How Ya Gonna Keep `Em?

Small companies trade stock, incentives, and respect for lower pay and longer hours

Timothy E. Healy was a young star, the top central region salesman in General Electric Medical Systems' ultrasound division. He pulled in $160,000 a year, and wore Hart Schaffner & Marx suits. But he wanted more challenge--and longed to be an entrepreneur. So in 1994, he put his $170,000 Cleveland home on the market and traded his suits for blue overalls and a laborer's job, driving a 25-ton dump truck at a lead-tainted Alabama factory site for Entact, a fast-growing Dallas environmental firm.

Two years later, his training program complete, Healy, 29, has moved into sales and marketing and in January helped spearhead the creation of an Entact spin-off company in Chicago. His $50,000 salary is less than one-third what he got at GE, but now he owns 4% of the Chicago affiliate, with a promise of significantly more if the operation thrives. "I wanted the opportunity to paint my own canvas, to put my touch on a company, and Entact afforded me that opportunity," Healy says. "I don't plan another job change."

FEW BENEFITS. It's a big win if he does stay put. Retaining key workers is an enormous issue for any company, but for small employers the problem is far more acute. Entrepreneurs typically demand long hours and intense commitment from their workforce, but they often can't pay as much as bigger rivals or offer comparable health and retirement benefits. A 1993 Small Business Administration study of 1980's data found that companies with under 100 employees suffered 15.2% annual turnover, compared with 9% for larger firms. Consultants say that, given the trend in corporate cost-cutting, the numbers likely are higher today.

A company of 1,000 barely hiccups when someone walks out the door. But a resignation or two at a 10-person firm can carve out a big enough hole to crimp business and dramatically choke profits. "If you lose two or three key employees, a good part of your business will go with them," says Bruce A. Walker, chief executive officer at Merrick & Co., a small Denver-based engineering firm.

Indeed, companies lose about two months of employee time for every termination because of training time, lost productivity, and other factors, according to Marie R. Dufresne, senior vice-president at Hay Group Inc., a management consulting firm. The cost, say experts: Up to $50,000 per lost worker. Small companies that can't afford training managers and are strapped by the loss of even one person's time suffer most. "People don't realize the cost of turnover," Dufresne says. "It's a serious hit."

Successful entrepreneurs keep top talent by balancing growth and the drive for profits with attention to the soft side of the business--providing a family-type atmosphere and the opportunity to do stimulating work that visibly affects results. More important, they offer some compelling financial upside, a chance for employees to share in growth through stock options and profit sharing.

If it works, employees such as Entact's Healy will put up with long hours, tough working conditions, and lower salaries, looking for a payoff down the road. Otherwise, top talent can head back to Corporate America, a competing firm, or their own new business, sometimes triggering a stampede of other skilled employees. "The danger starts when owners won't share the growth," says Kathy M. Dawson, chief executive officer at the Dallas-based Dawson Group, which provides human resource services for hundreds of small companies. "It can be devastating."

OWNERSHIP. Some startups adopt employee stock programs in their formative years, usually once they grow past the 10-employee mark. Top managers at five-year-old Entact, which earned $1.4 million last year on $10 million in sales, gave 20% of the stock in both its Dallas and Chicago operations to their 35 salaried workers in January. It also pays annual bonuses exceeding $10,000 to most salaried employees. And it plans to spin off new affiliates whenever a regional operation tops 40 workers, giving workers a greater sense of participation and a chance to build wealth. "They can have a significant impact, and they can have significant ownership instead of .0001%," says CEO Philip J. Pisani. The result: Turnover of salaried employees at Entact has consistently stayed below 7%.

Recent analyses linking employee stock packages and higher worker-retention rates are hard to come by. But a 1985 study by the National Center for Employee Ownership, a nonprofit organization based in Oakland, Calif., showed a strong correlation between the amount of money a company puts in its stock plan and the number of workers who said they planned to look for work in the next year. Corey M. Rosen, the center's executive director, says a strong stock plan at a small, growing company could cut turnover by up to half. Workers are even less likely to resign if stock vests over several years, requiring them to forfeit substantial sums if they move to another employer.

Financial incentives also can effectively juice employee performance. A recent study by the Consortium for Alternative Reward Strategies Research examined reward plans, such as profit sharing and bonuses, at 663 companies, about one-third of which were small firms. At the companies that quantified performance, productivity gains produced a 134% net return on what they paid out to employees. "A group incentive plan continues to be the most powerful way to engage people in the business," says Jerry L. McAdams, a study author and reward plan consultant for the St. Louis office of Watson/Wyatt Worldwide.

