Managing Your Company’s ESOP – Web Seminar with Jack Stack

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welcome to managing your company’s esop brought to you by Menke & Associates
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now i would like to introduce today’s presenter jack stack is president and ceo of src
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holdings corporation src has started invested in and acquired 47 businesses over the past 23 years
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ranging from engine manufacturing to banking enterprises src today has sales of over 300 million
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dollars per year and currently employs 1 200 people
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in 1983 stack and src employees bought the company from international harvester
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and proceeded to turn it into what inc magazine has proclaimed one of america’s most competitive small
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companies jack is the author of the book the great game of business published in 1992
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which was selected one of the 30 best business books of the year by soundview executive book summaries
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src has received both the national business ethics award and the business enterprise trust award
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src was also selected as one of the top 100 companies to work for in america
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jack’s second book a stake in the outcome was published in march 2002 jack is a national and world judge
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and past recipient of the ernst young entrepreneur of the year awards institute and has served as an advisor for this
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group since 1998. inc magazine has called in the smartest strategist in america
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and named him one of 25 entrepreneurs selected to represent 25 years that inc
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has been published jack was also listed among the top 10 minds in small businesses in fortune
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small business magazine and now to talk about managing your company’s esop
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here’s jack thank you thank you john i’d also like to thank my mother for writing
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that introduction um welcome everybody um i’m just going to go over today’s agenda
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again it’s going to be totally esop related but um it’s probably going to be more our
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journey to to down the esop trail some of the things that i’m going to try to cover
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is the obvious ownership culture how we play what we call the great game
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of business how we establish our strategic plan to develop
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a team and have a winning attitude tied into that would be the incentive programs
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um primarily based on instant gratification with an eye towards growth targets
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underlying all this is the most difficult thing i think that everyone experiences when they’re dealing with a
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nissan program and that’s the you gotta wanna i think of all the things that we’ll talk about today the most difficult
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thing that we have we work towards inside the company is the godawana
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and then i’ll try to give you some idea on where we saw uh the true value of the esop and
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and at the end how to get the most from it what i’d like to do is is try to tell
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you that and make a significant point at the very very beginning here that
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um the great game of business that we’re going to be discussing today is definitely a pattern it’s a system
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um i totally agree with collins in this in his book good to great that all the companies that he studied
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over a long period of time and studied the the factors by which they
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endured he came to the conclusion that it wasn’t about charismatic leadership it wasn’t about having something special
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wasn’t even necessarily about being the least cost producer what he came to the conclusion was the companies
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endure over a long period of time because they work patterns inside of their operations the great
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game of business to us has been our pattern when we came up with the phrase a great game of business to be totally honest
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with everybody it was a phrase that we used internally with our people because we wanted to change the way by
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which we managed we came out of the industrial society the industrial society taught us to take
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the ideas of management put them into the hands of hourly and salaried people and consequently the design of somebody
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working for somebody else would work and we spent 100 years trying to work with inside of that pattern
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and the 80s came we got global competition and then all of a sudden we had to have
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a we went from that industrial age to the information age and we had a whole new way of managing
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so what we wanted to do when we had this chance to really kind of redesign the way we managed
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was to go back and question the fact that maybe people don’t really like working for somebody else and how can we design
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a system by which people could work for each other and
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change change the basic design the old design um again um was uh
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take the ideas put them into the hands of people and then consequently everything would work and if you had four thousand people
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working for you and they all did exactly as they were told the product would come out and it didn’t and we spent billions of
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dollars trying to work within a design and so what we did is we came up with this approach what we wanted to do was
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make people business people and we wanted to get them to think and act like owners those were the two things that we wanted
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to change in the business if we were fortunate enough to be able to purchase it which we were in 1983
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so in 1983 when we left the industrial world and we became owners when we moved from being managers to being
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owners we then had the opportunity to be able to do something differently now most people
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will sit there and say well the greatest time you can have change is when something starts anew or when you’re in
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serious trouble well yes we started something then we were serious trouble but we were horribly naive we we were managers all
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our lives we weren’t owners we had this dream of of making everybody owners and
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skipping off into the sunset and having this democratic approach and we didn’t realize all the problems that
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one has in terms of trying to get employees to become owners in the sec
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regulations and just how many people can be part of a sophisticated buying group and so what
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we did at the very beginning is that uh the 13 managers of the company sat down and wrote a
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shareholder agreement we where we all agreed that somewhere along the line we would figure out how to
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create equity and how would we create a an ownership stake for the people we really
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felt very strongly that the people that were going to create the company deserved a piece of the pie and our objective is
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to create a big pie we have never leveraged our east up from the very beginning early esop has always been used
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as a result of motivation and we’ve looked at it from the standpoint of fairness
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um and we looked at it from the standpoint is that we believe that the people that spend the time in the
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organization deserve much of the credit as the people invest money into it so our
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esop is not leveraged our esop is totally uh primarily based on the standpoint of
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trying to build an enduring company over a long period of time and pass it on from one generation to the next
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inc described what we did in in 1994 as a revolutionary approach to business
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that’s based on simple promise of making money is the responsibility of everybody in the organization not just the people at the top it was
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based on that kind of promise that we entered into uh the conceptual idea of open book management
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because we wanted open of our books to teach people the business in order for them to become business people and consequently
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they could make the shift from manager or employee to to owner a lot of the materials that we have used
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over the past 23 years are available at this www.greatgame.com so if there’s
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accelerated lending processes there’s economic literacy textbooks if there’s anything that you
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want um we have provided uh and and developed a lot of training aids that we have used
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in all the various companies that we have started over the last 23 years so if you need further
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information it’s on that particular website our mission statement when we bought the
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company was kind of simple well as stated earlier we were part of international harvester company and
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we’re on the point of bankruptcy and very close to having shut down the factory and we were going to get a call
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any day that we had to lay 300 people off and so we mounted a campaign to try to buy the
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company it was in the pursuit of buying the company that we really began to understand the ownership mentality
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uh when we went out to borrow capital you know they didn’t ask us things about product or services they asked us things
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about a company things that we weren’t specifically taught in the industrial age
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and we really began to see the difference in the reporting systems i used to build trucks i had
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specifications i had all kinds of scorecards that that
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is um necessary in order to be able to manufacture a truck but not once did i have access to any
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kind of report cards that had to do with financials income statements balance sheets and cash flow statements
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and so we were in a hurry to buy the company and uh one of our our people suggested
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that we had a mission statement so we came up with a real fast one that stayed with us today and so our mission statement is very simply
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don’t run out of cash and don’t destroy it from within that has to do with uh making absolutely certain that
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our our esop is liquid that we have enough money for capex that we can grow the company
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um it sounds like a really simple mission statement but it really covers a lot of ground um i think when you’re running an esop
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company when you’re riding running a privately held company it’s twice as difficult as it is running a public health company because you’ve always
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gotta have your eye on a mysterious portion of that of that uh balance sheet and that is the
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the uh the liability of the esau program as the company begins to grow and the
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company becomes successful because it isn’t obvious in a statement so you got to keep in the back of your
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mind that as you create the value of the company you create the value of the esop you got to have it somewhere
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in the back of your mind the liquidity to be able to pay that and we’re very conscientious of that from day one and then obviously the last
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thing is is that let’s have the greatest morale the greatest time that we possibly can in order to be able to go forward and
