Five Ideas That Every CEO Should Know

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What follows are five unrelated thoughts on how to lead and grow a healthy and vibrant company. None of them are long enough to justify a stand-alone blog post, but all of them are important enough to highlight for current and aspiring CEOs.

(1) Crafting an Effective Company-Wide Bonus Plan

A thoughtfully constructed and well implemented bonus plan can be an incredibly powerful tool to encourage high levels of performance across any organization. However, crafting such a plan is often much easier said than done.

One of the primary reasons why is because the leader is forced to anticipate unintended consequences for each action or outcome that they’re hoping to reward. As Charlie Munger once remarked: “Another generalized consequence of incentive caused bias is that man tends to “game” all human systems, often displaying great ingenuity in wrongly serving himself at the expense of others. Antigaming features, therefore, constitute a huge and necessary part of almost all system design.”

For this reason, whenever a particular action or outcome is to be rewarded, leaders would be wise to ask themselves “What undesirable behaviours might this accidentally encourage?”.

For example:

• A CEO rewards her customer support team based on the number of tickets that they’re able to close or resolve in any given month (with each ticket representing a specific customer issue). However, in doing so, she may be inadvertently encouraging them to “cherry pick” the easiest and most straight-forward tickets, letting the long, complex, and truly important customer issues languish at the back of the queue.  

• A growth-oriented CEO rewards her sales team based on new customer acquisitions. However, in doing so, she may be unwittingly encouraging them team to a) spend less time tending to the needs of existing customers; or b) acquire new clients that aren’t well aligned with the company’s ideal customer profile (“ICP”) and are thus more likely to churn in the months and years to come.

It will likely be very difficult for CEOs to anticipate all unintended consequences, but at the very least a good bonus plan should aim to minimize them and their effects. Other signs that you’ve crafted a good company-wide bonus plan include the following:  

1. Simplicity: If the plan is too complex for an employee to clearly explain it to their spouse, then its motivational benefits will suffer. When in doubt, choose the simpler option.
   
   
2. Alignment: As best as possible, the plan should align employee and departmental goals with the company’s goals. If a given employee or department hits a goal, but doing so doesn’t push the company closer to its goals, then it’s worth reconsidering what you’re rewarding
   
   
3. Easy to Measure: It should be quick and easy to measure progress against goals at the individual, departmental, and company level. If the measurement of progress requires a few hours in excel, then it may be time to simplify  
   
   
4. Control: Desired outcomes should fall reasonably within people’s sphere of control. There is nothing less motivating than a goal that you have no control over achieving
   
   
5. Timing of Rewards: Ideally, a good incentive plan should feature a reasonably short period of time between desired behaviour and reward. For this reason, I often favored quarterly payouts as opposed to annual ones
   
   
6. Magnitude of the Bonus: At the risk of stating the obvious, the after-tax amount of the bonus needs to be sufficiently large, particularly for goals or outcomes that require significant amounts of time or effort to achieve. The juice must be worth the squeeze.
   
   

(2) How and Where to Spend Your Time as a CEO

I’ve lost count of how many times I’ve heard that a CEO ought to spend her time working on her business as opposed to working in it. Though this is indeed wise counsel, any small business CEO will tell you that it’s considerably easier said than done.

To help you think through how to spend more of your time “on” the business and less time “in” it, you might consider utilizing one of the three frameworks listed below:

(A) The 2×2 Matrix

This framework begins by having you track your time, in 30-minute increments, every day for two weeks (no special tools are required – I tracked my own time in excel). At the end of this exercise, you will then put each task into one of the 4 quadrants below, based on the extent to which you were good at the task in question (yes or no), and the extent to which you liked doing the task in question (yes or no).

It will surprise nobody to hear that one should aim to spend as much of their time as possible doing the things that they both enjoy and are good at (Quadrant 4). Practically, however, it is inevitable that at least some time will be spent in Quadrants 2 and 3.

What you really want to focus on, however, is Quadrant 1: The things that you’re not particularly good at and don’t particularly enjoy doing. By definition, the CEO should not be spending any amount of time doing any of these tasks.

