I’m going to talk about hiring your replacement. Maybe you’re growing. Maybe there’s an opportunity to scale up, do more, go to the town next door, do more stuff, different stuff, whatever it might be. I’ve been there –I’m going through it now with our real estate private equity company that we’re building, and I want to talk about mistakes that I constantly see people make when it comes to hiring executive-level management.
First of all, how do we find these people?
In addition to the online business courses I’ve made, I built a hiring course to help people know how to hire a team that can manage your company while you’re away, making you money in your sleep. It lays out how to hire people, how to set up payment methods, do interviews, and where to recruit.
Now, mistakes. Back in 2013 we just had a big year and were growing fast. We knew we needed more management superpower. The first thing we wanted to do was bring on somebody for equity, pay a percentage of profits to this individual, and have vesting equity over time. We tried this complex payment structure system, and it ended up not working. We did the same thing a year later with somebody else, and again, it didn’t work. Now we’ve simplified, letting folks grow into the roles we hired them for.
A while back I did some consulting for someone who was looking to hire an individual to take over their business. I got on a call with him, and he laid out on a spreadsheet of the profit-sharing details which also included a compensation bucket of how the money was to get split between the employee and him. This was way too complex, so the first thing I said was, “Let’s find a way to keep this simple.”
Profit sharing is never a good idea. Now, if you’re in a real-estate-private-equity company and you’re getting people involved in the ownership of equity, that’s different. But we have tried to pay people on profits, and it’s almost always complex even on a small scale. So do not share profits. Share revenue; make it a simple split of revenue. If you want them to be motivated this is the perfect way because revenue is an excellent metric of how well the company is going, and it can be paid out every month.
Many entrepreneurs trying to hire a replacement make the mistake of thinking that everybody who wants to come in and work for them is an entrepreneur at heart, and they want to be fully compensated based on how they do. That’s not really how it works. Simplify it and pay them based on revenue. Pay them based on some simple metrics as motivation, but don’t be afraid to make a base salary as well.
I also like phantom ownership, meaning, if we sell this company, you get a percentage of the sales price. That’s what we did in a compensation structure, and it worked! We had somebody come on and manage my student storage company, late in the process, a couple of years before we sold the company. We told him our goal was to grow the company and eventually sell it. He started as an hourly employee, but once we knew he had what it took to manage a storage company, we approached him and gave him phantom ownership of 5%. If we sold the company at a million dollars, he would get a $50,000 bonus. If we sold it for two million dollars, he would get $100,000. Because he was doing so well, the company actually ended up selling past that, and when he asked for a little more as we prepped to sell the company, we gave it to him because it made sense.
If your goal is to sell your company, communicate that right off the bat. That’s where this phantom ownership can be exciting for a CEO. Talk about your long-term vision. If your goal is to keep the business as a cash cow and asset, then make a large chunk of their payment towards a revenue-based commission structure so that they are tied to its performance.
Next time you try to hire a replacement, my advice will be the same as what I gave to the person who wanted to hire a CEO to run their company: Simplify it. Cut them in on a percentage of revenue, pay it monthly or quarterly as a bonus and give them a base salary. Don’t worry about phantom equity. Your job is to worry about the profitability of the company. Set it up so that they get paid based on some key metrics because it’s their job to grow the company and its revenue.
The last thing you want to do is have somebody coming in thinking that business is going to triple. Manage expectations on both your end and theirs.
If you are interested in learning even more, check out my hiring course to learn everything you need to know.
Three Key Takeaways:
- Avoid equity payments. The structure is complicated and rarely motivates the individual to grow and improve your business.
- Consider phantom ownership. This is a much simpler payment structure if you’re looking to hire someone to take over your business. Not only can you lay out your expectations, but it is also an effective way to motivate the CEO to grow the company since it will increase the percentage of the revenue they receive once the company sells.
- Keep it simple. Your job is to worry about the profitability of the company, while it’s the CEO’s job to grow the company. Manage expectations by being upfront, clearly communicating how you’re going to pay the person you hired.
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