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and achieve our goal we wanted to make the change uh the changes was relatively simple we
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wanted to leave the industrial world we wanted to go into the information age running we wanted to teach our people to be
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owners and we wanted them to obviously think and act like owners and change the
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thinking between employee associate manager and really ask the deep and penetrating
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questions um that we would love to hear in our staff meetings in in in our communications programs
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i was like a kid in a candy store i had spent two years going out there and trying to borrow
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money in order to buy the facility and as i went out to borrow the money i
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was kind of naive at the very beginning because i thought that well if i had a three-piece suit down and i had a good resume and i
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didn’t have any kind of a police record and i had all these degrees and this experience
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why wouldn’t the bank lend me money and as i went out to borrow money the people had asked me stupid questions
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like well when are you going to pay this money back and i’d say wow really good question i wasn’t here to pay the money back i was
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there to borrow the money to get the plan up and running and so in that two-year period of time i actually ended up running somewhere in
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the vicinity of 50 different types of business plans to try to borrow the money and no one
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really wanted to lend us the money because we’re trying to float a receivable that um the receivable that we were
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trying to finance um was owned by the person by the company that owned uh that that really
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owed six billion dollars to 200 banks no one really really wanted to lend us the money so we really had the
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opportunity to really learn a lot about uh becoming an owner and thinking like an owner and one of the things that
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that we began to realize is that there were two sets of report cards up there there was a report card that’s up there
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that that teaches people how to make things or produce services and then there’s a report card out there
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that totally evaluates the company and it’s kind of funny that the two are not intertwined that in most
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organizations that if you look at your own um accountabilities or your own goals or
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how you evaluate your own people very seldom do we have any tie-in with the financial statements
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uh we’re very very quiet quantitative and we have a tendency to optimize somebody’s
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job description but what we don’t realize is that we’re not engaging them to create a great company
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the idea behind a great game of business is to appeal to a higher level of thinking and as a result what we want
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them to do is to create a great company the idea is is that if you can get them to focus on a great company
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you have to make great products and you have to make great services so when you think about this process
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okay this pattern realize the pattern is to drive the person
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to replace the product and the service with the company the company now is the product the company is the truck
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the company is the retail store the company is the restaurant okay so under this new paradigm
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um what we want people to begin to understand here is that uh we want to create an enduring
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company we want to create a company that will endure over a long period of time that will be totally solid
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and we will evaluate that by using the income statements the balance sheets and the cash flow statements
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now i just spent two years running 54 of these things and i you know i became fairly good at it but
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every time i would go to a lender and that lender would tell me that they wouldn’t lend me the money i would get angry i’d get
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angry not at the lender i’d get angry at the company that i wrote for because here i would build an engine and i put
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it in a truck that would go at your families at 70-80 miles an hour but nowhere did they think that i could
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understand the report cards of the business they didn’t think i could read a balance sheet or they didn’t think i could read an income
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statement well um after two years of writing these things and beginning to realize that really this is what
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i’ve been looking for i mean i i had spent 14 years thinking every management fed every you
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know gurus philosophies i’m not trying to how to develop a high performance
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workforce and i was actually dumbing people down i mean when i went out there to borrow the
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money and people would ask me questions about how to build the value of the company i began to realize that
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it is a result of these financial statements that this is where all change occurs that as a result of these financial
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statements someone is interpreting these financial statements and then telling people in the organization what
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needs to be done in order to be able to create value or to protect the asset or to improve the
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growth of the margins or whatever and i i began to realize that if i could
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understand these things the people that i was working with could understand these things and if they could understand these
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things this was the management flavor of the month and it wasn’t going to go away that these
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financials were gonna be here they had been here since 1458 and then my lifetime there wasn’t a chance for
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them that they were going to end so why not teach them why not get them to understand them
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and if they began to understand them then they can have an impact and they can see where they made a difference relative to these statements
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so when we bought the company in 1983 we became the worst
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leveraged buyout in corporate america we ended up buying the company at an 89 to 1 debt to
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equity ratio that is horrible we borrowed 8.9 million dollars
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we had an 18 interest rate and the only equity that the entire management team
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could come up with was a hundred thousand dollars so our esop basically started with a hundred thousand dollars worth of equity
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in our first day of opening the only balance sheet uh item that i had to
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teach the employees was obviously the fact that we just borrowed 8.9 million dollars
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and we only had 100 000 worth of equity so i had debt on one side of the
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um the room and i had equity on the other side and i gave these guys a long speech on
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this is what we got to do we got to create cash we take the cash we pay down the debt the debt moves over to equity
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we build the value of the company and the company becomes ours and that’s the simplicity of business okay so maybe i over exaggerated
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simplicity but i wanted to teach people that the first critical number that we would have from day one
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okay was not what we would be facing internally but it would be this whole idea of making certain that
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the debt coverage was there that each and every one of us made an impact in terms of cash flow
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and if if in fact we could have cash flow we could pay down the debt and for every dollars of the debt we would have
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we would avoid an 18 interest expense i was then followed by my human relations manager
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who got up there and did exactly what you would do in the industrial world as you go over affirmative action you go
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over eeoc and you go over all the things that you need to go over and all the documents
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and then he looked at the audience and said you know he said if you can get a job somewhere else i would highly recommend it
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because when you’re 89 to 1 you’re brain dead and somebody should pull the plug now
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people have looked at us in the past and said well because you’re 89 to 1 you were able to
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be able to incorporate these kind of changes to move from the old paradigm to the new paradigm
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i wish that were true i can honestly tell you that we did not know what 8921 was we weren’t afraid of 89 to
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1 we were too naive to be afraid we started out opening up our um
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our business uh well we had an interesting thing happen to us from when we when we bought the business
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we had failed to um negotiate a transfer of
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our i.t systems with the international harvester company so as a result of that we open up on day
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one with no systems now the interesting thing about not having any systems is that you have
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no reports to hide behind and you actually have to go out and talk to people and so
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we had a situation where we actually put income statements balance sheets and
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cash flows together by going out there and asking people what they were going to do for each other i know it sounds kind of corny but if
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you take a look at your financial statements you’ll find out that actually there’s somebody out there that’s responsible for every single
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line on the income statements and the balance sheets i would go to the sales people and ask
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them what they were going to sell i would go to the materials people and ask them if they were going sales was going to sell this what was
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the material that they were going to bring in the labor people then would give me their inputs and i would get the overhead it was like the
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first time i had this staff meeting where they would come in and actually fill out an income statement
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and a cash flow statement and at the end of it they begin to realize that all these numbers are nothing more than stories about people
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and that the standards of business are basically set by the people themselves so in essence whereas we were stupid in
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terms of not negotiating a real good it program it really kind of helped us
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from the standpoint is that it accelerated our learning process by humanizing those financial
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statements and then everybody began to take this psychic ownership of of the line it was easy at first because
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i just built engines and i went around and i got all the information but then the more we began to teach the
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more people began to ask us questions uh someone came to me and asked me to break out
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uh nozzles and i broke out nozzles and i gave her all the data in terms of
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the marketplace and the general ledger and margins and lead times and everything of
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that nature and and i would go back and see these behavioral changes i’ve seen once the people had like the
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the the business itself they changed the business in in their own departments in their own
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organizations this one lady actually went repainted everything and and her inventory control system was
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almost immaculate because it was the first time she actually had costs of parts and now no longer did she