This exercise becomes particularly useful if the tasks and activities listed in Quadrant 1 can form a cohesive job description for somebody else. In my own case, I was somewhat surprised to see that Quadrant 1 read like a job description for a CFO. Once I finally hired one (with many of his day-to-day tasks being copied & pasted directly from this exercise), my life became immeasurably better as a result.  

As Andrew Wilkinson said in his book Never Enough: “There is always somebody else who loves the job you hate . . . It’s not enough to do what you love. You also have to stop doing what you hate.”

(B) Delegate Until You Arrive at Your “Unique Ability”

This framework adds an additional layer to the 2×2 matrix above. It posits that everybody has something that they are uniquely good at, and thus are uniquely qualified to do. It therefore suggests that the CEO should delegate or eliminate any tasks that aren’t aligned with what she is uniquely good at doing. Though you may enjoy hunting for bugs in your code base, and though you may indeed be good at it, does this really represent what you are uniquely qualified to do?

(C) Delegate Anything Below Your “Hourly Rate”

This framework would see a CEO quantify how much her time is worth in the form of an hourly rate. The easiest way to compute this would be to take her fully loaded annual compensation (base + bonus + accrued equity) and divide by 2,000 hours, roughly the number of working hours in any given year. With this hourly rate in hand, she should then consider delegating any task that she could reasonably pay somebody else to do for an hourly rate that is less than her own.

In Summary

Though each of these frameworks can be a helpful way to think about where you ought to be spending your time as a CEO, none of them are foolproof, and all of them are likely to periodically fall victim to the day-to-day realities of running a small business. As a result, the CEO’s goal in utilizing these frameworks should be progress, not perfection.

(3) Your Prices are Probably Too Low

I recognize that this isn’t a particularly original thought, but the more years that pass, the more I’m reminded of just how true it is: Perhaps the best sign of overall business quality is how much sleep the CEO loses the night before she raises her prices. For this reason, pricing power is one of the most important variables that I look for when evaluating any given investment opportunity.

In my experience, once companies establish their prices, they often don’t revisit them, or at least don’t revisit them frequently enough. Even when they do, many companies remain deeply fearful of increasing their prices, usually for reasons related to competition and/or customer churn.

Though in some circumstances these fears can be warranted, in others they are much less so. Indeed, in certain circumstances, raising prices can be one of the fastest, most effective, and “lowest friction” ways to unlock a nascent revenue and profitability opportunity that may lie within the base of customers that you already possess.

The revenue and profitability opportunity within your own customer base is likely directly proportionate to the degree of pricing power that you possess within the vendor-customer relationship. The more pricing power you possess, the greater your opportunity to successfully pass-through price increases, and vice versa.

Below are a few variables that would be suggestive of pricing power, though this list isn’t exhaustive. That said, the more of these that apply to you, the better:

1. Historical gross customer attrition rates have been low (less than ~10% annually). Though low attrition rates don’t create pricing power, they tend to be suggestive of it. If your historical data suggests that your product is “sticky”, it is likely so for a reason. All else being equal, the stickier your product, the greater your pricing opportunity
   
   
2. The majority of your customers use your product very frequently (daily or weekly, for example)
   
   
3. The majority of your customers use your product as a key part of their day-to-day operations (a “system of record”, in a software context)
   
   
4. Your product has high switching costs: It would either be very time consuming and/or very expensive and/or very disruptive for a customer to seek out another vendor (or build your product themselves)
   
   
5. Any outage or disruption to your product would cause your customers material financial or operational harm
   
   
6. The cost of your product represents a small percentage of your customer’s total operating budget (in combination with point #5, this would suggest that your product demonstrates outsized importance relative to its price)
   
   
7. Increasing prices would keep your prices roughly in line with your immediate ecosystem of competitors

With all of that said, be careful not to use your own internal, company-specific reasons for justifying a price increase to your customers. Valid concerns don’t always represent valid reasons to pass through price increases. Two such examples are provided below:

• “Our Margins are Low, and a Price Increase Would Help to Increase Them”: Though consistently low margins could in theory be suggestive of underpricing, it could also be suggestive of many other things, including a structurally unattractive industry where margins are falling across the board due to increasing competition and the resultant commoditization of the product in question. Consequently, if you have low margins and you’re considering price increases to be a panacea, you must first be brutally honest with yourself about why your margins are low. Depending on your answer, price increases can either make your situation better or far worse.