But compensation alone doesn't always keep workers from abandoning the enterprise. They respond to their environment, to constructive human relations. The Entact office in Dallas, awash in pizza and people in their 20s, feels more like a college fraternity than a rigid corporate workplace. "When you come back to work, you feel like you are coming back to see your friends," says Lori A. Bailey, 26, a graphic designer. Indeed, a study of 110 small entrepreneurial companies by the Center for Creative Leadership in San Diego indicates companies whose CEOs scored higher on employee development, communication, ethics, motivating employees, and other factors enjoyed better retention rates--and 20% higher profits.

By contrast, even well-intentioned bosses may kill off their business by focusing on profit at the expense of people. "Entrepreneurial people don't tend to be good listeners," says Reinhard Ziegler, a managing partner for the Dallas office of Andersen Consulting. "And to retain people, you have to listen." After shooting to $25 million in revenues and 80 workers in three years, a telecommunications company Ziegler consulted with closed abruptly in 1994. Key employees and more than half their customer service and technical people simply walked off in frustration over the disorganization and lack of support.

The recent turnaround at Tekelec, a small designer and manufacturer of diagnostic equipment and switching systems, bears out the importance of non-financial motivators. In January, 1994, the Calabasas (Calif.) company was on the verge of bankruptcy and cutting staff. Then Philip J. Alford, a vice-president and general manager, was made president. He secured a joint venture deal with AT&T to sell Tekelec switches, addressing the company's near-term cash crunch. He also initiated an aggressive employee-retention and participation program to keep staff from running to the competition. "He got employees feeling they were true partners in the business," says Scott R. Gardner, Tekelec's vice-president of human resources. "It was incredible. We had virtually no turnover in 1995."

The company gave its 250 employees stock options that vested over five years and handed out bonuses ranging from 7.5% to 15% of salary. Alford decentralized management to give division leaders more authority and responsibility for results and held quarterly employee discussion groups to encourage communication. By 1995, revenues climbed to $75 million and profits to $6.3 million. Turnover also climbed slightly, but at 12%, it remains lower than the 20% typical of the industry despite many calls from recruiters. "We are constantly looking for ways to keep people enthralled with what they are doing," Gardner says.

Ambitious professional people want to work in a stimulating environment that will further career development and allow them to contribute in a significant way. "They want a clear, meaningful purpose--a vision they are excited about," says Kay Plantes, a small-business consultant in Madison, Wis. Lacking such motivation, sensing that management is blocking them from advancement, a company's best people often will leave to form their own companies. When the boss turns into a control freak, talent heads for the exits.

SIMPLE FORMULA. That's why Jack J. Hurley, owner of Direct Mail Advertising Corp. in Miami Lakes, Fla., has offered his marketing vice-president about half the company and a promise of succession to the top job rather than lose the executive's skills at the $2.5 million business. "You have to match their entrepreneurial desire," Hurley says. "If you don't, they will go out mn their own."

Consider your workers' aspirations, and they'll stay happier--a simple formula, but hard to execute. A four-year-old Dallas telemarketing firm, Principal Resource, appears to have figured it out. In an industry known for its revolving door, Principal's turnover rate is under 20%. Moreover, it has retained executives at salaries averaging half their pay at previous jobs.

How? Environment, for one thing. "We try hard to treat people like adults," says Kim W. Graw, Principal's CEO. "To a lot of people, that is incredibly refreshing." Principal doesn't mandate scripts for telephone reps, and it tries not to oversupervise employees to prevent cheating, a common tactic in telemarketing. It attempts to reduce pressure on workers by hiring a full-time training manager--and by providing on-site massages twice a month.

Of course, there's the money. Principal pays its 19-person sales staff salaries above the industry average, and carves out 10% of profits for bonuses. For key employees, the company sets aside 15% of its stock, to be awarded according to performance. Elsie B. Sielen, who heads Principal's sales group, took a pay cut of about 50% of the $80,000 she had earned as an independent consultant. But she plans to make up the gap in a few years through stock and bonuses.

More important, Sielen wants to be part of a startup with growth potential. To do that, she accepted a demotion to telephone sales on joining up, although she once had supervised a telemarketing department of more than 300 people. But Sielen, 42, has no regrets. "I feel like the company is part mine," she says. "This is it. This is my last job." She has become a worker a small company can love.

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