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have a washer and a 35 cent item and if you use six of them per nozzle and you have 6 000 nozzles a
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month the dollar values add up and then and then i went over and i looked at her and she was looking at a nozzle tip and i
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was asking her what she was doing she said well this is an 18 nozzle tip and prior to this if it had a burr on the inside i would throw it away
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and now that i know it’s 18 i’m going to buy an internal grinder and i’m going to take that burr out
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and if i do that i’m going to reduce my costs and i’m going to improve the spread of my margins and
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i’ll have a higher gross margin and my mouth hit the floor because i was talking to her
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like a business person i’m talking to her about as a nozzle builder i was talking about her as a person
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that was truly engaged in in creating a company at the end of the conversation she looked at me and asked me why i wasn’t
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selling nozzles with the counter and she actually pushed me out of the box i mean i i’m from the old school i was from the
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industrial world i looked at the engine i was an optimizer and i just looked at the engine she looked at me and said look there’s
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probably about 10 businesses in this engine why aren’t we selling fuel injection why aren’t we selling turbochargers why
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aren’t we selling electrical components and it was a result of me appealing to her
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level of thinking a higher level of thinking that she began to teach me things and ask me
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questions about how we could become a more diversified company and how we could
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look at the businesses entirely differently again i was like a kid in a candy store i thought everybody could
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understand the business and there was a lot of pushback at the early stages um a lot of people come in and you know
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they’re they’re great people and all they want to do is work 40 hours and you need those people i mean you really need
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them and they don’t want any pressure and they just want to do their job nothing more nothing less but on the same token there
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are a lot of people in there that really really want to know what’s going on but are afraid to ask and they don’t have the confidence that
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they can understand financials and i found out through literacy tests and it’s an interesting to do thing to do in
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your organization is to actually go out there and ask people specific questions
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like how much revenue do we make per employee or what’s rev the difference between revenue and sales or what do you think the profit is
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in terms of the company it’s interesting to get an inventory of their perceptions because at the end of the day people
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have answers on your floor and in your offices and in your organizations nine times out of ten they’re the wrong
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answers it’ll really be eye-opening to go out there and you know compare their answers i used to do
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literacy tests and ask people what the tax rate of the company was and when they found out it was 42 percent they went wild they went
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crazy they thought it was communism that the government would take 18 of their payroll tax and now they’re taking
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42 percent of their profits but i began to realize that i had a literacy problem inside my organization
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and for me to get them to the point of becoming this business person to becoming this owner to really
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understanding the value of the equity we were about to impose upon them i had to get them to be able to understand and
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interpret the tea leaves and to me the tea leaves were those financials so i in all fairness i used the analogy
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of a game i went to him and i said look you guys blow me away and how you can play fantasy football how you can play
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monopoly how you can play texas hold them i said you know business is the same thing it’s
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a game okay um i didn’t use the analogy of the game to to embarrass business i didn’t use the
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analogy of the na of the game to de-emphasize the importance of business my people needed the confidence to
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understand that they could understand business that they could be going they could go from being an
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employee that they can go from being an associate they can go from being a manager to truly understanding what ownership was
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and the difference that they made if in fact they had the you gotta wanna to grab the brass ring
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so i broke it down i said look in order to have a game okay you gotta have rules and we have a
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ton of rules in business and no one’s to play a game unless you got rolls
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second thing is is that you need to have a score card and i readily admit that in all those
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years i had the wrong score card i mean i was using qualities using housekeeping i use the safety and they
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are truly important okay but nowhere you know singularly would they make a difference in terms of
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the lives of the people okay that that they needed to get all these things in order to be able to
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create a great company and so i promise that the scorecards that i would use would be
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things like the balance sheet like you were taught in high school or your teacher told you your county teacher told you that hey you understand
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the health of the balance company you understand the health of balance sheet that if you have a healthy balance sheet
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you have a healthy company you see i wanted people to come into work every single day never worrying about whether they should
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get married whether they should have a kid whether they should buy a house or they should take a credit card i want them to look at the balance sheet
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or the income statement and truly understand that they did have they had a chance that they had an opportunity
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okay that this company had some legs and that that it that they would make the
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decision for themselves whether this is the company that they wanted to work for or not and then obviously the last thing and
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kind of the simplistic thing is that no one’s going to play a game unless there’s something in it for them
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and we’ve got a lot of of outcomes okay we have the whole idea of careers and instant
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gratification okay we have the the ability to be able to provide bonus programs and equity
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programs and so in its most simplistic form we use the great game of business as a metaphor
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to give people the confidence that they can get to the point of getting it and it is about becoming this
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business person that truly understand what ownership uh is all about
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i realized that that that’s a very very big thing in its dope and and it’s really got to be
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outlined a little bit more clearly i started out with this grandiose scheme
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you know the rules the scorecard and the outcome but as i began to progress i began to
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realize that the only way that i was really going to change the culture and the only way i was going to change
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the behavior was through repetition repetition repetition and so what i’m going to go through
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right now is how we connect the dots okay how we put together the financial
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plan how we get them involved how we then reinforce them through weekly scorecards
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and ultimately get to the the conclusion and that is the economic value of the company and so the
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next portion of this presentation is the process itself and the repetitiveness of the process
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but i i think if you if you look at that one slide in front of you the idea behind the repetition to
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get the culture is that you need to come up with a pattern in the system where it’s where where you repeat repeat repeat but
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you got to be very careful that the repetition isn’t boring okay that that repetition is constantly
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interesting and and people uh want to walk down that long driveway in the
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middle of winter to pick up that newspaper to see the score or maybe to see their kid in a newspaper that’s what you’re really trying to do
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is get them the desire to come to work the next day to see how well they they have done and
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to see the outcome um the first thing that i realized we had to do is i had to bring the
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marketplace to the people not just the customer i had to bring the marketplace to the customer
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you know if you have a customer like walmart that’s one thing uh but if i could figure out the marketplace that drives the customer
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into walmart i want our people to understand what type of a game they’re in and so basically what i began to realize
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is that i had to get them involved in the plan at the very very beginning to get them involved in the plan the
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first thing i had to do was to utilize my sales and marketing people and ask myself the marketing people to
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put on bi-monthly or twice a year sales and marketing presentation
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now this is a template that we give to every one of our associates hourly salary managerial twice a year
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we follow this template okay the bottom line is is that i want everybody in the company
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to sign off on the sales marketing plan i don’t want any finger pointing later on that it’s
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sales responsibility i want our associates they have enough information and enough input that they buy in and they agree on
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the plan and that they have the opportunity to make any kind of adjustments now this may seem like a long long
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process and involves a lot of lead time but if you look at it your sales and marketing people do this every
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single day all right and so what i wanted to do is i didn’t want my sales people to go into the holiday inn and drink a martini when
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they lost the order i want them to analyze why we lost the order or why we got an order and to be able
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then to relate that to everybody inside the organization and to give you know give everybody that information
29:47
so the first thing we want to do and we do this twice a year we wanted to give them an analysis of the game that they’re into the market that they’re in
29:53
i mean if they’re in the construction equipment market right now and and the highways are going absolutely
29:59
crazy and you know there’s money being spent in terms of that industry i mean everybody feels good they got a
30:05
very good confidence level that the macroeconomics are are are in their favor i want them to
30:12
see the the the competition that they’re in all right i want them to understand
30:17
the competition because if they understand the competition they have a tendency to do things faster
30:23
quicker and better when somebody else when they know somebody else is doing it better than they do i came from a world where we had
30:29
industrial engineers and we did time studies and it was always a contentious
30:35
situation where the industrial engineer and the hourly person would sit there and argue about how fast something
30:41
should be done when it’s really the marketplace that really sets the standards but if you don’t bring the marketplace
30:47
to the employees or the associates okay they’re always going to be suspicious in terms of why you’re asking to do things
30:52
faster and possibly you know the mindset is for less money if i go to most organizations and i say
