Pay the Company First
Keith Williams took over leadership of Underwriters Laboratories in Northbrook, Illinois in 2005 at a time the company was not doing well and significant changes needed to be made. The company was carrying a high amount of debt and it was losing market share to competitors. In addition, the organization had become “siloed” and different divisions were literally undercutting each other. Williams made a number of moves to “right the ship.” What caught my eye in a recent article in Chief Executive Magazine (describing the transformation the new CEO took the company through) was the steps he initiated to “realign” compensation–and the impact those changes had on subsequent company performance. Quoting from the article, here’s what took place:
“Williams also changed the compensation program to align everyone behind the company’s success. ‘I call it ‘pay the company first,’ he says. ’Basically, up to the company’s operating profit target, all of the profits go to the company; and only after that target is met, do we start funding the incentive pool.’ For example, if UL’s target is $80 million, 100 percent of the first $80 million in profits goes to the company, the next $20 million to the incentive pool, and from there on, funds are split 50/50 between the company and the incentive pool. ’A lot of companies think, ‘I’ve got $1 million left in my budget, I should spend it,’ says Williams. ‘What we’re saying is ‘If you really need to spend that $1 million on our future, please do, but if you don’t spend it, half will go into the incentive pool.”
There are so many things right with this approach that it’s important to break them down. Let’s consider what was accomplished by the approach Williams took to compensation:
- Shareholder interests were protected
- The “silo” approach was dismantled (division had to support each other to maximize incentives)
- The workforce was taught where value sharing comes from–it comes from economic value added
- Everyone was clear on what the profit target was ($80 million), which means they had to understand when and how the company was profitable
There’s more, but that’s a pretty good list. And the result? UL had one hiccup in 2006 when it missed its earnings projections but hasn’t missed one since. Revenues were at $1.25 billion in 2011.
As I’ve often asserted, compensation is certainly not the only issue that impacts growth and performance in a company. And I’m not suggesting that is the case here either (nor is Williams). The point is that without this realignment of compensation, the way people were being paid would have been at odds with the strategic changes the new CEO was trying to initiate. How people were rewarded needed to be aligned with the overall plan to set the company on a different path.
Three cheers for a CEO that gets it.