Presented by

Connecting Employee Performance to the Stock PriceHow to motivate employees to help drive value

Presented to the Hawaii Chapter of the ESOP AssociationMay 1, 2014

Chris Kramer

Strategic Equity Group

For a copy of this presentation, go to www.slideshare.net

To help attendees better understand and explain to others…

• How employee behavior drives company performance

• How company performance and other factors drive value

• Basic financial and valuation concepts

• Specific metrics by functional area that can be used to measure, manage and forecast company performance

• Specific communication tools that companies can use to better connect employee performance to value

Introduction and Goals of the Session

• Board’s responsibility (goal) is to work through management to increase shareholder value (share price)

• Management deploys capital (human and other) to accomplish this goal

• Employees (human capital) perform better when they know what is expected of them

• Communication is key

• Other goals are important, but they will generally support goal of increasing shareholder value. Why?

Framework for Discussion

Valuation is:

•Forward looking

•The present value of future benefits

•An assessment of risk and return

•An exercise in identifying and quantifying intangible value

•A collection of judgments supported by data, analysis, and facts

•More intangible assets equates to higher value (and vice versa)

•Short term profit versus long term value creation

Valuation Concepts

Valuation Concepts

• Everything we do as employees is either positively or negatively, affecting the value (or at a minimum, supporting it).

• This can be viewed as either increasing or decreasing the risk, or return, or both.

• It can also be viewed as creating, improving, maintaining, or diminishing, intangible value.

• Every employee has a value to the organization, or contributes in some way (or you wouldn’t have that position)

• Thinking in these terms will help you derive relevant metrics and help employees understand how their role fits into the overall company

Connecting Behavior to Performance

• Employees want to know what is expected of them

• In business, what gets measured gets done

• Information must be shared and communicated

• What information, how to communicate:

• Metrics / KPIs, trends

• Company wide or employee/department specific

• Make them simple, but meaningful

• Communicate them consistently and frequently

Metrics/KPI’s

• Meaningful, relevant, concise ways to measure how you are doing, and to help predict future performance

• Should be in relation to something else (ratio)

• Should be viewed/reported over time, and viewed in conjunction with other metrics (i.e. not in isolation)

• Should be reported on a consistent basis, with appropriate frequency

• Should be communicated to appropriate parties in appropriate ways

Potential Company Wide Metrics

• Where does a dollar go? Show employees where money is spent and how it has changed. ID big initiatives.

• Revenue growth, gross profit, EBIT - in terms of dollars or margin, over time, per employee, compared to industry

• New customers, retention, proposals, backlog, etc.

• Safety, defect rate, units, utilization,

Potential Metrics for Functional Areas

• Sales – may speak for itself, but could vary depending on nature of business. Recurring revenue streams may need different metrics. Also measured as sales per employee, sales per salesperson, customer retention, average order size. In some cases, gross profit may be better.

• Production – could be # of accidents, utilization of equipment, amount of rework, some other quality measure (defect rate), number of widgets produced, etc.

• Marketing – may need to be activity based, not results based (e.g. number of emails sent, phone calls made, conferences attended, marketing pieces sent, articles published, web visits, etc.)

• Customer Service – hold times, number of complaints, satisfaction surveys, number of calls handled, length of call

• Accounting/Finance – reduce DSO (or keep it from rising), numbers of vendor/customer phone calls, time to close books, improve information flow

• Employees, like all of us, are most often driven by self-interest

• Key to communication is to draw the connection between their performance and how it benefits them (increased share price)

• This may involve sharing information, setting specific goals/objectives, measuring performance, and educating the workforce on how achieving or not achieving goals affects value

• Specific examples and company goals drive help drive this home, along with bringing it back to the ESOP.

• Key is to bring the metrics down to an individual or department level where possible

• It is entirely possible to achieve these goals without disclosing sensitive information

Communication

How do you get the message across?

• Staff meetings/employee meetings

• Measure and publish metrics

• Publish and communicate glossary of terms (perhaps with simple examples)

• Reward based on behavior (great game of business)

• Newsletters/memos, reports, other written communications

• Hold periodic training sessions on ESOP or related topics (optional)

• Employee meetings where your valuation advisor gives overview of value drivers and impact on value

• Language barriers

• Differing levels of business and financial knowledge

• Remote locations / employees

• What and how much to communicate

• How to make complex financial and ESOP concepts simple

• Company-wide vs. small group communication

• Engaging new employee owners

• Consistency/frequency of communications

• Who is responsible for communication

Communicating The ESOP: Biggest Challenges

Financial Literacy (Who, What, When)

Frequently Asked Questions (FAQ’s)

• SPD written in layman’s terms – “When do I get my money?”

Monthly Meetings

• Small groups – business focused – all related to ownership

behaviors

Annual Ownership Meetings & Stock Statement Distribution

• You have their attention because you are talking about their money –

take advantage of it.

Communicating the ESOP: Successful Programs

Safety Jamboree – ESOP Station

• Fun & games – Bingo, Tic-Tac-Toe, etc. – All tied to ESOP terminology from the FAQ’s

Open Book - Finances

• “Where does a dollar go?”

• Company Finances vs. Employee Paycheck

Publications

• Monthly Newsletter / State of the Company – Ownership focused

• Owners Manual – “Why ESOP?”

Communicating the ESOP: Successful Programs (Cont…)

Tenants of communication strategies

• Keep it Simple!

• Pictures tell a thousand words

• Focus on the few big items that you need to get right

• Train/communicate in small groups – identify a champion/influencer

• Communicate when employees most receptive

• Have fun with it where you can

• Multiple voices where ever possible – outside perspective

• Keep trying new things

ESOP Communication Strategies

Communication Examples

Where does a Dollar go? (Example)

Revenues $1.00

(-) Direct Costs $0.56

Gross Profit $0.44

(-) Fixed Overhead $0.14

Net Profit $0.05

A Single Dollar

(-) Variable Overhead $0.24

(-) Other Inc/Exp $0.01

$ 10,000,000

(-) $5,600,000

(=) $4,400,000

(-) $ 2,400,000

(-) $1,400,000

Company Wide

(-) $100,000

(=) $500,000

GGI Finances vs. Your Paycheck

Gross Pay• Wages from hours worked

(-) Income taxes, health benefits, EDD insurance & 401k

Net Pay• Take home pay

(-) Living Expenses• Food, rent/mortgage, utilities,

auto, etc.

(=) Disposable Income• How do YOU spend/invest???

Individual

(=) Net Profit• How do WE spend/invest???

Revenues• Sales to Clients

(-) Direct Costs• Labor, Materials, etc.

Gross Profit• Portion of remaining Revenues

(-) Overhead Expenses• Non-billable labor, vehicle

expenses, small tools, advertising. building rents, etc.

Company

Fun & Games!

ESOP Soccer ChallengeESOP Soccer Challenge

ESOP SquaresESOP SquaresESOP Family FeudESOP Family Feud

October is Employee

Ownership Month

October is Employee

Ownership Month

Whe

el o

f ESO

P

Whe

el o

f ESO

P

EXAMPLE

EXAMPLE

Closing Comments

• Tie employee performance to company performance by communicating metrics

• Reinforce that as company performance improves, so does valuation.

• As valuation improves, employees OWN account balance grows.

• Communicate early and often

• Keep it simple and relevant to the audience

• Use different tools including outside resources

• Make it fun

Contact us with any questions

Please fill out your evaluation forms and thank you for attending!

For a copy of the presentation, go to www.slideshare.net. Search for Chris Kramer or Hawaii ESOP Meeting

Chris KramerStrategic Equity Group

(714) 380-3300ckramer@segco.com