A strategic approach to aligning employee incentives with company goals

At Venture Growth Partners, we’ve had the privilege of helping high-growth companies implement scalable compensation strategies. One area we’re consistently called on to refine is bonus plan design, specifically, how to create plans that actually drive results.

Through our work with operators and leadership teams, our team has developed a set of guiding principles that we believe every bonus plan should follow. These aren’t theoretical. They’re built from real-world experience, and they’ve helped our clients align incentives, increase team accountability, and accelerate business performance.

The Five Principles of Effective Bonus Plan Design

1. Align with What Matters Most: The different bonus criteria you use for your team members should reflect the proper drivers of business success. This creates clarity and focus: everyone knows exactly what matters and where to aim their efforts.
2. Keep It Measurable (with Just a Bit of Flexibility): Objectivity is key, but so is sound judgment. Define clear, measurable goals while still allowing leadership to apply context when needed.
3. Set Aggressive, Yet Achievable Goals: Bonuses should stretch the team, but not break them. When targets are grounded in available resources and supported with performance checkpoints, motivation increases across the board.
4. Incorporate Performance Ranges: Avoid “all-or-nothing” thinking. Build in ranges for performance, so partial achievement still drives reward and signals progress.
5. Focus on What Employees Can Actually Influence: The best bonus plans empower individuals. You should tie incentives to outcomes that each team member can directly impact. Thus, it needs to be tailored to each role or position – i.e., the bonus criteria for sales people should be different from production personnel or customer service agents. You shouldn’t tie the bonus of a sales person to production volume or product quality, as you shouldn’t link the bonus of a production manager to sales growth.This approach ensures that the bonus structure reflects both the strategic weight of the role and the specific levers each person can effectively influence.

If you’re a founder, CEO, or operations leader considering your next step in compensation strategy, you just found out who to reach out to. Let’s make sure your bonus plan is working as hard as your team is.

When properly designed, a bonus plan lightens your load as a manager, incetivizes the workforce and aligns company and employee objectives.

For a free consultation, fill out the form on this page!

By Chris Seidensticker

Effectively managing back-office operations of early stage startups may not feel like the highest priority for your company, and it’s not. Developing and iterating upon your go-to-market strategy, achieving product market fit, continuing to build out your product’s features and functionality—all these are a higher priority. But ignoring your back-office tech stack is not something you can afford to do either, especially if all that work on sales and product are effective, and you find yourself on a rocket ship. A flexible, efficient, and scalable tech stack with all the pieces integrating with each other will be crucial for financial efficiency and sustainable growth. Optimizing your tech stack in key areas such as expense management, revenue management, and payroll is essential for streamlined operations, accurate financial reporting, and cost savings.

Before getting in to the different areas of a company’s tech stack, if optimization of that tech stack is not priority #1 for the founders, who should lead the charge in ensuring you’re set up for success? In an ideal world, you’ve engaged a fractional CFO who can fully assess your company’s needs, build a plan to allow you to understand your growth trajectory and what it will take to achieve those projections, and design a back-office architecture that will optimize your probability of successful scaling.

Expense Management

Efficient expense management is crucial for controlling costs and optimizing resource allocation. Sure, you can pay vendors out of QBO or even use Bill.com and get a couple of credit cards from your bank, but the overall expense management universe has evolved tremendously recently, and the controls, visibility, efficiently, and ease of use of options like Ramp, Brex, Divvy, and Airbase are leaps and bounds beyond what used to be available. For example, Ramp offers AI-powered algorithms that analyze expenses, identify savings opportunities, and provide real-time visibility for your entire leadership team. It offers vendor payments via ACH or check, credit cards, and employee expense reimbursement. It seamlessly integrates with accounting systems, automates reconciliation, and offers corporate card solutions with spending controls. On top of all that, if your credit card spend is large enough, Ramp is not only free, you’d also earn cash back!

Revenue Management

Optimizing revenue management processes is essential for accurate forecasting and sustainable growth. If you sell one product at one price to one customer segment, manage it all in QBO and bless your stars for having such a simple business model. But for the rest of us, a revenue management solution can make the difference between efficiently growing your company and having happy customers and missing invoices, missing collections, miscalculating revenue, and spending a massive amount of money down the road to clean up the entire mess. Revenue management solutions are as varied as revenue models, so have your CFO do their research to ensure that the solution chosen is the right size for where you are today and where you will be, given your projected growth, in 12-24 months. Look for solutions that are flexible, easy to use, and integrate well with your accounting system. Examples on the SaaS side include Maxio, TrueRev, Chargebee, and Recurly.

