Grading the Boss

It's great armchair sport, grading the president's first 200 days or 300 days—or in the case of President Obama his first major political gamble, health care reform. Grades land all over the board depending on one's ideology or access to facts. Although objective observation generates the most accurate grades. All this got me to wondering how small business leaders could objectively observe and grade ourselves—our pluses, our developmental needs. It's important to know those grades.


When is the last time you evaluated your own performance? How did it look? What did you do about it? It sure ain't easy to get good evaluations. We beat up on ourselves too much or ignore faults altogether because that's less painful. Denial and rationalization can rush in when we turn inward.

Here's a quick primer on self-evaluation. I found many angles on this when I was Head Coach (aka, CEO) of Tires Plus, the 150-store retail chain I cofounded and sold to Bridgestone. I did an annual performance review of myself and added that to feedback from people who reported to me, submitted anonymously to our HR director. 

I still chuckle about the reaction this got from people a few years ago at the American Management Association's CEO Conference in Quebec. When I mentioned feedback I got from an employee review other CEO's were appalled that I had allowed my employees to talk about me like that. Ignorance is not bliss, I told them. I'd rather know what employees are thinking and saying and make corrections based on valid criticism. That's how you avoid the Emperor-has-no-clothes syndrome.

Another evaluation tool I've always used is coaching myself on the run. "Nice job, Tom, on your helpful interaction with and advice to Charles," I'd say to myself. Or: ‘‘Uh-oh, Tom. You got defensive again when John gave you feedback." It's healthy to talk yourself via objective self-observation.

You can also fix on how you're doing by candidly asking people around you, "What do you like about what I'm doing? How can I improve?" Sure, at first they'll hesitate to tell "the boss" what she's doing wrong. But if you lead with the pluses, and keep repeating, you’ll pan some gold.

Indeed, it's fine to grade presidents and employees but not to the exclusion of grading yourself. No one knows you better.

Crazy CEO Pay Kills the Goose that Lays the Golden Egg

Now we have a "Compensation Czar."

Yesterday President Obama named Washington attorney Kenneth Feinberg "special master for compensation." How did we get to a point where the federal czar pool included somebody who has to watch Corporate America's cookie jar?

Amid the chatter about poorly rated subprime mortgage bonds, financial weapons of mass destruction and loony corporate and consumer leverage, CEO and senior management pay hasn't come in for an appropriate amount of blame for our Great Recession.

It’s sad that it has come to this. But maybe it’s the lesser of two evils. I'm hardly playing fast and loose with the word crazy to characterize the recent history of CEO pay. The ratio of CEO pay (salary, bonus, stock grants) to average worker pay was 24-to-1 in 1965, according to a 2005 Wall Street Journal report. In 2005, it had reached 262-to-1. (My pay was 8-to-1 when I was CEO of a $200 million per year retailer.)

You may ask, So what if these ratios are stratospheric? (You may also ask why I didn't pay myself more, a subject for a later post.) Companies have various stakeholders: CEO and senior management, line employees, customers, shareholders, the community in which they operate. If the CEO and senior management take a large stake, it has to shrink the stakes of the other stakeholders.

It's hard to take the stakes away from the customer since management competes every day with its rivals on price and quality. That leaves employees, shareholders and the community getting shafted. Employees, especially the lowest paid, are the most vulnerable. Before the crash, CEO’s engineered huge pay increases as they vigorously fought increases in the minimum-wage that hadn't budged for a decade (see Barbara Ehrenreich's "Nickel and Dimed"). The irony that must be lost on CEO's and boards is that the declining real wages eviscerate their customer base.

Golden Goose, meet Death.

Meantime, the official memo from the corner office says that capitalism is so darn fair. Indeed, capitalism is fair ... unless the egos and greed of CEO’s and senior management go unchecked. Then we have feudalism masked as capitalism; serfs working for overlords.

Shareholders feel the sting as well. For those who have made enough lately to pay expenses and taxes AND make investments, crazy executive pay has hurt their 401(k)'s and mutual funds. Anyone who invested in an index fund tied to, say, the S&P 500, has lost 27 percent over the last ten years.

Massive bonuses and stock grants without claw-backs encouraged reckless investing that led to 2008's crash.

Finally, communities lose when executive pay eats into the share of profits that they often earn from their “pillars of the community.”

The good news? Thanks in part to Warren Buffet's crusade more and more boards feel shareholder and community pressure to make sure that CEO’s and senior management don’t win at the expense of everyone else. One day, maybe CEO's will learn that, as my dad always used to say, pigs get fat and hogs get slaughtered.

[NEXT BLOG: How to terminate in an age of downsizing.]

Cut Costs (Not Your Own Throat)

Cost cutting is as common as spring showers when the economy goes south or your company starts missing plan. It's smart to get out in front—aggressively—in tight times. That said, you gotta know what to cut and what leave alone. What to cut?

