The Greatest Own Goal or the Greatest Collapse

The Greatest Own Goal or the Greatest Collapse

Last week saw the birth and collapse of the European Super League (ESL). Living in Atlanta, to me, the defeat was on a par of the Falcon’s 2017 Superbowl and Greg Norman’s 1986 Masters. On Sunday evening, there was the announcement of the formation of the ESL, comprising 12 “founding clubs” from England, Spain, and Italy. Three other unnamed clubs were soon to join, along with another five teams that would qualify annually for the 20-team competition. Within 48 hours, it was dead!

The announcement of the ESL was accompanied by a promise to “deliver excitement and drama never seen before in football,” and did they deliver!

Why was the ESL formed?

Why? Simply, MONEY. The fifteen founding clubs were guaranteed a place every year with no messy football stuff like qualifying and relegation! The teams would capture a larger share of the revenues with less risk. Expectations were that broadcasting rights might generate €4bn a year, nearly double the €2.4bn brought in by the Champions League in the 2018-19 season. 

As Martin Baumann put it, “We can sell just about anything to the Europeans. Why not our hyper capitalistic cartel-based pro sports system?” That sentiment seems very popular on this side of the Atlantic. Many other commentators pointed out that the owners sought profits before tradition, financial opportunities before culture, and self-interest before communal identity. The ESL was the logical outcome of the increasing commercialization of football and powerful few’s desire for monopolistic control. To enable the ESL, J.P. Morgan underwrote its formation with a $4 billion line of credit. 

While I like capitalism, I find it interesting the claim that this is capitalism. So saying ignores a couple of the mainstays of capitalism – no monopolies or cartels and creative destruction. The owners were not imposing an American capitalistic system on football; they sought to create an American-style cartel to reduce risk and transfer more money to themselves. This has just been done with F1 under the ownership of Liberty Media, turning the ten existing teams from car manufacturers into holders of very valuable franchise charters. Of course, technology development will slow, and the product quality fall. But we can’t let that get in the way of making money.

American sports competitions, especially the major leagues, are all effective money-producing cartels. Professional sports leagues in the United States are monopoly-like structures that ensure that the riches are spread evenly among a self-selected group. The teams stay in the league no matter how they perform. So much for the American ideal of meritocracy! 

The only economic competition they face is from rival leagues; that is why the U.S. system is a century-old marketplace of rival sports leagues. The combination of less risk and less competition for talent produces higher profits for owners. According to a ranking last year by Forbes magazine, forty-three of the world’s 50 most valuable sports teams are American – aren’t cartels wonderful! Such a structure has several results:

  • “Brand value” is not necessarily tied to on-field success. The “worst teams” in one season get the best players through draft picks the following year. 
  • It provides an inferior product, as I have discussed before. Guaranteed a place in the league means there is no need to invest in the team and deliver a good product for the fans. Recognition that the product is inferior is reflected in U.S. sports capturing a smaller share of the global viewing audience each year. 
  • It delivers more money to the billionaire owners, who theoretically have invested in the clubs. In every American sport, an inferior on-field product isn’t a reason for billionaire owners to make less money, e.g., Tampa Bay Buccanneers. The Bucs, I believe, have the worst record of any team in the NFL, even though they have two Super Bowl titles – 278-429-1. With such a record, they would have probably been relegated in European sports and no chance at any championship.

For those unfamiliar with relegation, unlike American teams, European sides play in open leagues, where the three poorest performers get demoted to a lower tier, with stingier broadcasting and sponsorship deals. The three top performers in the lower leagues get promoted to a high league reaping greater rewards. Club owners thus gamble on making it to the top, investing generously at the expense of profits.

The European model is genuinely a capitalistic one where owners take risks and invest for a potential reward. Creative destruction is evident: between 1992 and 2014, there were 45 insolvencies in the top three tiers of English football, 40 in France and 30 in Germany. 

So why did the ESL collapse? 

