to comply with Section 162(m) requirements may result in some loss of flexibility in fashioning a suitable payout arrangement for the top-paid executives.
How can you make sure you and your employees don’t overstep these rules?
The problem is that many employees and executives are not familiar with these rules, even though they are the recipients of significant amounts of income that are subject to them. Of course, this is less of a problem for Section 162(m) than it is for Section 409A.
For example, in the case for severance plans, an inadvertent 409A violation may occur simply because the length of the payment schedule causes the severance to be treated as deferred compensation. Many former employees signing off on separation packages without the benefit of competent legal advice on 409A issues may not realize the income tax ramifications until it is too late to do anything about it.
Employees and employers alike must become familiar with these rules. Employee benefits counsel can and should assist in the educational process through in-house seminars and other training programs for human resource personnel.
By becoming familiar with these rules, as well as with the common scenarios when they typically arise, human resource personnel can meaningfully assist employees. Although these tax rules may be complicated, a basic understanding of when and how they apply can be achieved with the right kind of program in place.
Daniel N. Janich is an officer in the employee benefits practice group in the Chicago office of Greensfelder, Hemker & Gale, PC. Reach him at (312) 419-9090 or firstname.lastname@example.org.
Building to Leadership in Energy and Environmental Design (LEED) standards can lower your operating costs, earn tax credits and incentives, reduce your carbon footprint and enhance your reputation.
LEED is a third-party green building certification system developed by the U.S. Green Building Council to make buildings more environmentally friendly. Although it may be required in certain jurisdictions, LEED serves as the voluntary national standard for building sustainable buildings. LEED aims to identify and implement nationally recognizable green building strategies and performance criteria for the design, construction and operation of sustainable buildings.
“LEED and sustainable construction have become more than just a trend,” says Cristina E. Spicer, LEED AP, associate in the real estate group at Greensfelder, Hemker & Gale, P.C. “LEED buildings penetrate all aspects of our personal and professional lives. You need to be aware of changes in the building industry so you’re not left behind.”
Smart Business spoke with Spicer about what you should know about LEED certification and the risks and benefits of building to LEED standards.
What key things should a business leader know about LEED?
LEED is administered by a third party, which is under no obligation to certify a particular project or to a particular standard. It’s crucial that you have adequate protection and properly allocate risks through well-drafted contracts and obtain adequate insurance for the project. Also, be aware of the financial resources available so you can maximize the bottom line. Building to LEED standards can cost from 0.5 percent to 10 percent more than traditional construction projects, so it’s crucial to be aware of the benefits to offset costs.
What are the risks and benefits of building to LEED standards?
There are more green and sustainable products available now, but there is a risk that these will not work as intended. Address all warranty issues on the front end to make sure risks are properly allocated. There are legal risks, such as knowing when LEED is required or what to include in a contract, such as defining the parties’ expectations, the standards sought, the parties responsible for administering the LEED certification process, warranties and representations of the parties, and legal remedies for foreseen and unforeseen consequences, such as failure to achieve a certain level of LEED certification. The financial bottom line also becomes a risk that increases if the project’s goals and anticipated performance are not clearly stated and pursued from the beginning. The decision to build green or LEED should be made as early as possible to avoid costly changes during design and construction.
However, the benefits are numerous. The USGBC estimates, on average, operating costs decrease 8 to 9 percent, building values increase 7.5 percent, return on investment increases 6.6 percent and occupancy ratios increase 3.5 percent. There are also tax credits, deductions, grants, exemptions and accelerated depreciation schedules, which can be coupled with other financing options and traditional tax credits to maximize your financial benefits. There are also environmental benefits, such as improving indoor air quality, and intangible benefits, such as reputation, improved absenteeism and occupants’ health and well-being. You will reap more benefits the longer you hold on to the building.
What recent changes have been made to LEED?
LEED v3 (2009) established many changes, including the introduction of regional priority credits. Before, there was no differentiation between where a building was constructed and the environmental issues in that location.
The LEED certification levels and processes have stayed the same, but the number of points needed to achieve each level has changed to a 100-point system. The levels are Certified, 40-49 points; Silver, 50-59 points; Gold, 60-79 points; and Platinum, 80 and above. There are 110 available points if you add the four regional credits and six innovative design credits.