30:59
to them who sets your salary they’ll tell me the human relations manager or they’ll tell me the
31:05
ceo or in most cases that they don’t understand it’s the marketplace that sets the standards
31:10
because we don’t bring the marketplace to them so our our situation here is to bring the marketplace bring the
31:15
competitive in and i’ll show you examples of that the next thing is is that we then forecast for 12 months plus four years
31:23
contingencies are built into all of our planning processes because if in fact we we miss the plan
31:31
and people’s jobs are at stake we need to have contingencies in order to make certain that we don’t have layoffs
31:37
and knock on wood we haven’t had a layoff in 22 years because of this contingency and trap door types thinking
31:43
we then had the sales and marketing people discuss where they talked about where they were the last six months where’s the plan we
31:50
give the customer survey results to the people and then we don’t accept forward plans
31:55
unless they’re strategies that accompany the plans and then the most critical thing is we allow the people to go in and buy in
32:02
and we vote on the sales marketing plan at all the facilities uh throughout the entire uh operation so
32:09
this is a really important template and this is a template that we just get better at every single year we’ve done
32:14
it 46 times now all of our sales and marketing people know that eventually in six months
32:20
that they would uh you know they know it’s coming so they’re constantly getting information and the information is
32:26
constantly getting better but the neatest thing about it is that our employees love this information our employees love to go home and talk
32:32
to other people about the energy supply problems or the challenges relative in the agricultural
32:38
markets or you know what’s happening at general motors today all right they love to have that type of information it makes them
32:45
a you know a better educated person in terms of the entire process but this
32:50
thing has worked extraordinarily well in extraordinary efficient and i’ll give some examples how it looks at uh look at how it looks
32:58
this is a company we got a logistics company uh we have uh quite a few companies at this particular
33:04
point in time but this would be an analysis of the marketplace all right it would talk to you about how big the marketplace is what it’s growing at okay you can see
33:11
the logistic industry has grown is about an 89 billion dollar market uh it’s growing at the rate of 14 percent
33:18
okay it tells you about how information technology is changing logistics significantly and so this kind of gives everyone in
33:24
this particular organization this is one of our kidding companies uh uh in terms of logistics
33:32
and this is another example of uh an automotive organization all right this would be a
33:38
competitor this would be one of the slides that would go to all the associates inside of
33:43
the organizations this is probably uh really critical
33:49
in terms of our analysis okay what this is is these are benchmarks and in a lot of companies they’re
33:55
associated to a lot of industries or if they can’t get this thing they can get them off of publicly traded companies
34:01
you can get this kind of information off of donald brad streets you get some information from your bank
34:06
um we ask ourselves and marketing people to benchmark ourselves in terms of
34:12
three categories uh in the competitive world one’s profitability one’s efficiency and the other one is
34:17
liquidity we think that this is the these are the are the important keys that if we focus
34:22
on these keys um we can actually go to our people and tell them if you understand this
34:29
it’ll have a big impact on your job i used to do things like total quality management programs and knock your socks off
34:36
service and tell them well if you do this it’ll change your life forever and it didn’t all right but when i began
34:41
to use the financial ratios we really began to make a change and we really began to make a difference
34:48
and it really evolves then into the whole idea of ownership and i’m going to go to a little bit more
34:54
detail on this competitive uh graph i just want to show you some examples of the temples themselves
35:00
this is how a five-year forecast would look you can see the rate of growth of this one particular company
35:05
it’s forecasting seven percent to sixteen point six percent eighteen thirteen and remember sitting
35:12
in this audience are people that uh starters and alternators and generators
35:18
and they’re getting this kind of information uh basically twice a year they’re getting a macro idea
35:25
this is a an example of contingencies and what you’ll see is our idea contingencies is that we would
35:31
like to have it in product development we don’t necessarily have to introduce it so what we can do is that if we have
35:37
a downturn in the economy in order to have stability in terms of the workforce we can introduce these things because we know
35:43
what phases they’re in if you look at that stage of development on this on this chart
35:48
it tells you whether it’s ready to go or whether it’s in a feasibility or whether it’s going through an an evaluation process and so
35:56
contingencies have really worked well for us because our we started this business to create jobs
36:01
and hold on to our own jobs so jobs are are very very important to us and so when we look at our sales and marketing
36:08
forecasts we want to make certain that there is there’s a what if there what if we get high interest rates or
36:14
what if we get high energy prices or what if something happens in terms of the marketplace do
36:19
we have a contingency and so this is an example of a contingency the the stage that the contingency in
36:26
and then how fast we can bring it to the marketplace so if we were going to have a downturn of about 15 in terms of our sales and
36:32
marketing we could rush to the contingencies and then we can introduce them at a lightning speed
36:40
this is a simple example of one of the companies that has a sales expense line of six and a half
36:46
million dollars they’re actually spent six they’re favorable by 122 thousand dollars
36:54
this is a customer survey um i think it’s really important that your people in a whole organization get the
37:00
customer surveys um too often the customer survey is just sale in a sales and marketing organization it doesn’t have any impact
37:07
on people in the organization then there’s this gap and there’s this frustration so what we do is we go over the customer
37:13
surveys every single uh six months and
37:18
we make absolutely certain the interesting question i think in our customer surveys
37:24
is that would you recommend our product our service to somebody else that’s probably the key question and the more people that we have rating
37:30
at at the three four five the more we know that people are out there promoting the product
37:36
the more people that we can get into that three and four range the faster we penetrate the market
37:43
uh these are some of the key initiatives in in one of the businesses that we’re in
37:49
this is an indication of the employees voting um you will see here that uh at the end
37:56
of 01 people on the left-hand the great column these are the number of people that voted on the plan these are the people
38:02
that believe the contingencies you can see that not all years there they
38:07
nod their heads but in the recent years because we’ve been doing really really well they
38:12
really have a high level of confidence this is the competency that ended october of 05
38:18
uh this company had a contingency they bought of all the people that were sitting in the audience 90 bought the plan
38:25
and about 85 percent bought the contingencies so the whole idea is to take the excuses out of the workforce
38:31
okay the whole idea is to stop the finger pointing so when if anybody if we get something that we
38:36
can’t figure out all right something hits us as an unexpected surprise at least people had the opportunity here
38:42
to sign in that they had all the information going forward i mean it’s very critical that they understand
38:49
the high involvement planning portion uh in terms of the marketplace
38:54
another uh thing that we do is we do morale studies and morale studies um uh really helped us
39:01
out we work on morale studies we had a 17 question morale study that we do once a year and it’s ironic that we have specific
39:08
questions one of the questions we have here is are you actively seeking employment outside the company and ironically that equals our attrition
39:15
rate it seems overly simple but uh twice a year or once a year we go out there and do a morale study of 17
39:22
questions and we really learn a lot from them but the biggest thing that we learn is that are we incrementally getting better
39:28
and is there continuous improvement and the one that i look at the most on the on the employee
39:34
morale survey is uh as your supervisor treating you like a person if we
39:39
fall short on that one simple question now we fall short on the entire morale study so those are
39:47
some examples of the of the of the macro all right there you got the sales plan so now i go to the lady that’s running
39:53
nasalettes and i say okay here’s the sales plan here’s what the sales guys are going to do and then i turn to the lady that’s
39:59
running the room and i say okay would you uh please tell me what tools
40:04
you need to do the job and i asked her then to put together an income statement cash flow balance sheet
40:10
and succession plan now you need to understand here is that income statements cash flow balance
40:15
sheets are nothing more than the tools that she needs in order to do the job that’s what i look at these things for
40:21
all of our financial statements are done from the ground floor up they’re not done from the top down
40:27
so frequently i talk to people and they sit there and go i gave the guys the numbers and i don’t get the change i gave the guy the numbers
40:34
and that’s not what we do here the numbers come from the people they come up they don’t come down when i
40:42
worked at a large company i was only allowed to put together a budget that had
40:47
indirect material and every year that i put that budget together the budget would come down two weeks later and be
40:52
cut by 15 percent you’d say to yourself why in the world did i put that budget together
40:58
when they when they had an idea what they wanted in that budget and why didn’t they tell me what they wanted before i put that budget together
41:05
and i went through this massive disempowering powering process and so i promised myself i ever had this
41:11
company that i would make darn sure that the uh the that they would have the opportunity
41:18
to submit their plans and i wouldn’t micromanage them and i wouldn’t pick them apart now i realize that that takes a great
41:24
leap of faith and i realize that it’s very hard for managers and and executive management to hold their
41:31
breath but what i was able to do was to develop something that doesn’t necessarily micro manages
41:40
but tries to take what they’re doing to a different level and i’ll show you what it is
41:45
i only want to control one thing in all the assets and all the businesses that we have and i that is is that i want to make certain
41:52
that i know where the weaknesses are in the company and that we are doing something about the weaknesses
41:58
in other words if you take a look at this little profitability chart in front of you let
42:03
me explain it to you this way let’s use the lady in the nozzles she got the sales and marketing she took
42:09
the sales and marketing for a 12-month period of time she knew every single month what the sales were going to be she goes out to her
42:16
people and she does an income statement and she does a balance sheet and she does a cash flow statement
42:21
i then take her numbers and her numbers for instance are if you look at the two years prior the one year prior in the current
42:28
year all right her pbt or profit before tax two years ago was 7.2 she fell a little
42:35
bit last year at 5.6 but now she’s coming back at 7.1 in the old days it’d be a great improvement
42:42
you’d sit there and go wow we’re going from five point six to seven one but as a result of our high involvement
42:48
planning process we know where the industry is at in nozzles so i can compare
42:53
where she is compared to the industry now remember i have not micromanager i’ve not told her she’s got too many
42:59
people in the warehouse i have not told her that you know she uh she’s spending too much in in a given
43:06
area all i’ve done is compared her ratios in terms of the marketplace and as i look through these ratios what
43:14
i’m looking for in is where she’s weak because i know if i don’t fix where she’s weak it’s
43:20
going to nick the value of this company that buyers will come in and they will look at her company
43:26
and they will match these ratios to the industry and so what i figure out is that if i can always keep a company ready for sale
43:33
i’ve got it running at its peak and so let’s take a look at the next slide here
43:39
and see the weakness that we have inside of the company the weakness inside of the company for
43:45
instance is inventory turnover if you look at inventory turnover you’ll see that she’s got an inventory turn
43:51
from 4.4 to 5.9 again in the old days you’d look at that thing if you didn’t have any industry
43:57
information sit there and say wow that’s really good this is excellent but if you look at the industry you’ll
44:03
see somebody has turned 20 times and the average is eight so you know right there there’s a weakness that in all the
44:10
information that she’s been able to put together okay that you’ve got this weakness all
44:16
right you’ve got an inventory weakness that somebody is out there generating more cash flow than you
44:22
are generating she also sees that somebody’s out there so what we will do is we will not go
44:28
down there all right we will not go down there and say how to take down your inventory or what
44:35
you should be doing what we will do is we will go out there
44:40
and we will put together an incentive program and we will try to compensate her and her
44:47
entire company to turn more inventory and if they turn more inventory and they
44:53
generate more cash we’ll take a portion of that cash and we will put it into a bonus pool and
44:59
we will allow people then to attain a bonus as a result of curing the weakness
45:06
inside of their company now we use percentages and we have numbers but for this particular instance we’re just
45:13
going to be using the the financial statistics now let me go in a little bit of detail
45:19
if you look at 5.9 which is your goal what we do is typically go back to the
45:24
prior year of 4.4 and we’ll take 4.4 and we’ll go to 20.2
45:31
times inventory turns and there’s about 13 steps between 4.4 and
45:36
20.2 so what we’re gonna tell her is that for each step she makes for every turn that she gets better
45:44
okay we’ll increase your payroll by one percent with a possible bonus pool of 13.