I believe it was because of hubris. Through hubris, the founders ignored the sport’s business model and Ben Horowitz’s sage advice, “Take care of the People, the Products, and the Profits— IN THAT ORDER.” 

Hubris

Hubris is a terrible thing and causes many failures in life and business. Only hubris can cause a few rich people to come up with an idea that generates such visceral and universal hatred, or put another way, Never underestimate the incompetence of people.” The hubris of the American owners that they could easily impose the U.S. system on European clubs showed that they were willfully ignorant of an alien culture.

Value Creation

Value creation is about “the job to be done” for the customer. The league claimed it would be an exhibition of elite football. However, with no qualification, the teams would not have had to try very hard and thus reduce the value of the “job to be done.” However, even more concerning was that the league’s criteria were not based on being the best in Europe but merely the richest. Once a world power, Arsenal is barely one of the best in England and just a bougie to Newcastle United. Arsenal currently sits ninth in the Premier League table, out of reach of Champions League qualification, and likely to miss out on the less lucrative Europa League as well. Choosing the clubs by the wealth of the owners killed any pretense at value creation.

Marketing

The key to marketing is delivering on your brand promise. The brand promise in European sports is the promise of the club’s success. The basic unit is the club in European sports, which tends to be much older and more locally rooted than any franchise and far more fervently followed. Many clubs are over a century old and ripple with local associations and mythologies. For those who want a greater understanding, I would suggest watching Sunderland Til I Die.

Not only is the club the basic unit, but there is a “holy trinity” in a football club, the fans, the players, and the manager. The owners are there to invest and collect profits. Unlike in the U.S., when a team wins a championship, the owners are never seen lifting the trophy, only the players and the managers.

Sales

The key to sales is to know your core customer, the FANS. The fans were not amused, to put it bluntly. Unlike peripatetic American sports fans, English football clubs’ fans are even more zealous and less forgiving. The Glazers, Stan Kroenke, and John Henry were pretty much despised by the fans of Manchester United, Arsenal, and Liverpool, respectively, before the ESL. If they were unaware of this, the fans that welcomed the Glazers to Manchester chanting “Die, Glazers, die!” should have been a hint. The ESL announcement only made things worse. Liverpool fans were burning effigies of John Henry outside Anfield. A banner outside Old Trafford read, “Created by the poor, stolen by the rich.” A YouGov poll found that 79% of British football fans opposed the Super League, 68% of them “strongly.”

There have been massive protests by Chelsea, Liverpool, Arsenal, and United fans at Stamford Bridge, Anfield, The Emirates, the Carrington training ground, and Old Trafford within the past 5 days. All the fans have been complaining about the money taken out of clubs rather than investing in them. Opposition was fiercer still among fans of clubs outside the ESL, some of whom burned Liverpool shirts. However, American billionaires excel at ignoring public outrage. Kroenke and the Glazer family might’ve waited out the protests until kingdom come. However, the rest of the founders abandoning the ESL gave them no choice.

Value Delivery

The key to value delivery is keeping the customer satisfied which in European sports is RIVALRY. The rivalry between teams is local, not leagues as in the U.S. Liverpool’s main rival is neither of the Manchester teams but Everton, a mile from Anfield. The ESL would have removed these rivalries. Further, ESL was not designed with these in mind, but for millions of foreign fans, in Asia and America who care less about such details. In European football, this was heresy. But overall, the ESL would have stopped the key rivalries that make European football what it is and thus reduced value delivery.

The Outcome

There were apologies all around. John Henry issued a groveling apology to Liverpool’s fans: “I’m sorry, and I alone am responsible.” This is something I don’t any U.S. fan has heard from an owner. Also, JP Morgan has apologized, which shows how much it has realized that its role might damage its chances of getting business in Europe. However, apologies are the least of the owners’ issues as hubris takes its toll. The speedy collapse presents an opportunity for the wider community [members of the Premier League] to drive a harder bargain during the auction of a new round of Premier League broadcasting rights. The result is that the ESL founders may receive a small cut this year.