The professional accreditation process also changed. Before, there was only one test under which people were accredited as LEED APs, and no experience was required. Now, three tracks have been created LEED Green Associate, LEED AP and LEED Fellow which allow people with significant experience to distinguish themselves.
What is included in the certification process?
The entire certification process is channeled through the Green Building Certification Institute (GBCI), so you need to work with someone experienced in the certification process to avoid unnecessary time and money spent on learning how the process works. There are five steps to certify a project: registering the project, preparing the application, submitting the application and documentation, having the application reviewed by GBCI and having the project certified.
An appeal process is available for points (also known as credits) denied by GBCI. Careful selection of the credits sought is vital to certification to avoid later appealing denied credits. Have knowledgeable people help you understand the requirements for each rating system’s prerequisites and credits and use all resources available. Your team should include designers, architects and legal counsel to help you make design and construction decisions early in the process to maximize financial resources and to advise you on the legal issues.
What does the future of LEED look like?
By 2010, industry analysts estimate that approximately 10 percent of commercial construction costs will be allocated to LEED and green projects. We are also seeing discussions by local governments to require LEED for private projects. LEED will take center stage as the discussion on the energy crisis, global warming and the search for alternative fuel sources continues.
Cristina E. Spicer, LEED AP, is an associate in the real estate group at Greensfelder, Hemker & Gale, P.C. Reach her at (314) 335-6827 or email@example.com.
With the recession and credit crunch affecting virtually all sectors of the economy, a greater proportion of company acquisitions today involve distressed companies. Whether the seller or target company is already in bankruptcy proceedings or simply experiencing financial difficulties, these deals present unique challenges, says Ann Gelfand, managing director of Aon Risk Services Central Inc.
When a company finds itself in financial distress, it often sells off noncore assets, subsidiaries or the entire company. The goal of the seller is to maximize the amount of cash it receives, which often means compromising on deal points such as indemnity terms. Even if a seller makes it a priority to keep the indemnity cap low, its financial condition may cost it the bargaining power to achieve this. The likely result is that the seller is forced to accept indemnity terms (high cap and/or escrow) with which it isn’t comfortable.
Smart Business spoke with Gelfand about how to do deals with financially distressed companies.
How can both parties get comfortable enough to close a deal?
In many instances, transaction liability insurance products can provide a solution. In the seller-friendly deal environment of past years, representations and warranties insurance (RWI) was used to supplement a relatively low seller indemnity cap for breaches of reps and warranties, resulting from the buyer’s lack of negotiating leverage or as an accommodation to the seller by replacing or reducing an escrow.
Distressed deals come with their own unique issues, for which RWI can offer a valuable solution. In these deals, it is critical to minimize cash escrows yet still offer a buyer protection against contingent liabilities. A seller-based RWI policy can be written to insure a large percentage of the seller’s indemnity obligation to the buyer. For example, the seller may agree to a high cap but would be able to insure most of that indemnity obligation.
Alternatively, if a buyer is purchasing assets from a seller in financial trouble, the buyer will likely have the leverage to negotiate favorable indemnification terms. The issue is whether that indemnity offers true protection for the buyer if the seller is unable to satisfy its indemnity obligation.
The survival period for the reps and warranties (and the related seller indemnity) usually extends from one to three years (often longer for tax, environmental and title reps). Moreover, even if the buyer negotiates an escrow of purchase price as security, the escrow will likely only cover a portion of the indemnity cap.
How does this apply to bankruptcy situations?
Potential buyers of bankrupt companies (or of their assets or subsidiaries) can usually perform due diligence and negotiate the purchase agreement to include customary reps and warranties. Because of the need to maximize the return to creditors immediately upon the sale, however, those reps and warranties usually will not be backed by any seller indemnity for breaches discovered after closing, as reps and warranties do not survive the closing. In a bankruptcy sale in which the buyer cannot negotiate indemnification, a buyer-based RWI policy could be written in excess of a retention of approximately 5 percent of the purchase price, providing recourse for the buyer where otherwise it would have none.
Are there other insurance solutions for transactions?
Whether a company is looking to emerge from Chapter 11 bankruptcy or contemplating a transaction outside of bankruptcy, tax uncertainties often arise and may get in the way of the business goals of the parties. Tax insurance is invaluable in these situations.