Payroll

Efficient payroll management ensures accurate and timely payments while maintaining compliance. In today’s mostly remote world, working with a payroll partner that minimizes or eliminates the administrative burden of multiple state payroll tax registrations and filings is paramount. Of course, not only do you need to pay your employees, but you also need to offer benefits and hopefully an intuitive interface for your employees to review their options and make their selections. Although Professional Employer Organizations (PEOs) are a popular option given their promise to offer outsourced HR support plus lower benefits costs, the reality oftentimes leads to frustration and false promises. PEOs are expensive, tend not to help as much as expected with compliance and taxes, and oftentimes don’t achieve the benefits savings expected. Alternatives to PEOs include the standard-bearer, Gusto, and Rippling, which offers global payment features and employee hardware and onboarding management.

Conclusion

Optimizing your back-office tech stack as an early stage startup requires careful consideration of the right solutions but will ensure your company grows in as efficient a manner as possible and minimizes regulatory, compliance, and tax risks. For expense management, look for solutions that offer cost optimization and real-time expense monitoring. Revenue management depends on your company’s requirements, but the more complex your product offering, pricing, and customer base, the more important it will be to work with a flexible, powerful, and easy to use revenue management system. Finally, your payroll system needs to ensure your team gets paid, compliance and tax requirements are fulfilled, and benefits are managed as efficiently as possible. Remember to assess your specific requirements, cost factors, and scalability needs before making final decisions. Engaging a fractional CFO will pay dividends galore in this area. By selecting the appropriate tech stack, you can drive efficiency, accuracy, and growth in your back office operations. Good luck!

Article originally posted on June 11, 2023 at: www.fractionalsunitedblog.com

Hiring a CFO or COO, on a full-time or fractional basis, is an important decision and milestone for small and medium-sized businesses.

In our experience, if you can relate to some of the issues listed below, you would greatly benefit from having a high-caliber CFO or COO by your side. On the other hand, we also know that it is often both unwarranted and cost prohibitive to go from having no CFO or COO in place to hiring one on a full-time basis. And herein lies the dilemma for many small and medium sized businesses.

Enter VGP’s fractional executive services – enabling you to retain a world-class CFO or COO on a part-time basis for a fraction of the cost, matching your needs and budget.

A friend of our firm, Jeff Horine, wrote a very interesting article that we would like to share and add our commentary to. Jeff is an experienced CFO and turnaround expert. The article he wrote reflects lessons learned and common threads of turnaround situations he worked on. To read Jeff’s article (a 5-minute read), please click here.

Having been involved in a few turnaround situations ourselves, and with dozens of client engagements across various industries, we have seen some of the same predictors of failure or success, and a couple of others worth mentioning:

1) The lack of a strong number 2 on the team.

To Jeff’s point, the lack of a strong number 2 person on the team (or the Conscience of the CEO, as he calls it) makes it very difficult for a company to succeed and realize its true potential in the long run. Diversity of thoughts and the open debate of ideas invariably bring out the best solutions and strategies, which are key to maintaining sustainable, profitable growth. Having this sounding board, both internal (CFO, COO) or external (board of directors or advisors, CEO peer group), will invariably make the CEO better at his/her craft; improve decision making; and lead to superior financial and operating results. So, if the competition has a strong number 2 in place and your firm doesn’t, they will likely outperform yours.

2) GroupThink / Yes Culture.

When everyone is drinking the kool-aid, the blinders are on. While having a strong company culture and being proud of one’s accomplishments are a good thing, the danger is that it leads to GroupThink and corporate myopia. Unfortunately, we have come into a number of situations where it was obvious for any experienced outsider that the company had the wrong strategy or product, or that what worked in the past would no longer work in the future, and yet no one inside would see it or admit to it. To avoid this, build a strong culture that is keen on innovation, fresh and new perspectives. It is important to embrace the notion of “Fail Fast / Fail Forward”. Recognize when things are not working, learn the lessons, fix the problem and build a better solution.

3) A weak Marketing or Finance Function.

• SMEs often have little sophistication or strategic thinking in the key functional areas of Finance and Marketing.
• SMEs often underinvest in Marketing, and therefore don’t get to fully monetize the potential of their products or services. Marketing is equal parts art and science, and the trial and error involved in refining one’s strategy can be frustrating, and expensive. Effective Marketing typically (i) utilizes more than one channel (e.g., digital, TV, print, etc.); (ii) takes time to produce results and (iii) can be hard to determine the ROI (except for digital). However, if you have the ambition of growing your business significantly, you simply can’t rely only on word of mouth, referrals and personal connections. These methods typically don’t scale. And that’s where Marketing shines.
• SMEs also are lacking in the Finance function, which can be very costly and dangerous as they look to scale-up.  A weak Finance function typically results in: poor resource allocation; bad investment decisions; no financial discipline on pricing decisions; cash flow problems; bad deals on debt and equity financing; and ultimately a lower valuation at exit.

In our experience, a fractional CFO or COO can effectively play the role of the strong number 2, perhaps even more so than a full-time executive. The reasons include:

• The fractional executive’s livelihood does not depend on any single client, which would naturally make them more inclined to challenge the thinking of the CEO and give the CEO their unvarnished opinion;
• Fractional executives are both insiders and outsiders. As such, they are a lot less likely to suffer from GroupThink or tunnel vision;
• Fractional executives are often very experienced, having worked across a number of industries and companies or having held other C-suite positions. This helps expand their creativity and problem solving capability.