However, the real threat is regulation. Boris Johnson, Britain’s populist prime minister, read the tea leaves and thus vowed to “do everything I can to give this ludicrous plan a straight red [card].” Oliver Dowden, Britain’s sports minister, wants to examine everything to stop the new league, from competition law to governance reform. His words, “Owners should remember that they are only temporary custodians of their clubs; they forget fans at their peril,” should be a stark warning. Also, the British government launched a wide-ranging review into how football is run this run. There is pressure for British clubs to adopt the German community-ownership model with fans owning 51 percent. While some point out that fan ownership did not dissuade Barcelona and Real Madrid from joining, the Spanish and Italian leagues’ financial health is more impoverished than England’s.

Who says football is boring?

 

Copyright (c) 2021 Marc A. Borrelli

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What Are The “5 Parts of Every Business”?

Kaufman says in every business model there are “5 Parts of Every Business,” each of which flows into the next:

  1. Value Creation: A venture that doesn’t create value for others is a hobby.
  2. Marketing: A venture that doesn’t attract attention is a flop.
  3. Sales: A venture that doesn’t sell the value it creates is a non-profit.
  4. Value Delivery: A venture that doesn’t deliver what it promises is a scam.
  5. Finance: A venture that doesn’t bring in enough money to keep operating will inevitably close.

 

Value Creation

Kaufman defines Value Creation as “Discovering what people need or want, then creating it.”

Most customers don’t know what they need or want. As has been pointed out many times, people wanted a faster horse, not an automobile. However, whatever they want, in reality, they are just seeking a solution to a problem. Therefore, the critical issue is determining “What problem you are trying to solve?” Or, as Clayton Christensen said, “What is the job the customer is hiring you or your product to do?”

Defining this is often hard, as many companies don’t know what job their clients are seeking them or their products to provide. I have discussed this before. However, as the adage says, “people aren’t buying drills, they are buying holes.” This is a vital part of your business model.

So, working with your team to determine “the job to be done” and your “Core Customer” is well worth the effort because you can better describe what you do, and all your employees will better know what you do and how what they do impacts it.

 

Marketing

Kaufman’s definition is “Marketing is defined as attracting attention and building demand for what you have created.”

In today’s digital world, with Google, Facebook, Linked In, and Instagram, marketing separating yourself from the masses is hard, especially if people don’t understand the product and service. Therefore, by focusing on the job to be done or the problem you are solving, it easier to stand out among the crowd.

Also, as you identify what the “job to be done” is, you can better identify your Core Customer. Remember a Core Customer is:

  • An actual person with needs and wants. If you sell B2B your core customer is still a person because you have to convince a person to buy.
  • Who buys for the optimal profit.
  • Who pays on time, is loyal, and refers others.
  • Has a unique online identity and behavior; and
  • A customer who exists amongst your clients today.

Build Direct started as a company supplying contractors. However, it soon realized that while contractors were a key customer component, they were not the company’s Core Customer; instead, Build Direct’s core customers were young female DIYers interested in the products and education. Build Direct focused its marketing according to that recognition and started providing much educational content for young female DIYers. This specific marketing drove much better brand recognition and engagement.

Also, South Shore Furniture in Canada identified their core customer as “Sarah.” Sarah is so vital that there is a mannequin of Sarah in all meeting rooms, so no one forgets whom they are seeking to serve.

Besides, marketing to the correct demographic is easier and more fruitful if you know your Core Customer. Without this information, the marketing section of your business model is just hope, not a strategy!

 

Sales

Kaufman defines sales as “Turning prospective customers into paying customers.”

However, as Jeffrey Gitomer, put it “People don’t like to be sold, but they love to buy.” So the key is how do you move prospects into customers? Businesses have to earn their prospects’ trust and help them understand why it is worth paying for the offer. Another way of looking at this is, “What is your brand promise?”