Absolute waste. It's stuff like note paper and things like extra, unused phone minutes. Ask employees for their cost-cutting ideas. They know where the waste is buried better than you do.

Overly expensive purchases. Try to get three bids on practically everything you buy, especially large expenses—and even on small, ongoing expenses.

Employees. Grade your employees' performance and potential on a scale from A to F. Then book a candid talk with whomever you graded below a B, or with whomever isn't trending in that direction. Sensitively and firmly free up their futures. Consider salting their duties into other positions before opening the positions to hire.

The P&L statement. Go down your expenses line by line for other ideas. Utilities? Can you crank down the thermostat 5 degrees for savings?

But beware of cutting into bone. By that I mean, triple-check that cuts don't accidentally lower revenue or simply shift costs. Seriously ponder before cutting the following.

Marketing. The advertising and P.R. expense lines are favorite whipping boys when business is hurting. The problem is that down times are when you need your name out there more than ever. Otherwise revenue will fall further. Certainly, stay within industry guidelines (generally 4 to 5 percent of sales) and measure which efforts are effective (the web makes this easier than ever). Hard times also open up opportunities to negotiate harder since you have leverage over desperate media outlets.

Education. This is the lifeblood of your company, essentially no different from R&D. Less of this means more ineffective and uninspired employees. Do. Not. Cut.

Technology. Yep, hold these expenses to a specific ROI but be very careful with cuts. Reductions here generally mean you'll wind up needing more humans doing what the technology would've done. Further, you'll lose valuable reporting tools, essential for strategic thinking.

Bottom line: Cut, yes. But cut with care and understanding. That will help profits and get you pointed north again.

Social Capitalism: The New Market Philosophy?

Suddenly it dawned on me in the midst of a recent meeting of Deepak Chopra's Evolutionary Leaders: What we're missing is a market philosophy called social capitalism. People are hammering capitalism and socialism a lot these days. Yet when I think of socialism's root word, I think of sociability or something good for society. Webster defines socially-minded as "actively interested in the well-being of society as a whole."

I like that. But I don't like the definition of socialism: "an economic or political theory advocating government ownership and administration of the means of production and distribution of goods." That's not in the best interest of society.

Nor do I want feudalistic capitalism or feudalism masked as capitalism. But that's where the last 40 years have taken us. The wealth gap between the workers and the bosses is one of the most reliable metrics of healthy capitalism. The exact ratio is CEO pay-to-average worker pay, a ratio that 38 short years ago was 28-to-1.

Great by me if a CEO makes 28 times the average wage of his employees. Responsibility deserves rewards. At the company I founded, Tires Plus Stores, my pay was 10 times what my average employee made. Fast forward to 2005's ratio, a whopping 465-to-1.

Remember, capitalism is a system of wealth distribution that's both determined by private citizens and affected by worker productivity. Recall the old line, the harder we work the more we get paid? Despite ballooning productivity the last 40 years, non-executive workers' real wages are down 5 percent during the same period CEO pay has exploded from 28-to-1 to 465-to-1.

Corner office fat cats are coining a new expression of greed: pigs get fat and the middle class gets slaughtered. Falling wages, loose credit, high interest rates and predatory advertising (among other things) eviscerated the middle class. Through this lens the recent consumer collapse feels like karma. In a nice little bit of symmetry, a consumer pullback causes retailers to cut back on distributors and manufacturers run by -- you guessed it -- those selfsame fat cats.

Yet here's the rub. When you and I get into trouble we're reminded that Bill Clinton ended welfare as we know it. Pitty the needy. But when business falls off and big corporations get into trouble we taxpayers bail them out, whether or not we like it. Sounds like socialism for the rich and capitalism for the rest to me.

Bottom line: I'm a capitalist so long as corporate leaders are actively interested in the well being of society as a whole. Neither feudal capitalism nor corporate socialism is in society's best interest. Which brings me back to my epiphany. Maybe social capitalism is the way to organize our society.

To Regulate, or Not to Regulate. That is the Question.

Whither regulation? Lots of debate on this. With firms crumbling left and right, especially in banking, the most unlikely characters are jumping into the regulation bed together. Imagine Ayn Rand and Karl Marx canoodling in a corner at Smith & Wollensky's.

On the right, many in the government-is-the-problem crowd suddenly want the feds to step in and support the free-falling markets. On the left, many in the government-is-the-answer crowd are loath to bail out a bunch of Wall Street fat cats.

The history of regulation shows it swings back and forth like the pendulum of a grandfather clock. Typically, regulation is light until stability grows into instability as excesses grow and consequences settle in. It's all invisible until suddenly one morning the consequences crash through our kitchen windows. (Note: Adam Smith's "invisible hand," made famous in his 1776 "Wealth of Nations," referred not to federal intervention in the markets but to the societal benefits of people behaving in their own interests.)