45:49
now most people will say well why do you just stop at 13 you got to realize i’m an esap company
45:56
and the more bonuses that i put i i put out the more comes out of after tax profits
46:02
and so what i’ve got to be very careful about is the measurement of the bonus program and to make certain that the
46:07
stock price rises every single year so we’ve come up through 23 years and we
46:13
found out that if we pay salaried and non-exempt and hourly 13
46:20
of their payroll and we pay exempt and professional and managerial 18 of their salary we
46:28
pretty well can still meet an increase in terms of the value of the company let me be more specific on the next
46:33
slide all right here’s what it looks like so she started out last year at a 4.4 turn
46:41
i told her that she goes to a 5.6 turn we’ll put one percent of the bonus poll
46:47
if she goes 5.7 to 6.9 we’ll put 2 in the bonus pool if she maxes out and
46:53
she can hit the top of the industry which is a 20 to a 20.2 should get 13 percent of bonus pro now
47:00
our bonuses work kind of differently because what we want to do is we want you got to get on inventory at the beginning of the year you can’t wait
47:05
till the fourth quarter so what we want to do to encourage people to make the necessary changes
47:11
quickly our bonus payouts are you can make ten percent of the max in the first quarter you can pick up
47:18
another 20 in the second you can pick up the 30 in the third you can pick up 40. even if you’re behind if you hit the 20
47:25
turn at the end of the year you can pick it up later on so the max you can get we want them a
47:31
little taste in that first quarter but if they miss it let’s say they only get eight percent
47:36
that two floats in and then they’re now playing for 22 in the second i know let me tell you the story behind
47:42
this the story behind this is that they went out there they got their team together
47:48
if she drops her inventory from a 4.4 down to a 20. that’s 4 million dollars
47:53
that came out of her inventory so that was a big number she’s got 17 people in there so you can realize that
47:59
13 of that payroll the 4 million dollar drop in inventory is self-funding
48:04
so she goes out and starts sending out all these teams and getting everybody together but the most ironic thing is
48:10
she goes to the person that’s turned an inventory 20 times and she asked that person you know
48:15
basically what happened and how did it happen and she found out that the supplier consigned inventory to that particular
48:24
uh competitor well our people come back they’re furious okay they then call up
48:29
the supplier they ask the supplier why are they not consigning inventory and
48:34
you know what the supplier said the supplier said well you never asked and so as a result of people
48:41
benchmarking and people looking at best practices they were able then to hit about 75 of
48:48
their bonus program under this scenario in the past 23 years i’ve probably had over 20 different types of bonus
48:54
programs because i’ve had a different weakness in every company every single year whoever thinks that profit is your only
49:01
weaknesses out of their mind you’re gonna have different weaknesses and so what we try to do is we try to
49:06
put our incentive programs to make absolutely certain that we are controlling the weaknesses
49:12
the long-term weaknesses inside of our company so in essence if you look at the bonus
49:18
program there there they cover three things you know we’re an 89-1 debt to equity company we’re highly leveraged
49:25
so we’re masters of leverage and what we want to do is leverage as many things as we possibly can so we
49:30
leverage the bonus program and though our bonus program is three-fold all right the first thing is
49:36
is that it’s an insurance policy that when we all go to bed at night we’re all working on the same goal all right so one company will have one
49:44
financial ratio possibly two and one would be off the income
49:50
statement won’t be off the balance sheet because you want to have the cash to pay the bonus program but more importantly it’s an insurance
49:56
policy that we’re increasing the value of the company the second thing is if i give instant
50:02
gratification if they win and they do better than market they deserve better than market so they get market wages but if they
50:08
perform better than the market and they perform in the upper percentile of their competition they deserve
50:13
a little bit better than market so we got the idea of instant gratification that they look forward to it but more importantly when every time you
50:20
use a dimmer statistic and you spend a year teaching them how they can make a difference
50:25
it becomes an educational tool it’s just absolutely critical okay with these bonus programs that they
50:32
they become educational most people will put together a profit sharing program and they’ll sit there
50:37
and feel very good about the fact that they’re allowing their employees to get more money but they don’t have an idea how to make a profit
50:44
so what we do is we when we put out a bonus program it’s as a result of the high involvement
50:49
planning process it’s about what they want in terms of the financials it’s about the financial ratios then being compared to the
50:55
marketplace it’s figuring out where we’re weak in terms of the marketplace it’s then engaging the people
51:01
to cure the problem that you have inside the organization so you can get the company to endure
51:07
over a long period of time so our our bonus program really complements
51:12
three different types of situations and again it’s critical that you
51:17
understand that it’s self-funding everyone is on the same bonus program
51:22
and it is paid out on a quarterly uh basis here’s some of the other ones we had in
51:29
the past we’ve like i said before in 23 years we’ve had all kinds of programs we’ve had
51:34
diversification goals we’ve had the reduction of loan balances we’ve had a return on assets
51:40
it’s just amazing when you begin to look at your business as the product and a look at its
51:46
specifications to see what you really need to fix and then what it takes to go about fixing
51:51
them i i gave you some examples of some of the of the of the programs that we have
51:58
these are examples i’m on a corporate bonus program that generate cash flow if we have an operating
52:04
cash flow the corporate people are involved in the in the bonus program in terms of cash flow
52:10
these are some of our goals this is how it lays itself out this is over the 12-month period of time it’s broken out
52:16
by the quarter and again it’s all self-funding the next one is a bonus program at one
52:23
of the facilities that’s based on their loan balance that they drive their loan balances down they got to generate cash
52:28
flow and as a result of that they got an operating pbt that that works in their benefit to be able
52:35
to try to drive their balances but they can also drop receivables or inventories or something
52:41
these are like schematics okay this is a company that um has a
52:47
positive cash flow program this is a heavy duty program that’s strictly
52:54
on pbt pbt is a is a weakness in terms of this one particular company and so
52:59
they’re addressing their weakness as a result of the bonus program again uh
53:05
last but not least in terms of the high involvement planning process is uh we do have all kinds of
53:13
accelerated learning processes that we’ve developed we have classrooms we have tuition refund but i will tell you this and it’s this
53:20
informal process okay that baseball field that you saw earlier that repetition repetition that our
53:26
people learn um our people learn seventy percent of time by playing the game and they play it every single day they
53:32
play it every single week they play it every single month you know most people want to have training programs where they don’t take people
53:39
off or they take people off their uh their job assignments and uh this is one
53:46
way you can keep people working and you still can get them active uh in terms of the game the first
53:52
section that we just went through is the whole high involvement planning process now i’ve got a list of questions here and i’m going to stop for a second
53:57
i’m going to kind of go catch up on these questions uh gary sherman says do you only use
54:02
percentages or do you use full numbers we use full numbers i use uh percentages
54:08
when i look at the the competitive data but every single day we’re dealing in live numbers
54:14
is it practical or even possible to learn how the competition is achieving superior standard in their inventory terms i i think i
54:20
explain that by finding out that they move from owning the inventory to consigning the inventory
54:26
those are the things that as you hunt as you begin the process of trying to improve
54:31
and to just be equal to the competition you learn about what other people are doing in terms of
54:38
organization what i like about using competitive data is people change quicker when they know somebody else is doing it better
54:44
they move much faster when they someone else is doing it and it gives them the confidence that they in fact can do it
54:50
instead of management saying that uh you know this is the way it needs to be done
54:56
we’ve tried to take that process out if you look at the great game of business it’s a process where it doesn’t you’re not managing the person you’re managing
55:02
the system deming was right when he said you know the achilles heel the american management system
55:08
is the way we manage nine times out of ten when we have a problem we shoot the person okay when it’s a systems problem well
55:14
you have to have a system they have a systems problem and this is basically our system
55:21
okay so let’s go into the second stage you got the plan everybody’s got the plan everybody’s bought into the plan people signed off on the
55:28
plan you’ve covered the customer appraisals you’ve covered the size of the market you’ve told people what piece of that market
55:34
you basically had you told them how they can be able to penetrate more markets you try to tell them the best practices
55:40
in the industry they have and they’ve given you a plan they said okay here’s what we’re going to do here’s where we’re going to be at
55:46
all right now most people stop at that planning process okay if you’re stopping the planning process you’re missing a
55:51
great opportunity to have a lot of fun so what we do is we try to make the process live okay um what we have is a is a very very
56:00
interactive uh reporting system on how we were able to get everybody engaged in the score keeping and to take
56:07
that psychic ownership of each line of the financials and so what we’re going to be doing here is going through
56:13
the the the following the action and the keeping score and i think the first thing that’s
56:20
important to recognize is that in our staff meetings we probably have one of the most productive staff meetings that i’ve come across
56:26
and it’s productive from the standpoint is that you walk in and you have to fill out an income statement and you have to
56:32
fill out a cash flow statement in a blur blank you come into this meeting and you got to tell people what’s going
56:39
to be done for the month it’s really an exhilarating way of of looking at the businesses
56:45
the irony of the situation is is that there is no time to have sessions there’s no time for people to point
56:50
fingers there’s no time for people to be mad there’s no time for people to have fights because
56:57
you have to fill out the line in other words you have to have all these things done before you walk into the meeting
57:03
and what i’m going to do is kind of walk you through and these are live examples of some meetings the left hand column of the slide that
57:09
you have in front of you is all the various businesses that we have and i can run a huddle or a staff meeting weekly and handle about 20
57:16
companies in less than 40 minutes because everybody knows their line
57:21
everybody has the psychic ownership line the first thing that we want to do here in the very first step is we want to
57:27
just make certain that the sales plan is is still live is still active so the sales people go around the room
57:34
and what they’re doing is they’re going to give you a new opinion if you look at heavy duty that first line that plan that top plan well that came off the
57:40
high involvement planning process our year starts in february and so what they were saying is that they were going to their original plan
57:48
which was given to us at the sales and marketing meeting in october said they were going to sell 4.9 million in
57:53
february 4.8 million in march and then 4.8 million in april and then they have an opinion
58:00
and so we get their opinion and you know the markets change and things of that nature we want to give everybody as much
58:05
information as we possibly can like go down to automotive and you’ll see for the month of march automotive just went crazy they had a
