“Before we knew it, we learned that we were having a Grand Opening for our new Manhattan retail store later that week. And we weren’t even a retailer“
To help with the growth our family business, our family hired a key non-family manager for the first time. Attracting an outside manager into a family business is especially challenging with regards to compensation. Like many closely-held firms, we weren’t willing to give up equity in the business, so we created a compensation package built around a performance bonus. We selected an outside executive who came from a larger company, who brought proven expertise to grow our company rapidly. Coupled with their high ambition, it seemed like a good idea to tie their compensation into sales growth.
The new manager was hired to run our Distribution Center and was nothing short of ambitious. He had quickly mastered this role, and was eager to take on additional responsibility. We gave him the added responsibility of inventory liquidation. As an online merchant we sold all of our merchandise through the internet. We also had a small warehouse outlet store to sell overstock. In less than a year the new manager had opened three new outlet stores. The sales from these new stores were significant and we kept rolling them out.
It all came to a head when we learned that a new Manhattan store was having a Grand Opening along with a sizeable payment for building improvements. This red flag caused us to look further into the cost effectiveness of the outlet stores and we quickly determined they were unprofitable. We also learned that there wasn’t enough overstock from the websites to supply the stores with surplus and the manager had purchased new merchandise to keep the outlet stores well-stocked. We were buying new merchandise inventory and immediately selling it at clearance store prices through our outlet stores. The new manager was receiving large bonus payouts tied into revenue goals, because the sales line was growing, even though the stores were unprofitable. We cancelled the grand opening of the new store and closed all the remaining stores, except for the original location.
We learned three very valuable lessons from this situation:
1. When developing compensation packages work with an experienced advisor. Resist the temptation to do it on your own.
2. Monitor new key manager’s performance closely during their early tenure.
3. Focus their efforts on their core areas of expertise and be aware of their venture into new areas. This may seem obvious, but there is a tendency to have them take on a General Manager role, thinking that their experience in a larger company easily transfers into being an expert in all areas of a smaller company.
Outside key executives can be very valuable to your business; you just need to monitor them more closely until you have confidence and develop trust in their abilities. Oddly enough, just the same as you would any employee.