• “Our Own Costs of Production Have Increased, so we Need to Raise Prices to Reflect That”: Though matching your increasing cost profile with an increasing revenue profile has the potential to be a happy consequence of a price increase, it shouldn’t be the reason to do it in and of itself. This is primarily because your customers don’t (and shouldn’t) care about the internal operations of your business, including what it costs you to serve them – if your costs are going up, that’s your problem. If you have pricing power however, matching your increased costs with a commensurate increase to revenue (via pricing) can be a very valuable luxury to have.

(4) You’re Probably Trying to Accomplish Too Much

Why are so many motivated, well-intentioned and otherwise capable management teams able to set logical and compelling goals each year, yet so few are able to regularly achieve them?

In my view, it’s almost certainly because they’re trying to accomplish too much. Indeed, in my opinion, setting too many annual goals is one of the primary reasons why most companies find themselves achieving none of them.

I recognize that when running a SMB, there are a seemingly endless number of problems to solve and opportunities to act upon. These problems and opportunities usually present themselves in the context of finite resources, competitive pressures, and tight timeframes, and as a result it’s incredibly difficult to limit your annual priorities to just a few things. Yet, if you want to achieve the things that are truly important to your company, this is exactly what you should be doing.

There is a diminishing marginal benefit to setting a greater number of annual goals. Indeed, studies have shown that the greater the number of goals that you set for your company, the less likely you are to make meaningful progress against any of them.

If you deem everything to be important, then what you’re really saying is that nothing is of particular importance. Indeed, many CEOs wear a long list of annual goals as a badge of honor, implicitly thinking of them as a reflection of their ambition. In my experience however, a long list of goals is usually more reflective of a leader who doesn’t truly understand where she should be allocating her company’s scarce resources: Any mediocre CEO can set a large number of goals, but it is the truly skillful leader who can distill her company’s problems and opportunities into just a few truly important objectives. The following two skills thus become critically important for the CEO, both of which are harder than they may sound:

1. Prioritizing what’s truly important in an environment where everything can reasonably be argued to be important
2. Selecting the right goals, the achievement of which will lead to other desired outcomes naturally falling into place

Choosing goals based on the concept of “importance” is actually how most companies undermine the achievement of their goals before they even set them. As a result, when formulating your annual goals, don’t “what’s most important” (again, because almost anything can be reasonably argued to be important). Instead, ask:

“If every other area of our operation remained at its current level of performance, what is the one area where change would have the greatest impact?”.

Based on my own experience, your company should have no more than two major goals per year. Anything more than that and you’ll likely decrease your prospect of achievement against any of them. This isn’t to say that your company will only achieve two things in any given year. Indeed, if you select the right goals, then your achievement of them can and will lead to other desired outcomes naturally falling into place.

In this way, your major goals should serve as annual “themes” for your organization, creating a “north star” of clarity for the following twelve months that should guide substantially all of your major decisions. In my experience, having more than two “north star themes” (in addition to being an oxymoron) will do nothing but undermine the clarity that every CEO should always be aiming to create.

(For much more detail and structure around how to set the right goals for your company, you’d be wise to read The 4 Disciplines of Execution by Chris McChesney, Sean Covey, Jim Huling, Scott Thele, & Beverly Walker)

(5) Why Your Company Needs a Set of Core Values

Particularly in my early years as a CEO, I couldn’t help but roll my eyes whenever somebody suggested that I needed to codify and publish a set of core values for my company. Weren’t core values the tired, hollow, and meaningless platitudes that companies created simply because they felt they had to? Was it really that important to tell our stakeholders that “teamwork” and “ethics” and “integrity” were important to us as a company? Surely there were more important things that I could be doing.

As I came to realize over time however, my skepticism towards core values wasn’t because the concept of them was hollow and meaningless, but instead because so many companies had done such a poor job in establishing theirs.