Companies need to know what their brand promise is. For example, Starbucks is “Love your beverage or let us know and we will always make it right.” Some organizations may have supporting brand promises to prove more definition of the brand promise. Your brand promise must be measurable, because as Peter Drucker said, “What gets measured gets managed.” So if it is measurable and measured, the organization can ensure that it meets its brand promise, which provides more assurance to the prospect. Finally, with a clearly defined brand promise that is measurable, the organization ends up saying “No” more than “Yes” to opportunities and ideas since they will damage the brand promise.

Since no one wants to be taken advantage of, Sales is about educating the prospect to identify what is essential to convince them you can deliver on your promise. A clearly stated brand promise that is measured and quantified increases the ability to persuade the prospect to purchase from you. It amazes me how many business models don’t have a brand promise.

 

Value Delivery

Here Kaufman defines Value Delivery as “Giving your customers what you’ve promised and ensured that they’re satisfied.” With this, I have no issues. Anyone who doesn’t deliver what they promised is effectively a “scam artist.”

To ensure you that make the customer satisfied, you have to exceed the customers’ expectations. A popular way to determine customer satisfaction is through Net Promoter Score scores which we see more and more (if you are looking for help with NPS surveys of your customers, contact me). You want more promoters and detractors. However, the NPS score tells you what the customer thinks after experiencing the service or product. Companies need to develop systems that ensure the service or product is exceeding expectations.

A great example is the Ritz Carlton’s policy whereby any Ritz-Carlton employees can spend up to $2,000 per incident, not per year, to rescue a guest experience. This policy ensures that the customer is getting a great experience because it empowers employees to fix problems and provides the customers’ concerns are solved quickly. As David Marquet says, “Move the decision making to where the information is.” That is what Ritz is doing, and it is empowering employees and making customers happy.

Companies that have outsourced many functions to cut costs, so any customer has difficulty reaching the people they need or have to spend five minutes going through a phone tree to contact some is already failing at this.

Ensure your business model tracks customer satisfaction and you have ways to ensure that customers are happy.

 

Finance

Kaufman defines finance as “Bringing in enough money to keep going and make your effort worthwhile.”

As I have pointed out, this is key, and many people don’t realize the situation because of flawed analysis and lousy modeling. However, the key for any organization must be a well-defined “Profit/X.”

Many organizations don’t have a well-defined Profit/X, but there is a lack of discipline that ensures good financial performance without it. Profit/X is some unit of scale, and profit can be gross profit, net profit, EBTIDA, or EBIT. Examples that I have seen are:

  • profit per airplane
  • profit per job
  • profit per customer
  • gross margin per delivery
  • profit per employee

There is no correct Profit/X, just the one that works with your business. One organization that did deliveries chose Gross Margin/Delivery, which focused on reducing the cost of delivery to maximize profit. Once Profit/X is selected, the entire organization must seek to meet or exceed it; thus, everyone needs to understand it and how they drive it. With that focus and discipline, the organization is more likely to meet its financial goals and objectives.

 

Summary

In summary, the organization needs to be able to define its business model by the following:

  • Define the problem its products or services solve or, more precisely, what job they do.
  • Who their Core Customer is so they can market to them effectively?
  • What is their brand promise, and how is it measured?
  • That their customers are satisfied, returning and recommending.
  • That they have identified their Profit/X so that they are profitable.

Doing this work is an excellent exercise for any leadership team to help bring clarity to your organization. If you need assistance doing it, contact me. Good luck, and may your business grow.

 

 

Copyright (c) 2021, Marc A. Borrelli

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  1. How CEOs Lead
  2. Changes in priorities
  3. Changes in business models.