For example, in one situation, a plan of reorganization required the funding of an escrow account to backstop a tax indemnity covering ‘golden parachute’ excise taxes under Code Section 280G. This effectively required the creditors of the company to wait up to six years for the IRS statute of limitations to lapse before funds could be paid. A tax insurance policy insured the former executive who was the beneficiary of the escrow in the event of a successful IRS challenge. Funds equal to the policy limit were released from the escrow account and paid to the creditors of the estate.
Bankrupt companies will often hold net operating loss carry forwards (NOLs) that can be used to offset taxable gains. Code Section 382, however, limits the ability of the successor company to use the historic NOLs going forward, except in limited circumstances. Whether or not these tests have been satisfied will require a determination by counsel and would leave the estate and/or the successor company with a tax bill should such determination be challenged by the IRS.
A tax policy ensuring that the Code Section 382 limitations have been properly applied would provide comfort to the parties to proceed with the transaction. The policy would cover tax, interest, penalties, contest costs and a gross up. Such a policy could insure the estate if it is required to provide a tax indemnity. Alternatively, it could ensure that the successor corporation will obtain the economic benefit expected.
Note that tax issues involving utilization of NOLs are not unique to bankruptcy and can arise in other deals, as well. Recent TARP legislation also enhanced the availability of NOL carry backs for various transactions.
RWI and tax insurance are the insurance products most commonly used in distressed deals, along with coverages such as environmental insurance. But outside of these areas, it is often possible to craft unique insurance solutions to address unusual issues that may arise in a distressed deal.
Transaction liability products can make the difference between completing a transaction or not, and the value is even apparent in distressed deals, in which the ability to close a deal can alter the future of the company.
Ann Gelfand is managing director at Aon Risk Services Central Inc. Reach her at (314) 719-5187.
John Stroup was not taking over a company in trouble when he was named president and CEO at Belden Inc. in late 2005. The electronic cable designer and manufacturer provides cables for a variety of industries and was doing a good job, with revenue hitting the $1 billion mark in 2005, up more than $350 million from the year before.
But Stroup saw a flaw that he believed needed to be addressed.
“The thing that has been my greatest challenge at Belden and continues to be my greatest challenge is really creating consistent alignment within the organization and being able to execute on what we believe to be important on a daily basis,” Stroup says.
What separates the average companies from the great ones is often the discipline and focus they give to the things they do best. Each fall, Stroup noticed that employees just don’t seem to have the same focus on company priorities that they had in January and February.
“Other things creep in that people want to work on,” Stroup says. “People are well-intended and it’s not like these ideas are bad ideas. But in any organization, and most notably a company, it’s not so important to determine what you’re going to work on. Often it’s more important to figure out what you’re not going to work on, because you just don’t have endless resources.”
Stroup wanted to find a way to keep his 7,500 employees focused on the things that mattered most to the success of Belden.
The answer was to start using hoshin planning, which is a systematic planning methodology that was developed in Japan.
“It allows a company to literally on one piece of paper be able to identify the key breakthrough priorities that are important to us,” Stroup says.
All he needed to do now was determine which key priorities would make it onto that paper, develop a plan to achieve those goals and do it in a way that Belden’s employees would support.Get to what matters
When you’re trying to bring order to your business and devise a strategy for how to get things done, it’s crucial that you do things in the right sequence.
“The execution of your plan is entirely different than the development of your plan,” Stroup says. “Those two things really need to be done separately and they need to be done sequentially. Otherwise, you’re going to have great execution but on the wrong things, or you’re going to pick the right things, but you’re not going to execute any of them very well.”
Your first step should be to pull in your critical thinkers and get down on paper the most important things that matter to your business. Make an agreement that this list will not include personal pet projects that don’t serve the greater good of the business.
“It’s not about, ‘Here’s the thing I want to do,’” Stroup says. “It’s really got to be a very thought-based process with as much data as you can possibly get to be able to accurately identify those things that are truly strategic.”
Be purposely divergent in the beginning to allow for the consideration of all ideas that fit this mold.
“Then I ask each one of those people to dive into more detail in their specific areas, which allows them to involve others in the process,” Stroup says. “We have eight to nine different things we’re really looking at in detail and within each of those eight to nine teams, we probably have no more than eight to nine people. So in our company, we probably have nearly 100 people that are involved in the process. But we have nine to 10 people who have oversight in the final decisions of the working of the plan itself.”