Without exaggeration, instituting a meaningful set of core values within my own company might have been the most impactful thing that I did in my 7 years as CEO. Below are a few of the primary lessons that we learned over the years to make our values truly meaningful.

(A) Avoid Aspirational Values, and Discover Your Actual Ones

For your core values to be meaningful, they must represent values that already exist within your organization. At all costs, avoid “aspirational” values that you wished your company possessed. For example: If innovation isn’t a particularly important part of your business, and your employees aren’t particularly innovative, then listing “Innovation” as one of your core values is the first step to making them meaningless. In this way, establishing your core vales is a discovery process, much more than it is a brainstorming or ideation process.

Also be sure to avoid values that people are simply required to have in order to work for you. For example, we never listed “Ethical” as one of our core values, because in order to work for us, you simply had to be ethical. We didn’t need to be more ethical than any other organization – ethics were simply something that you possessed or you didn’t. If you didn’t, we wouldn’t hire you.

In discovering our own core values, we broke all of our employees into multiple groups of 5 people, and asked each group a single question:

If you could clone any of our existing employees to lead our company to world domination, don’t tell us who you chose, but instead tell us why you chose them.

Because these characteristics defined people who already worked at our company, they were by definition not aspirational values. They described who we actually were when we were at our best. Just as importantly, because our employees played a central role in the creation of our core values, their level of buy-in was far higher than it would have been had the management team codified the company’s core values on their own.

When you communicate your core values internally for the first time, be sure to use stories to illustrate what that value looks like in a day-to-day context. Don’t say:

“Our first core value is ownership. That means doing whatever is required to get the job done. Our second core value is …”

Instead, say something like the following:

“Our first core value is Ownership, which means doing whatever is required to get the job done. Last week, without anybody knowing, Susan stayed at the office all weekend to help get a new customer online. This was never requested nor expected of her. She didn’t ask for praise or recognition, and she didn’t even tell anybody that she was doing it. She simply did whatever she needed to do to get the job done. Susan, you are the living embodiment of our first core value of Ownership”.

…see the difference?

(B) They Should Be Unique to Your Company

Each value itself doesn’t have to be unique to your company, but your collection of values should be. Remember, core values are a timeless set of guiding principles that describe who you uniquely are as individuals and as a group. Selecting a set of vanilla core values that could easily describe any other randomly selected company won’t help you achieve this objective.

(C) Values Should be a Carrot, Not a Stick

Within your employee base, your set of core values should be viewed in a fun, light-hearted, and positive light. They should be used as tools to celebrate and reward, not as tools to reprimand or punish.

Though you’d be trying to instill the same value, there is a very large difference between rewarding an employee for living a core value, and punishing an employee for not living that same value. If your employees view your core values in anything resembling a fearful light, then they will lose all of their power.

(D) Operationalize Them at Every Opportunity

Coming up with your list of core values is the easy part. Making them truly long lasting and meaningful is the much harder part. One of the best ways to do this is to “operationalize” your core values as an important part of your company’s day-to-day operating processes. Here are some ways that we “operationalized” our values:

1. Hiring: As part of our core hiring process, we made it mandatory for each hiring manager to ask all prospective employees a standardized list of questions that we thought best captured our core values.
2. Promotions: When we promoted employees, and communicated those promotions internally, we rarely tied it to job performance, but instead to the extent to which the employee had consistently lived our core values.
3. New Employee Onboarding: Whenever we hired any new employee, from the CFO to the Secretary, on their first day I would personally meet with them for 1-2 hours to walk them through our company’s mission, vision, and values.

(E) Choose Your Names Wisely

Part of making your core values fun, approachable, and memorable (and thus sticky and meaningful) is in the names of the values themselves. For example, instead of “thinking like an owner”, we chose “We Take Out the Trash” (because owners always do whatever is required). Instead of “teamwork and interdependence”, we chose “Jenga”. Instead of “positivity and optimism”, we chose “Kaboom!!”. Though this may sound like a small detail, it isn’t. As an employee, it’s a lot easier to forget “ownership” than it is to forget always having to take out the trash.

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