How CEOs Lead

  1. Unlocking bolder (“10x”) aspirations. COVID caused most CEOs to question their assumptions about the pace and magnitude change attainable. The realization that a change in mindset can dramatically affect goal setting and the operating model, many CEOs are effecting changes in a few months that companies previously assumed would take years. The speed for many of these changes is down to employees working longer and harder; however, many CEOs also recognize that many employees have more time available with the stop in travel.
  2. Elevating their “to be” list to the same level as “to do” in their operating models. With COVID, leadership has to change. CEOs’ priorities were setting up strategy, culture, and making people decisions at regular times. However, now it about maintaining morale and ensuring employees are prepared for whatever may come in the face of uncertainty. Thus, leaders are changing how they and their senior management team show up. Leaders now need to be empathetic and offer words of encouragement.  According to Lance Fritz, CEO of Union Pacific, “[Employees] need to see that their leadership is vulnerable, empathetic, and making decisions in accordance with our values, which I’d better be the living proof of.”
  3. Fully embracing stakeholder capitalism. While I have also previously discussed embracing stakeholder capitalism; however, COVID has accelerated this trend as it has emphatically affirmed the interconnection and interdependence of businesses with their full range of stakeholders. CEOs are confronting tough decisions with profound human consequences every day. CEOs have realized that their choices are affecting their employees, communities, and suppliers. How they behave will have a long term effect on their business, especially as 87 percent of customers say that they will purchase from companies that support what they care about.
  4. Harnessing the full power of their CEO peer networks. As a result of COVID, CEOs talk to one another much more and at a much greater rate. The belief is, “Let’s learn from each other. Let’s hold hands. Let’s commiserate.” They are achieving this through informal networks and groups like Vistage. The power of a Peer group where you can be vulnerable and get input into these hard decisions is immense. CEOs don’t have to feel like they are carrying all the weight themselves. During the Great Recession, Vistage member companies outperformed non-Vistage member companies [. ]

Changes in Priorities

Not only are CEOs changing the way they lead, but companies are finding that their priorities have changed dramatically! According to the recent IBM survey, companies will focus more inwardly over the next two years. Their top priorities now are:

87% Cost Management
87% Enterprise Agility
86% Cash Flow and Liquidity Management
84% Customer Experience Management
76% Cybersecurity
75% I.T. Resiliency
65% IoT, Cloud and Mobility
58% New Product Development
52% New Market Entry

 

As companies move away from just-in-time delivery, 40% of those surveyed identified the need for space capacity in their supply chains. However, about 60% said they were accelerating their organizations’ digital transformation, and three-quarters plan on building more robust I.T. capabilities.

Changes in Business Models

Finally, many companies have also changed their business models to address market changes resulting from COVID, including some clients. Some of the creative pivots are:

  • Mandarin Oriental. As mentioned last week, many high-end hotel chains are supplying alternative residences for the wealthy. MO has not only done that; it seeks to deliver the luxury experience where you are rather than at a destination. The company promotes “Staycations at M.O.” at its properties if there is one in your city. These staycations offer early check-in, late check-out, a free bottle of wine, and credits for other purchases. However, if you don’t want to leave you home, MO says, “Just call room service.” They will deliver food, items from the cake shop, supplies from the spa, or other merchandise to your house.
  • JD.com. For producers of alcoholic beverages, COVID was a considerable blow. During the Chinese shutdown, its e-commerce giant, JD.com, go D.J.s and performers to stage three hour live show online. During these shows, viewers could purchase alcoholic beverages from Rémy Martin to Budweiser and have it delivered to their doors with a single click. As a result, whiskey sales from “a single partner brand” increased eightfold during a day with the show. As a result, JD.com plans to continue its live music events but to expand the products it offers.
  • David Dodge. As auto sales plunged nationwide, according to the Washington Post reports David Dodge in Glen Mills, Pa., the auto dealership sold more cars in July than in any previous month in its 15-year existence. David Kelleher, David Dodge’s owner, pivoted to meet the changing market. The company created a business development center to consolidate online leads and located it prominently just inside the front door. Salespeople now work phones, email, texts, and Zoom. They are using FaceTime to accompany customers on test drives. For those customers who want to stay socially distant, David Dodge allows the whole process online, and they deliver the vehicle to the customer’s home. Kelleher and his top salesperson, Mike McVeigh, doesn’t expect to return to the old ways once COVID is behind them.
  • Chipotle Mexican Grill. For a company that had been struggling with several crises over the last few years, when COVID hit, Chipotle new it had to change its business model to survive. The model was for pickup orders to be its lifeline. The company added “digital kitchens,” which handle online orders for pickup, at those restaurants that didn’t already have them, to enable this pivot. In May, Chipotle announced it would add 8,000 new workers to meet the growing demand. In July, it needed to hire 10,000 more. The company has aggressively added “Chipotlanes,” drive-thru lanes exclusively for picking up digital orders. That business model requires more employees than traditional stores—hence all that hiring is much more profitable.