58:12
plan at 2-2 and they booked orders for 3-5 then they came back in order 3-6 and now they got 4-5 our automotive
58:19
business is absolutely exploding we try to give them that information as early as we possibly can
58:26
i granted we were off our forecast but in these weekly meetings what we try to
58:31
do is tell people as far out in advance so we forecast out six months in the first step of the of the staff meeting
58:37
we’ve been around too long we’ve seen too many different changes we try to do the best we can to be as accurate as we
58:42
possibly can but markets change and things change and the idea is to react within the lead
58:48
times and so what we try to do in this meeting is when people leave they got a fairly decent idea
58:54
on what’s happening out there and do they need more resources and do they need more materials so the first about 10 minutes
59:01
you go around and just tune up that that financial plan and then obviously you have the actual
59:07
this is truly a financial statement okay that that occurs at the staff
59:12
meeting and what you’ll see here is you’ll see um a whole lot of lines and i would just
59:17
recommend that if you guys are going to do income streams do common sense financial statements this is a common sense financial statement for us
59:24
i want to know what the back i want to know what this the projected orders are if you look at that 4 million what’s
59:29
behind schedule available to ship what we’re going to ship okay what’s the final the number and the net
59:36
revenue that’s going to occur as a receivable that memo line and inventory yeah it’s not right it’s not an accounting it
59:42
doesn’t it it doesn’t have anything to do with an income statement but in the old days
59:48
inventories were so critical to us i wanted to know real early what the inventory level was because at that
59:53
level in the old days i could tell you what the cash flows company was going to be so this is just a memo item only now here’s
1:00:00
the one thing i want you to realize that in every single one of those lines there is an ownership of those wines
1:00:06
somebody owns the sales line the production controller owns the backyard line okay the cost of good line is owned
1:00:12
by the accounting department but the variances are owned for instance by the purchasing department if you look at
1:00:18
the purchasing department they’re saying that based on the two and a half million dollars that’s going to be received
1:00:24
they’re going to have a favorable variance of seventeen thousand dollars they’re gonna have a material usage variance of eighty two thousand
1:00:30
this is where a piece of the ownership comes in pictures your picture your purchasing
1:00:37
manager running out to the warehouse going out there and getting the previous day receipts scanning them against the
1:00:43
cost line and then having a favorable variance well she screams all the way back to her office because she knows her department
1:00:50
has made a difference to the tune of seventeen thousand dollars she has been better than the standard cost better than the
1:00:56
estimated cost and she’s truly making a difference everyone in our company if you if you go
1:01:02
through these things as a person if i could go back to the people who invented these things a long
1:01:07
time ago what i would ask for is is if uh
1:01:14
give me a line where i can put the person’s name there okay now i’ve got a question here it
1:01:19
says is this possible is this process usable in a small professional services firm
1:01:25
yes it is we have us we have professional firms we have banks the key to understanding this
1:01:31
thing is that we all have the same report cards all right we may all get different messages but at the end of the day the
1:01:36
income stay on balance sheets and cash flow statements are this are the same from industry the industry
1:01:42
to industry this is not a manufacturing oriented concept all right i have consulting companies i
1:01:47
have a publishing company okay i hate my daughter has a retail sales star all right
1:01:52
all this is applicable to any type of a business because we’re all evaluated
1:01:57
off the same song sheets let me take it to the cash flow statement this is oh this is the ending of the
1:02:04
income statement you can see that in heavy duty they’re off by forty one thousand dollars on their plan i told
1:02:09
you automotive was really going gangbusters they’re 143 000 over their plan
1:02:15
and so this gives us a projection of what the month is going to look like the month of may or month of april in this case
1:02:22
we got some idea this is a communication tool within 48 hours everybody inside of the
1:02:30
company gets a copy of this they get a copy of the sales plan they get a copy of the income statement and they get a copy of
1:02:35
this cash flow statement so they know where they stand relative their company we design this based off of publicly
1:02:42
held companies that send out quarterly income statements to people that invest money in their
1:02:47
company we’ve done it kind of odd that we spend billions of dollars giving people information
1:02:52
uh on the material differences that occur inside of a publicly held company to those people that invest money into
1:02:58
it what we wanted to do was give it to our people who invest the time and and and doesn’t have an alliance
1:03:06
okay uh i wanted to tie in the people that have the time and the people invest
1:03:11
the money and in this case they’re the same people because my people are shareholders my people are owners so they need to see this every single
1:03:18
day so they can take action so they can take mute uh they can make moves on this but more
1:03:23
importantly this is a communication tool we tell them where we stand financially and then at the end of this meeting we go around
1:03:30
the room one more time uh these are other there’s a little bit more data than we
1:03:35
give them we give them return on asset goals they get a lot of data i’m starting to believe that hourly
1:03:41
mechanics get all that type of information but we give them all that every single week and then
1:03:48
at the end of the meeting we give them the material significant things that are going to occur anything that’s going to affect the
1:03:53
value of the company everything that’s going to affect the company going forward so in our
1:03:59
weekly huddles okay they get income statements they get cash flow statements they get financial ratios
1:04:05
and they get anything of material significance about what’s happening uh relative to the company this is
1:04:10
critical when i was in a fortune 500 company we had communication problems we had communication problems because we didn’t have anything to
1:04:16
communicate our people here can communicate everything that’s occurring inside of the company all the variances
1:04:22
all the deviations have a lot of time in order to be able to correct this thing and then at the end of the day okay
1:04:29
we’re able then to me at the end of the month we’re able to measure who’s in control and who’s not in control
1:04:35
we measure people’s forecasts and if you can forecast accurately you can forecast the world it’s a very powerful tool
1:04:43
so at the end of the communication process there there are four things that that that are
1:04:48
repetitive that annual financial plan that bi-annual sales and marketing meeting those daily departmental
1:04:54
monitoring and those weekly huddles now let me explain the daily departmental monitoring it’s amazing that once people have to go
1:05:01
to this staff meeting and report a number how they invent their own systems to track their own numbers
1:05:07
and i will tell you that in most companies whether you’re a service or whether you’re an engineering company and if you’re responsible for billable
1:05:13
hours it’s absolutely amazing if you’re a commissioned person it’s amazing how people
1:05:18
have put together their own processes or their own patterns to be able to monitor what they’re doing
1:05:24
on a daily basis the key is is to connect the dots how are those measurements affecting the overall
1:05:32
impact on the company and what we use is we use those those financial statements in order to be able to do that
1:05:39
i’m going to stop a second i got some questions here uh our company is the home medical equipment sales and rental business is
1:05:45
there any way to get a list of similar businesses so we can benchmark our esop company if
1:05:50
you go to www.greatgame.com there’s a case study about a home medical company
1:05:56
down in down in miami that’s sending medical equipment all throughout the world
1:06:01
now you can get them you can get it off that i noticed that you have an esop and a
1:06:07
401 k program on the statement is your 401k program a matching program if so why wouldn’t it be better to use
1:06:14
the cash for financial strength and help increase the stock price okay you’ll see at the end of this program my stock price has increased
1:06:20
every year since uh 83. we put the 401k program because we want diversification in terms of our
1:06:27
employees and yes i do match six percent we matched three percent and we were very benevolent organization
1:06:34
uh so we have the 401k program for the from the diversification and then they have the esop program
1:06:41
as well your employee buying survey showed a dip at mid 03. can you explain what caused
1:06:48
this um i know where we had one dip is when we moved one factory into another factory we
1:06:54
we got grew a factory and then one factory had no accidents ever from the time that we’ve
1:06:59
built that business and in the process when we took a machine tool off that person got hurt and all of a sudden our safety question
1:07:05
went through the ceiling because we we had that one particular accident and rude our ruined our worker comp mod and it’s and
1:07:12
then we also found out that when we moved one factory to another factory that in the old factory they’re getting
1:07:18
free coffee and then they had to pay for the coffee and as a result of the survey we then were able to then give them free
1:07:24
coffee and then the scores went up people fudge figures no they can’t there’s no possible way you
1:07:30
can fudge a figure because as much as you think that you can cook these books it’s impossible
1:07:37
with all the double entry bookkeeping with all the the auditing that goes on we got sales tax auditors in there we
1:07:44
got irs auditors in here we got bank auditors in here you know eventually it’s transparent but
1:07:49
what’s more importantly if it comes from the people okay it’s very very difficult for them to fudge and then and that’s a great
1:07:56
question because one of the things about this weekly huddle is the immense peer pressure i mean you’re going four weeks in a four
1:08:02
week month five weeks in a five week month all right and you’re going into these huddles all right and there is no way that if you’re
1:08:08
going to keep changing your number are you going to come across as if you’re in control so what happens you got to develop a
1:08:14
deep passion for that psychic ownership of the number or you’re going to look like a full the peer pressure and an overbooked
1:08:20
management company is uh incredible you mentioned early on that lots of people just want their 40
1:08:27
hours if after thoughtful attempts and incentive plans 80 employees still don’t seem interested in
1:08:32
more than just their pay their area not the big picture do you still pursue
1:08:38
this for the twenty percent well let me tell you something about my ownership program here i have three
1:08:44
million outstanding shares of stock i have a million shares that people have purchased
1:08:49
i have a million options that are out there and i have a million in the esap so i got 33
1:08:55
of these up please realize that my esop is not leveraged at all it’s an incentive
1:09:00
program now this is my own analysis of this i
1:09:06
realize that the esop program is distributed equally amongst all people regardless of the performance that
1:09:12
that they attribute to the company that’s true okay my options and i will show you
1:09:17
later on are given to people that want to take risks and want to grow the company so i have a little step up in my
1:09:23
ownership programs here by using option programs to reward those people that really want to take risks
1:09:29
i realize that there are people there you know and you need them to be able to be stable they really
1:09:34
just enjoy what they’re doing that don’t want to take risks all right so they’re compensated as a result of the esop and i’ll show you later on
1:09:41
as we get to the stake in the outcome portion how they uh are eligible for stock options
1:09:49
uh last question and i’ll keep going what has been your historical stock distribution percent
1:09:54
relative to salary three to six or three percent is is in the 401ks and about three
1:10:01
percent has gone into the esau program uh annually since uh 1984.