By Jeffrey Horine

The number one predictor of success (or failure) for many businesses-regardless of industry or company size – is rarely diligenced by most investors and lenders.

During the course of completing six turnaround and restructuring engagements for the portfolio companies of large financial institutions, I uncovered a recurring theme of five early predictors of trouble. The most common predictor may be the least obvious and most difficult for an outsider to diagnose. However, it is one of the keys to understanding a company’s likelihood of success.

The most common predictor? In every single engagement, the CEO lacked a strong number two. Strong enough to voice a dissenting opinion. Strong enough to be valued by the CEO. Strong enough to navigate uncertain situations as a co-pilot with the CEO. Strong enough to be the Conscience of the CEO.

I briefly discuss all five predictors below, and then explain how to diagnose the number one predictor of trouble by looking for the Conscience of the CEO.

Predictor #5: Competitiveness

Competitiveness, which is an indication that a company’s products and/or services are providing differentiated value in the marketplace, was the least common of the five predictors. Although it is a predictor, declining revenue was a problem at only two of the six engagements Icompleted. For mature companies, this trouble is evident in the form of declining market share, not necessarily revenue. For early stage companies, this trouble manifests in a difficulty to attract or convert beta customers.

Predictor #4: Unit Economics

This theme occurred in three of the six engagements and manifests in the form of lower than required gross margins. Often, management did not properly understand the profitability of each customer, product or service. Without proper costing information, poor pricing decisions were made.

Predictor#3: Financial Management

This theme occurred in five of the six engagements and was a direct result of management’s failure to prioritize these activities. The companies were all generating sales and acceptable gross profit and EBITDA. However, in many cases, accounts receivable weren’t being collected in a timely manner, nor were such delays factored into the cash flow forecast, leading to sudden liquidity crises.

Predictor #2: Operational Execution

This theme occurred in five of the six engagements. It manifests in the form of inadequate, inconsistent or non-existent milestones or KPIs. In most cases, there was no causality with the metrics being evaluated. Management teams that couldn’t agree on the drivers of success typically took actions in reaction to results rather than proactively to impact results.

Predictor #1: Leadership Alignment

This theme was the most common of the five predictors and a problem at all six of the engagements. The trouble in each case is apparent in the form of unhealthy C-suite dissension. Healthy debate is an essential part of evaluating a proposed course of action and can help a CEO lead a company to a better ultimate result, having addressed potential problems upfront. At these troubled companies, however, when management disagreed on the key problems and opportunities in the business, the CEO either dismissed the dissenting opinions or the opinions themselves were never voiced to the CEO for fear of reprisal. Without the presence of a Conscience of the CEO, the fate of these businesses was at the mercy of the CEO – alone – – to gather and filter information and make decisions without a proper vetting process. The key to uncovering this dissension and void in a business begins with interviewing the management team members, individually, to get a sense of the group dynamics and the CEO’s affinity for soliciting meaningful input from what should be his most valuable resource.

The CEOs of the most successful companies I know have strong support systems. The CEO may be smart, decisive and tough. Yet, in every case, the CEO also has one or more people who effectively act as the Conscience of the CEO. Boards of Directors, Advisory Boards and Scientific Advisory Boards are considered places for the CEO to obtain constructive input. However, a CEO may be wary of the fiduciary obligations that could be triggered by candid brain-storming with a Board member, or concerned with demonstrating leadership abilities with respect to an SAB member or other Advisory Board member. Some successful CEOs assemble “shadow” advisory boards comprised of trusted former colleagues with no direct connection to the company, and this can be a useful approach. Others participate in CEO forums with other CEOs, although there are shortcomings with these arrangements.

Most successful companies have in place one or more members of the executive team, often the CFO or COO, who function as the Conscience of the CEO. To be clear, my observations do not underestimate the importance of the CEO to the success of a company. However, companies are more likely to achieve success when there is someone firmly in place as the Conscience of the CEO.

Jeffrey Horine has more than 20 years of executive level operating and consulting experience. Jeff recently served as the CEO of an early stage technology company with funding from the Bill & Melinda Gates Foundation, USAID and the CDC. Previously, Jeff was the CFO and Interim CEO at a 828 IT company where he raised $40 million 1n venture capital. Earlier, Jeff was recruited to form and lead the Industry Consolidations Group at Citadel Investment Group, a $25 billion hedge fund, after negotiating five acquisitions as the principal architect of a roll-up IPO with a $140 million valuation. Contact: www.linkedin.com/in/JeffHorine.

As published in Startup Magazine at https://thestartupmag.com/conscience-of-the-ceo/ and on Medium at
https://medium.com/@ieffrev.horine/conscience-of-the-ceo-178cc230a256