Cause for Concern

All these changes are requiring more from employees in terms of working longer and harder. As I have noted on numerous occasions, empathy is needed, and burnout is a huge issue. What is worrying is that IBM’s research, drawing from other surveys that included employees, found a disturbing wide gap between “employers significantly overestimating the effectiveness of their support and training efforts” and how employees feel about these measures.

Source: IBM Institute of Business Value

As CEOs and leaders, it is critical that as you face COVID and plan for changes in leadership style, changes in priorities, and pivots in your business model, you need to do more for your employees. They are scared, uncertain, working from with kids doing school virtually, potentially overwhelming debt (see below), and they need management to support them. Those leaders who don’t rise to this challenge will see the good employees leave and create a reputation stain that could last a generation.

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Compensation in a COVID World

Compensation in a COVID World

We are all dealing with the impact of COVID. For some, business is soaring, others it is a struggle to survive.  Whichever is impacting your business, it will impact compensation planning for 2020 and beyond. As I said a few months ago, your budget and plans as of March should be in the shredder and along with them your compensation structure.

From what I hear, companies are following the courses of action:

  • Cutting or increasing compensation budgets;
  • Changing work hours and/or rates of pay;
  • Indefinitely laying off, or, significant increases in hiring; and
  • Changing incentive and sales compensation plans (both plus and minus) to retain valuable talent and customer relationships.

So what is your company doing or planning to do? All your employees are wondering and watching, so the sooner you address these issues, the better. Communication is essential, and compensation is all about communication during times like these. 

 

Your Financial Position

How has your business been financially impacted? Managing significant increases in business levels can be as challenging as big declines. Therefore, you need to have realistic forecasts, and an understanding of your ability to pay your employees is critical. Many have taken PPP loans; however, they were a bridge gap, and it looks like the canyon is much more extensive than the bridge. We will be living with the trials and tribulations of COVID for another 12 months or more, so Congress’ eight weeks cover is insufficient. 

 

Review employees and their value to the “new” organization

It is time to review all your employees. Do they fit with the “new” organization and its direction? Many great people have been laid off, sidelined, or are unhappy in their current positions. Thus there is an opportunity to hire better people that would have been unavailable before or people you need to execute the pivot you are experiencing.

Also, look at your employees and determine:

  • Who rose to the occasion, and who didn’t?
  • Who has pulled their weight and more during these hard times?
  • Who has lead and supported others when they were struggling?
  • Who didn’t?

Now is the perfect time for a talent assessment exercise, e.g., a 9 Box matrix to determine who is performing and their potential in your “new normal.”   

 

Review base compensation plans

How long is it since your compensation structure system was last updated? What data did you use to develop your base pay program? How was that data aged, and to what point in time?  

Currently, it’s critical to understand your compensation structure and related pay practices. As businesses adjust to the “new normal,” compensation and pay practices are in a unique position. Some employees will receive a pay rate that is less than what they were making with unemployment compensation, especially with the federal support. Some employees will have received premium pay (e.g., hazard or appreciation pay differentials) because they were “critical workers.” How long will can you support this? How do you communicate with employees if, or when, you stop the premium pay? Since the COVID crisis continues unabated, how do you justify to your employees that they were critical a month ago, but not now, or not in four months when we expect the winter to make the crisis worse? Managing your communication is vital as you may alienate good employees who feel betrayed. Furthermore, realize that employees will have become dependent on the additional income.