1:10:09
all right let’s move forward this is critical listen from 40 000 feet everybody wants winners
1:10:15
okay everybody wants to feel part of a team everybody realizes what it takes to win
1:10:21
but nobody has a process to win you got to have processes in your organization to win we have a
1:10:28
whole mess of small wins i mean when we put out a bonus program we break it down into really really
1:10:33
small things we could have pizza parties we can put dollar bills and hats of people ask the right
1:10:38
questions okay we can give people fake money in terms and senator auctions in order to be able
1:10:45
to to to learn and to understand and to you know that lady that goes from uh the purchasing department out there to look
1:10:51
at her variants as relative to the material she throws her fists up in the air okay because she has that psychic ownership
1:10:57
in terms of her job the idea is to understand that winning is a process all right and that little wins add up to be big
1:11:04
wins we i came to the world of optimization a long time ago all right and if and there are still
1:11:10
people in our society that believe optimization is the answer in my world
1:11:15
if i optimize to the point of my best practice i’d only got two or three percent more
1:11:21
on the bottom line it’s about as best i could have done but if i can teach innovation and i can develop new products okay and i can
1:11:28
develop new things i get higher margins and we get a heck of a lot more return on the
1:11:33
buck by teaching people the business side of it all right and get them to become business people and if you teach them
1:11:39
how to become business people they want to run businesses and they’re ready to run businesses and then you can take advantage of the opportunities that
1:11:45
come along so we’ve lost nothing by creating winners at the end of the day you want to have that self-esteem you want to
1:11:52
have that pride and you want to have that teamwork but it is a process and this is what the game is all about
1:11:58
all right we’re into the final oh this is a i know i don’t mean to oversimplify business
1:12:04
this is in a nutshell our my our job in this company is to create cash i know that sounds crude i’m glad i
1:12:10
don’t look you square in the eyes okay but business is the great cash not for profits is to create cash okay
1:12:17
and then distribute the cash as equitably as possible well we try to train our people in is
1:12:22
that we create the cash we use as many people as we can to figure out where the cash goes and this is where cash goes cash only
1:12:30
goes to seven places okay it’s not rocket science the idea is the hard part is to figure
1:12:37
out how to put a little bit in every pot how to make certain that your debt is under
1:12:42
control and you had maybe the capacity to pay uh to buy out esops later on or to make certain they have liquidity the right
1:12:48
type of equipment compensation inventory shareholder buyout savings receivable taxes
1:12:54
that’s where cash goes so what we try to train our people is that hey we got to create the cash we get
1:12:59
everybody together we appeal to everybody’s higher level of thinking and then we figure out you know how to make these
1:13:04
types of investments so we can build that enduring company you can only do that when you get your people to the point of thinking and
1:13:10
acting like owners and they really truly understand how to operate what the business is uh well this is a new one
1:13:18
the final stage is the stake in the outcome all right here’s the here’s the phenom there are three things a mistake in the
1:13:24
outcome the whole idea of instant recognition well my god if you’re promoting open book management you’re giving people the
1:13:29
psychic ownership of the line you’re giving them the arena to go in there and say what sales are or say what costs are
1:13:36
say what expenses are all right you’re giving them the arena all right in order to be able to share
1:13:41
with everybody the differences that they’re making inside of the organization me you know
1:13:47
when i look at the financials i look at having the best of both worlds my financials very seldom change you
1:13:54
know sales always starts net profit after tax ends cash always starts on the balance sheet equity
1:14:00
always ends it okay sources of uses of funds i mean i get a pattern there
1:14:05
where it is the same month in and month out okay but what’s really cool is all the
1:14:10
changes that occur inside that pattern you know change is really is really a paradox all right
1:14:16
it’s a it’s a dichotomy from the standpoint that people like it and then they hate it well with
1:14:22
financials what i have is that i have a foundation i have those financials that are same but all those numbers
1:14:28
all those stories in their financial changes all the time so it’s really kind of provides a sense
1:14:33
of excitement uh and education for the people so we got instant gratification in terms of
1:14:39
the ability to be able to do it when you teach people to come business
1:14:44
you can create new businesses all right you know we don’t have a new ideas box a new ideas box gets filled
1:14:50
you don’t have the right type of people to answer it you know people get frustrated with it if you try to put rewards on new ideas people are jealous
1:14:56
of reason new ideas but if you can teach people how to put together a business plan
1:15:02
it filters out all the crazy ideas and it gives you really some really interesting things to think about and please don’t
1:15:08
disregard the fact is that the more you teach people the smarter the questions are and the
1:15:13
smarter the questions are the harder you gotta work in order to be able to answer the questions i’ll never forget the greatest question
1:15:19
that i ever had from somebody on the shop floor in a meeting was from an hourly person
1:15:25
that raised their hand and said okay i understand all this he said but look at we’re only evaluated
1:15:30
our appraisals are coming in an 11 and a half times multiple what are you doing to take it to a 40
1:15:36
times multiple what a brilliant question i mean that hourly guy was looking at me
1:15:41
sitting there saying look all our lives we’ve been taught you know that it’s not about working hard it’s
1:15:47
about working smart he was looking at me trying to tell me what kind of story am i going to build that i could leverage
1:15:52
the after tax earnings higher than the 11 and a half times that we are currently getting those are
1:15:58
the people that you churn out when you get into the point of getting it this is our sales over the last uh
1:16:07
started out at 16 million dollars with sales um and we currently have approximately 200
1:16:13
and or 300 million dollars our sales plan for o5 and that’s a result of all these
1:16:19
companies what you have in front of you is all the companies that we started since 1983. we have banks we have technology
1:16:26
companies we have software companies we have insurance companies we even have a teen
1:16:32
studio investment that we uh we have a beauty salon in texas uh
1:16:39
this play tribe is a new company that we just started it’s going to be bringing in [Music]
1:16:44
playground equipment for for churches chur there’s a really an interesting niche out there that uh
1:16:50
we’re getting mega churches right now the mega churches need uh playground equipment and so we’re
1:16:56
hooking up we’re trying to take advantage of that niche uh if you look at this thing it looks like somebody’s brain on drugs and it
1:17:02
defies everything you probably heard about staying inside your core competencies if you look at heavy duty at the very
1:17:07
beginning at the top left that was our first company our first company we built engines and
1:17:13
we taught our people the business and then one day the janitor came up to me and said you know you talk about debt equity you talk
1:17:20
about job security he said you sit there and you say that if we get the debt down from 89 to one to two to one you know we can
1:17:27
rest assured that we’re going to have a future he says you’re out of your mind he said i looked at your income story your
1:17:32
balance sheet the other day and he said 76 percent of your receivables are the truck market and the truck market has a recession every
1:17:40
uh six years and you don’t really care about us if you got all your eggs in one basket he kept pushing his broom and like a
1:17:46
giant of industry i called my staff together and i said do you know that 76 of our receivables in the truck market
1:17:51
and from that very day we looked at our business totally differently we asked ourselves questions like
1:17:57
what goes up in a recession or what goes down in a recession we found out that uh and uh automobile parts go up in a
1:18:04
recession so we got into the automobile business and then we got into the energy business as a result of
1:18:09
of engines plus and then there was a drought somewhere in the midwest and we got involved in irrigation units and
1:18:16
every time we saw an opportunity we were fortunate enough to have the people that we could put in those positions to
1:18:22
be able to grow the company now we grow the company from the standpoint of trying to figure out
1:18:28
at any given period of time will we have the liquidity to be able to handle the esop now if you look at this graph what this
1:18:34
or this this organization chart i will tell you directly that we started to diversify the company with
1:18:42
the idea that if in fact we needed to raise money to pay people that were leaving the company
1:18:47
as a result of the success of the esop we could then pay them out if you go
1:18:53
down to the middle of the line you’ll see a a company called signature bank all right we got into that we started a bank
1:18:59
seven years ago we got him with a great group of people we started a bank we grew the bank uh for the last seven
1:19:05
years we started the bank at with sixty six million dollars worth of equity
1:19:10
uh the bank uh has has grown substantially in that seven year period of time
1:19:16
um our bank stock has more than quadruple that has been a tremendous return on investment it is
1:19:22
sitting on our balance sheet at a cost basis if in fact we were going to have a run on esop or if somebody was
1:19:29
going to be leaving the company we could cash out the signature bank stock and then we could use that money to pay
1:19:36
uh anybody that would be leaving the esop i know this this this is a very very busy graph
1:19:42
but this graph was basically put together as a result of making certain that at any given period of time we
1:19:48