As you’re selecting people, be thoughtful about how the experience will help the individuals chosen.
“The company may benefit from an individual being on a particular subject, but that individual might actually benefit more from being on another subject because that’s an area where they really need to develop,” Stroup says. “So we really try to take both into consideration when we develop the teams.”
At some point, you need to change from being divergent to convergent and get your list boiled down to the essentials.
“The process you use to converge can be as simple as voting around the room or as authoritarian as the CEO saying, ‘Look, these are the three things we are going to work on,’” Stroup says. “It sort of depends on the style of the leader and the style of the company.”Stick to it
A business plan is the equivalent of a personal exercise plan: If you don’t act on it, nothing happens.
“If we all ate well and exercised every day, our health care costs would be cut in half,” Stroup says.
Sticking to a business plan requires that same type of daily commitment.
“It’s all about a culture of discipline,” Stroup says. “I don’t think there’s any way to do it quite frankly if you don’t have a CEO that embraces and lives that culture of discipline. If the CEO doesn’t, you create an opportunity for everybody to feel like it’s OK that they took Wednesday off or took Friday off or they felt it was OK not to follow up.”
It comes down to setting expectations for everyone.
“The limited amount of time you have with any individual means you have almost no opportunity to observe and follow up on how they spend their time,” Stroup says. “I start by setting expectations. If my expectations are not high enough, then people are going to have tons of opportunities to waste time. I try really hard to make sure my expectations are such that there isn’t a lot of free time.”
While you can’t establish tight bonds when you have thousands of employees, you do still need to have conversations and be out there with your people and talking to them about how they are doing.
“You can find out pretty easily whether or not somebody really is trying and struggling to perform as opposed to somebody that isn’t performing but isn’t really trying very hard,” Stroup says. “That’s a pretty easy thing to do if you invest the time with people.”
To make sure everyone sticks to the plan and is making regular progress, Stroup has his employees develop their own metrics that are specifically tailored to their responsibility at the company.
“Operations have had metrics for years,” Stroup says. “Whether it’s quality, on-time delivery, productivity, safety — the operations team has had metrics forever. One that is a little bit less straightforward is human resources. But of all the groups we have in Belden, I’d say the human resources group has done as good a job as anyone, if not better, of identifying really good metrics to determine whether the things they are doing are making a difference.”
The solution for the HR team was tracking employee engagement — how good is each employee at understanding the things he or she does and how the employee connects to the company’s goals.
“It really tries to get at just how effective and engaged our employees are,” Stroup says. “Our human resources team has a measure for that every month and they measure it every month.”
Employees who struggle or slip on their metrics are not going to be punished just for ha ving a bad day, week or month.
“It’s OK with us if you are behind plan because we purposely create stretch objectives,” Stroup says. “Reaching our objectives is very difficult and it’s OK if you fall short. But it’s not OK if you are not vigorously trying to figure out why you fell short and what you feel you need to do differently to get yourself back on track. That’s what we’re focused on.”
Making the metrics public provides a little extra incentive and instills some competition in the effort to get better.
“There’s one thing that everybody wants to know and that is, ‘What’s the score?’” Stroup says. “I know I always tried a little harder when the scoreboard was on. I’m a big believer that everybody needs to have a scoreboard and they all need to be turned on.”
Stroup wants his employees to always be trying to win.
“It’s not OK just to go out and work hard,” Stroup says. “We want to win and when we don’t, it sort of irks us a little bit. We want to figure out what we didn’t do or what we did do that mattered.”Don’t quit
Stroup has received confirmation as to the success of his plan each year at the company’s annual board meeting.
“Every year, we’ve revisited the list of strategic issues and opportunities,” Stroup says. “We have not changed any of our issues and opportunities. We have exactly the same list. It gives our associates confidence that we are working on the right things. And if we continue to execute well on those things, we’ll continue to deliver the kind of improvement we have over the last three or four years.”
Under Stroup’s guidance, Belden’s revenue has risen from $1.25 billion in 2005 when he took over to $2 billion in fiscal 2008.
Even though the company has made great strides, Stroup says you have to always be pushing for more.
“We can only declare victory if two things happen,” Stroup says. “One, there is really a process that has been developed that is sustainable. And secondly, it’s in fact delivering the expected result. You cannot have just one. If you get the results without the sustainable process, you haven’t really done what you needed to get done. And if you develop a process, but it’s not giving you the desired results, then again, you’re not going to be happy.”