The market is providing so many mixed messages about pay structure, that it is hard to know what one should do. Some of the views are:

  • No need to adjust pay ranges this year, maybe not even next year.
  • Reduce pay ranges temporarily, at least, which is becoming common, especially if it means keeping staff.
  • To remain competitive and attract the best talent, you may need to increase your pay ranges.
  • Those organizations that are reducing staff may need to increase the compensation of remaining employees who will have to take on additional roles and responsibilities.
  • Those organizations pivoting to new markets, products or services and need new people, what industry norms do you use to determine pay structure?

Salary survey data lags the market and survey data will not be available until 2021 or later. Thus, without reliable data, you need to understand your competitive market for the people you need and determine what you can offer in that situation.

You need to review your employees’ compensation in terms of:

  • New or fewer responsibilities;
  • Value to the organization as a result of any changes due to COVID;
  • Value to the organization as a team player and going beyond, or not reaching, what is required:
  • Comparison-ratio data (current rate of pay divided by target/market rates) once the revised base compensation structure is determined.

It may be necessary to change starting pay rates for positions and employees in your pay structures. If, however, you are looking to reduce pay, ensure beforehand that you are not stepping into a minefield, and get advice from an HR professional. Issues to be avoided are:

  • Reducing the compensation of those on contracts with specific payment;
  • Appearances of discrimination or retaliation; and
  • Reducing compensation of those on H-1B and E3 visas.

Finally, if reducing pay for existing employees, you need to communicate the changes, what will it take for compensation to return to previous levels. With regard to the trigger event to return pay, it must be something that everyone can see. If not it will seem arbitrary by management and therefore detrimental to morale and performance.  

 

Review incentive compensation plans

With your strategic plan in now the shredder, hopefully, a new one is now ready or on its way. Your incentive compensation plan needs to be tied to your strategic plan to ensure alignment with the organization’s goals, and so incentive compensation should be adjusted annually. However, most companies will have to adjust mid-year as, during this accelerating period of COVID, six or more months is too long to wait. 

Examine all your incentive plans and review them to understand all of the plan provisions. You need to stress test plans monthly in light of changing market and financial conditions to evaluate their impact on business and individual employees. The rapidly changing business environment requires careful examination of such plans to ensure they represent the intent of and are aligned with the business strategy. 

For those employees who receive a significant portion of their compensation in the form of incentive compensation, there are several factors to consider.

  • If your business plan is out the window, the compensation targets need to change.
  • If, due to falling revenues, compensation is likely to drop dramatically, resulting in retention issues, then migrate more to base compensation.
  • Adjust goals so that there are wins! Incentive compensated employees, usually salespeople, are very competitive. If you remove wins from their life, their performance may suffer.
  • Those businesses that are realizing a significant increase in activity, incentive compensation is an excellent way to reward performance. However, a best practice is to establish maximum award payout levels as well as performance thresholds, as the increased performance may be due more to unexpected economic forces than the efforts of employees.
  • If employees are likely to realize unexpected windfalls that are not a result of their efforts, be prepared to make adjustments
  • Due to the uncertain nature of the economy, revisit your payout schedule to ensure it continues to make sense in today’s environment.
  • Run Monte Carlo simulations on your incentive compensation plans to ensure that they don’t pose a risk to the company.

However, most of all, communication is key! Communicate clearly, early and often. Managing employee expectations during difficult times is critical. Failure to communicate no matter how good the resulting plans are will cause problems in the organization that could be damaging at times like this. 

 

In case you missed it, communication is key!

Compensation is an emotional issue, and it impacts the lives of all your employees and their families. At this time, everyone is experiencing a great deal of stress:

  • Is my job safe?
  • Can my children return to school?
  • Are my parents safe?
  • Do I have enough cash to survive?