would have the liquidity to be able to buy out the esop and we always kept our
1:19:54
eye on that particular line 47 companies in 23 years and we’re not done yet
1:20:00
that’s the pattern geop the great game of business pattern um and i explained to you before our
1:20:07
ownership is is uh i’ll explain to you a little bit about our esop um again uh 33 percent of the company is
1:20:16
in the esop the stock options i’ll just show you a graph where we
1:20:21
how we distribute the stock options our stock options are a little bit different than most stock options um our stock options best in a seven
1:20:29
year period of time and you don’t we will issue a stock option at the
1:20:36
current appraised value for instance if one of our executives uh deserves uh stock options they would get it at the
1:20:42
existing price but it wouldn’t uh best for uh three years in other words for to be
1:20:50
fully invested in the stock option you got to wait seven years at the end of the 37th month
1:20:56
you can buy 10 of your options if you want to buy them twenty percent in the uh fourth fifth year
1:21:04
uh thirty percent in the sixth and forty percent of the seventh our our stock options are long term
1:21:10
options um we we’re here for the long run we are here for the stability of the company
1:21:16
so but we also have the feeling that if if you really add to the value company
1:21:22
going forward then you really deserve a piece of the pie if in fact you’re willing to take the risk
1:21:27
we also have people that have bought stock of the early stages of the company and whenever we
1:21:34
have a willing buyer a willing seller they they meet in the financial organizations
1:21:40
and there’s transactions that occur if you have previously held stock inside the company so we have
1:21:45
something of an internal stock exchange which we don’t promote but exists inside the organization we
1:21:50
have the first right refusal and so uh but most of the time we there’s some interchange smaller changes
1:21:56
of stock maybe some directors would would buy some stock um but up to this point of time everyone
1:22:03
that’s left the company we’ve been able to buy the stock back and we have fully funded even the original
1:22:10
owners out of cash this is just kind of a template that we use it’s
1:22:15
it’s not the golden rule but as you can see if you’re a young employee coming into the company
1:22:22
you’re here for a while if you become a team leader we’d like to at least have a thousand options if you got a senior manager you get a
1:22:29
thousand to five thousand options the general manager five to fifteen president one of the
1:22:35
companies could have fifteen to 50 and then if you’re running multiple um organizations uh 50 or plus is it’s
1:22:42
not typically uncommon but that is basically kind of like our
1:22:47
it’s a very very general rule of thumb but surprisingly as every year when i review where everybody
1:22:53
stands in the organization uh it’s pretty darn equitable i mean you may know how to make up your own when
1:22:59
you when you have it our stock price remember that a hundred thousand dollars i told you we
1:23:04
had started on 83 it’s now over 100 million dollars they’ve created 100 million dollars of equity
1:23:10
uh since uh 83. uh the stock price is 120 it’ll be appraised uh here our year
1:23:17
ended and it’ll probably be 132 a share which means that a person that started with us in 1983 that was doing
1:23:24
uh let’s say turbo chargers uh currently has about 300 000
1:23:29
shares of stock so this program has just been absolutely successful
1:23:35
in terms of our program here okay got a couple questions it says what has been your historical
1:23:42
stock distribution percent relative to salary i think i said that what is your net profit
1:23:48
per employee uh i really don’t know um i i’d have to get that for you but uh
1:23:55
our profits have risen 23 uh 22 years in row our profits have have
1:24:01
risen and we our profits grow well they used to grow between five and
1:24:07
six percent which was really fine but recently they’ve been growing 10 to 15 percent on an annualized basis
1:24:14
okay i’ve taken up a lot of time it’s kind of a quick survey in terms of uh how we teach people to take full
1:24:21
advantage of the employee stock ownership program uh what we do is uh we basically see a real
1:24:27
momentum change in our people when they get about two years of their salary in the in the esap program
1:24:32
uh they really become an active interest in it but i’m telling you it’s this repetition repetition it’s this pattern
1:24:38
that really drives the behavior inside of the company and again we’ve lost nothing as a result of it we
1:24:44
haven’t lost any customers uh nobody’s taken the information and run it and use it from a detrimental
1:24:50
basis and not once in 23 years so somebody came out there and said well you make this money i need
1:24:55
more the coolest thing about it is is that if they want to make more we can show them how to make more and
1:25:01
it’s up to them to be able to make it here’s some more questions what’s the
1:25:06
key to an esop success um well first of all i think you got to
1:25:11
teach them what they got it’s very expensive tool all right and if you’re just going to give it to them and not teach them what
1:25:17
they got you know you’re really giving it away you’re really real i mean this is a really really big deal i mean when
1:25:22
you’re giving people equity i mean this is the this is the gap between the hands and have-nots
1:25:28
and the problem that we have in this our society is that we try to fill the need of the have-nots
1:25:34
by increasing the minimum wage what we need to do is teach the have-nots how they have made it
1:25:39
and yeah they have some made it as a result of ownership i’d love to see more information on how
1:25:45
your salon works uh do they share in the e-stop distributions how you’ve been successful
1:25:51
in getting hairdressers to buy into esop uh that’s a real long long
1:25:57
answer i’ll try to email you back in terms of how that works but uh you’re definitely right is that these are
1:26:02
independent entrepreneurs when you get them to buy into the big picture and they can see the big picture you definitely get a higher level of
1:26:08
performance a reduction in terms of turnover and yes we’ve tied them into the bonus program
1:26:15
uh are your options isos or uh well i’ll tell you you in order to
1:26:20
use your options you get up into that higher category you got to have both so you’re limited in terms of isos and
1:26:27
non-qualified so yes we have both we have qualified non-qualified and then we have the challenges with the
1:26:32
alternative minimum tax just like everybody else and if anybody can explain the alternative tax please
1:26:38
uh send me a wire because what we do is we give our people free accounting consolation uh and there
1:26:45
isn’t an account in our town that can figure out alternative taxes it is a real nightmare we’re
1:26:50
trying to understand how to put dollars aside
1:26:56
uh reserve fund without paying corporate tax on it have you done that year to year we put
1:27:03
dollars into it but you know you put stock into it you put paper into it you put the paper into it uh you get the
1:27:09
tax benefits of putting the the stock inside of it so if you’re gonna fund your esop let’s say
1:27:16
for a hundred thousand dollars for a hundred thousand dollars for a stock in it you get the the tax break on that uh
1:27:22
paper if you put cash on you get the cash on it so we have but but i’m seeing a reason to put the cash on it
1:27:28
uh in the end it’s much much wiser use the cash inside of the company uh we are a
1:27:34
hundred percent play on we can get there quicker if you buy us is that possible
1:27:39
tell me your financials we’ll take a look at them we take a look at everything and yes we have a venture capital fund
1:27:45
we actually spent spun off a venture capital fund because in the banking industry you can only go so far because it’s so regulated
1:27:52
we saw a lot of entrepreneurs a lot of deals and as a result of that we started a venture capital firm so
1:27:58
well i think we’re done from this end i should i hear i sure had a good time i hope you
1:28:03
guys did well thanks uh jack and thanks to all of you for uh for joining today’s web
1:28:10
seminar i i thought it was extremely uh informative and extremely useful and we
1:28:15
hope uh all of you found this information useful and informative
1:28:21
and i want to remind everybody again jack has a separate business called the great game of business
1:28:27
that’s a for-profit uh consulting business that’s designed to advise companies esop or non-esop
1:28:34
about how how they can grow their company based on jack’s own experiences and efforts and
1:28:42
successes and there’s a whole organization that spun off uh doing this kind of consulting work so
1:28:48
if you’re interested in in getting some consulting or some more advice on this
1:28:53
go to go to that website again
1:28:58
www.greatgame.com there’s a lot of information articles there there’s there’s an annual
1:29:03
conference that jack holds in saint louis every year that’s extremely useful quite quite worth going
1:29:08
to uh so i think there’s john there’s a lot of case studies on there that i notice there’s a lot of people
1:29:15
asking about their specific industries and we have tried to take as many case
1:29:20
studies as we possibly can relative to individual industries and you can just take off their results
1:29:26
their programs you know a lot of people question what kind of work here and there is
1:29:31
i think the biggest value out there is those case studies and they are so inspirational it’s
1:29:37
incredible i agree um there’s there’s nothing more instructive than
1:29:42
actual case studies i know somebody asked earlier can can you do this in a service company or in a retail store or
1:29:49
distribution and absolutely you can you know you need different parameters and maybe
1:29:55
different incentives and different ratios and or industries
1:30:01
john i’d be more than happy to tell them about my 23 year old daughter went into the clothing business that had to learn
1:30:07
the difference between inventory turns and margins and and i assume she’s uh succeeding
1:30:13
quite well well she’s a left she’s a left brainer okay that has done an incredible job with her customers but i
1:30:19
need to get her to turn that inventory a little bit quicker okay well um again thanks everybody for
1:30:27
attending the uh the session thanks and that’ll alright thanks everybody it was enjoyable i really
1:30:32
appreciate it
1:31:17
you