How to reach: Belden Inc., (314) 854-8000 or www.belden.com
As the recent outbreak of H1N1 has once again shown, the threat of a disease-related crisis to your business is real. If not properly handled, disease in the workplace can cause serious and expensive consequences, including high levels of absenteeism, loss of productivity, business interruption and increased liability claims. And if not well managed, the situation can also lead to significant risk to your business’s reputation.
“Many stakeholders are beginning to question existing crisis preparedness in their organizations and are finding it difficult to provide the levels of reassurance expected,” says Mary Walkenhorst, health care practice leader at Aon Risk Services.
Smart Business spoke with Walkenhorst about the questions you should be asking to ensure that your organization is prepared to cope with a pandemic or another crisis of similar size and scope.
What does a business need to consider in a pandemic?
To limit the spread of the infection, medical and government authorities are likely to temporarily close schools, nonessential public services and places where large numbers of people gather, such as public transportation hubs. In that case, your organization needs to consider the impact, especially in relation to increased absenteeism, that this would have on normal operations.
Much of the impact during a pandemic will be from absence from work. Some of those absent will have the virus, while others will be unavailable as they provide care for family members or look after children who are not in school. You have to make sure that you include these ‘additional’ absences on top of expected infection rates in your planning.
In addition, an increasing number of telecommuters will help reduce the number of employees who need to travel to and from work and reduce the chances of workers contracting the virus. Establish a work-at-home policy and make the technical infrastructure available. Also, cross-training for critical jobs will allow staff to fill in for absent co-workers. Identifying critical functions, determining necessary skills and planning for training will help you achieve this.
Is an existing business continuity plan enough to deal with a potential pandemic?
Existing business continuity plans are likely to focus on an interruption following a loss of use or damage to physical assets. A pandemic-induced interruption is different because, although physical infrastructure is intact, human capital is affected. Have you considered the adequacy of existing plans to cope with a pandemic? For example, are plans in place to ensure that all response and recovery teams can replace team leaders and members if they are unavailable?
Many organizations have invested in the development and implementation of business continuity planning. However, only a minority have subjected these plans to testing and given the nominated recovery teams the opportunity for a dress rehearsal. You need to subject your existing business continuity plan arrangements to rigorous testing using a pandemic-based scenario, then use the results to refine the plan.
For example, existing processes for facilities management may prove insufficient in a pandemic. You need to identify where existing processes need to be improved and address increased cleansing, increased use of disinfectants and other cleaning products, washing of uniforms, increased inspection, and the shutting down of air conditioning and climate control systems to minimize spread throughout facilities.
A pandemic will necessitate a series of temporary measures to ensure critical business functions are maintained. Consider making arrangements for segregating teams, providing dedicated transport and staff accommodation near the workplace and ensuring access to health care for staff.
Government and health authority understanding and knowledge of pandemic flu is continually evolving. You need to create a process to gather expert advice and up-to-date information from local health authorities, government and other relevant specialists to assist in formulating your plans and identifying individuals at the greatest risk.
How can a business address security during a pandemic?
Public services that are taken for granted will be stretched, and their availability should not be assumed. This could have wide-ranging implications for law and order, and security arrangements should be reviewed to ensure they are adequate.
Make sure your organization reviews its security protocols and makes the necessary arrangements to fill potential gaps if emergency services are unable to respond.
How can a business ensure its supply chain?
There will be widespread disruption to the normal shipping and receiving of goods and services necessary to sustain business. In addition, travel restrictions will limit the movement of people. You need to establish alternative supply and delivery chains and consider the potential impact if transport restrictions are implemented.
Most organizations heavily rely on suppliers for key services and may outsource entire functions to specialist partners. Given the heavy reliance on third parties, review their contingency plans to make sure they are adequate for a pandemic.
How important is communication in the midst of a pandemic?
Even in advance of a pandemic, fear, anxiety and rumor will affect work force behavior. When the pandemic actually hits, this situation will worsen, and providing timely and accurate information will prove critical.
Before that happens, you need to develop and implement an effective communication plan so that staff can be updated as the situation develops.
Mary Walkenhorst is the health care practice leader at Aon Risk Services. Reach her at (314) 854-0702 or firstname.lastname@example.org.