Next: Government flies from sleep into overreaction: "We must regulate!" As time goes by and we feel the benefits of some regulation, "the regulated" begin crying that they're so manifestly pure in interest and intent that they no longer deserve the chains of regulation. It isn't in their interest to acknowledge that regulation helped stabilize things to begin with, and they count on the short collective memory of the citizenry to forget it.

Soon the people have allowed their representatives to water down regulation. After a short-lived honeymoon of good behavior, history shows that too many swashbuckling CEO's sidestep former laws that had become rules that were now, really, simple recommendations (weren't they?).

Always, we fail to understand the mind of the business leader. Most honed their competitive mettle in sports—much of it healthy, like doing their best, learning to lose gracefully, good sportsmanship. But many competitive people take one particularly bad principle from the lockerroom to the boardroom: The tendency to stay just a shade within the rules and when nobody's looking, Katie bar the door.

When basketball refs aren't calling fouls the competitive player will foul more to stop his opponent. When the refs don’t call the fouls, you don't exactly hear the culprit yelling, “Hey, ref, you missed that last foul! I really hacked him good!” Not gonna happen.

In the business world, leaders ignore boundaries if there's no regulator around and they're pressed to gain every edge to beat quarterly expectations. Guidelines fade fast when they feel pressure to perform (with kid’s expensive schools, hefty house payments). The rationalization defense mechanism kicks in: Those aren’t really rules.

Ironically, regulation is good for business. It's good medicine, whether preventing or curing disease. While they don’t like the taste, without it business can’t help itself from wallowing in the mud, forgetting the old line about pigs getting fat and hogs getting slaughtered.

Recent abuse is so bad that the medicine needs to be industrial strength yet sensible enough to restore confidence in our institutions and rebuild their balance sheets. We got through much the same mess with the mortgage-inspired S&L crisis of the '80s. Let’s hope our memories are a little longer this time around.

Betting On (or Against) the Future—Your Choice

Remember back about a decade ago when Xerox was stumbling toward the cliff of bankruptcy? They regained their footing by going on a cost-cutting rampage. Fortunately for Xerox, they kept one cost center sacrosanct: Research and development. The corporation has since recovered and pulled in a billion dollars a year. Chalk up the lion's share of earnings to products developed by their comfortably budgeted R&D team.

This should send a clear message to our small-business community. Your products and services need constant improvement—hard-earned customers demand it. Whether technological, procedural or educational tweaks, you gotta do it. Otherwise you're betting against your future.

There's an interesting broader context here. In recent years, our country's leaders have been betting against our collective future. Just look at our stunted growth in science and medicine. Why is this? U.S. university science grads now rank 17th in the world. That's just the start.

To make matters worse, many of our best graduates are immigrants who, for a variety of reasons, go back to their countries of origin to develop new technologies and fuel employment and innovation outside the U.S. In a global economy, that spells disaster for America.

Why has the U.S. fallen backward and how do we right ourselves? We need to coordinate our political, educational, and business communities to promote opportunity. (Microsoft's Bill Gates rightly lobbies all the time to improve our schools and liberalize our immigration policy.) That takes financial support, expanded curricula and more quality teachers.

You can do your part. As a small businessperson, don't take your eye off innovation. Consider getting involved in your local community to increase focus on science and technology. Your community and business's future depends on it.

Strategic Alliance is for Small Business Too

Sunday I settled into The New York Times business section and found a surprisingly delightful Page 1 story about Disney’s 2006 purchase of Pixar Pictures and the combination’s success. Here’s an instant where small-business people could tear a page from Corporate America’s playbook.

Sure, strategic alliance is something of an overused phrase. But it’s an important part of your small-business arsenal. Alliances can land access to otherwise unavailable technologies, employees, customers or financing. “Strategic alliance” is a catch-all for everything from special vendor relationships, mergers of equals, sales or acquisitions. Yet all of them contain potentially treacherous curves.

Consider these five points prior to, during and after a strategic pairing:

1. Team only with companies whose values and philosophies match your own healthy culture.

2. When finalizing details of the combination, define in writing:
a) What each player brings to the field
b) Each player’s needs and desires
c) Authorities and responsibilities
d) Directions for dissolution—how would the combo unwind? Assume nothing and imply nothing. Murphy’s Law is even more present in strategic alliances.

3. Insure the two companies have seamless borders. Firewalls create miscommunication and inefficiency. Personnel from the combining companies should talk directly to one another rather than send smoke signals up and down the corporate hierarchy. This isn’t as simple as it sounds. Each party needs to introduce people by telephone, videoconference or in person and define the communication channels.

4. Leaders should hold team sessions to explain the reason for the combination and its benefits.

5. Also hold regular conferences to discuss how each side’s pre-agreed needs are being met, what’s going well and what needs attention.

For the small businessperson, a well-considered and executed strategic alliance can mean 1 + 1 = 4.