So now is not the time to add to that stress, as it will sabotage employee performance and thus corporate performance. Communication is essential — it is genuinely all about communication.  

You cannot stop rumors and “water cooler” talk, especially in a virtual world. Thus, even if you say nothing, your employees are watching and listening. Your behavior, in the absence of a clearly stated rationale, will drive assumptions about both the organization’s and their own prospects. Many will assume the worst possible scenario.

No news is NOT good news during uncertainty and overly optimistic pronouncements, which contradict the information they see if even worse. Whatever the report, the employees still want to know what their leaders are thinking and doing concerning strategy and tactics. This communication will provide the background to the reasoning involved when making compensation decisions. While they may not agree, they will appreciate honesty and transparency. It will also stop the rumor mill, reduce wasted time due to stress and worry, and provide focus.

Therefore, your managers and supervisors must have conversations with their direct reports on what to expect, what you know right now, and what you don’t know yet.

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One of my first newsletters discussed hubris and how WWII was a result of hubris in many places from WWI onwards. Unfortunately, while the arrogance never left, it appears to be back with a vengeance as we struggle to deal with the COVID crisis.

Hubris is the wanton insolence or arrogance resulting from excessive pride or passion. It is the classic temptation of mortals who, finding themselves garbed in the unaccustomed robes of leadership or success, start imagining themselves bulletproofed against disaster — and so tempt the fates. Their own belief that they will prevail is enough to qualify as excessive hubris when they are defeated.

As I write this, Georgia has just announced the highest daily count of COVID cases, and the numbers have been rising for the last couple of weeks. To see more on Georgia and COVID, please see the article below.

In business, dashboards need data other than financial data as financial data is always backward-looking, and is not forward-looking. Well, the daily case count in most of the current COVID crisis states is backward-looking due to test labs being overwhelmed. The current wait time for results is over a week, so the number announced yesterday is over a week old, the actual number is much higher. Furthermore, deaths are currently lagging infections by 19 – 20 days, so if the case numbers are spiking and death rates are lagging those numbers, we can expect a considerable number of deaths in the next month. 

Where is the hubris? Our elected officials and ourselves. Our elected officials have decided that their beliefs and models will be correct regardless of the advice of public health officials. While I hear criticism of public health officials and scientists because they keep changing their views, I think of Paul Samuelson’s famous quote, “Well, when events change, I change my mind. What do you do?” With this crisis, public health official and scientists are updating their views daily as they get more information in a Bayesian way. Unfortunately, political leaders and the public don’t like uncertainty and changing information, so they have decided in their arrogance to plow ahead with their view of the world. 

Today we all continuously hear that everyone is entitled to their opinion. That is true. However, it is the next step that causes the problem; most of us believe that our opinions are facts. Wrong! The truth is that a fact is a statement that can be supported to be true or false by data or evidence. In contrast, an opinion is a personal expression of a person’s feelings or thoughts that may or may not be based on data. Indeed, we found many of our views on emotions, personal history, and values—all of which can be utterly unsupported by meaningful evidence.

The denial of scientific evidence and expertise because it doesn’t fit our narrative will cause untold damage to the country. I have seen many people say, “What is the problem, only one percent of those infected dies!” In truth, that number may be high with the benefit of remdesivir, but it is still over 0.5 percent. However, we have over 130,000 dead in the U.S., and the number is rising daily. Besides, many who recover from mild cases are experiencing strokes and blood clotting. More evidence is showing there is heart, lung, and neurological damage from the decease for those that survive. Finally, we look at SARS, a COVID precursor, four years after recovery, psychiatric morbidities, and chronic fatigue persisted.

Thus the economic effects of COVID will last long past the point where we have a vaccine or herd immunity as many survivors have increased health issues. Thus, hubris is taking and will continue to take a terrible toll in terms of human and economic costs because of the arrogance of a few who find it not to fit in with their belives and models.

All of us can use this sad state of affairs as a lesson to avoid hubris in ourselves so that we don’t inflict damage on our organizations and lives.

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