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June 3, 2019
How can the right HR leader impact your stagnant culture?
We recently took on a project to help an $80m millwork business with 180 employees find an exceptional HR executive leader. The private equity owners purchased the business and replaced the legacy operator with a new President in 2016. The sales at the time of purchase were $96m with 4% EBITDA, declining to $80m with 2% EBITDA by 2018, forcing them to replace the President in 2018. The private equity owners and the new President did not care to repeat their past mistakes; they requested our evaluation of the business model to help them develop the right questions to be successful in the turnaround. Candidly, private equity owners are some of our favorite clients – they have a high desire to win, embrace the facts and quickly adapt to new information.
The company they bought was stuck in what we call the “1974 Syndrome”. It was operated by a legacy founder and owner with an egocentric leadership style, with low performance expectations and discretionary bonuses. The cultural theme of “we take care of our people” with no metrics measurement in place can be interpreted as “guaranteed jobs for everyone.” The average age of level 2 and 3 leadership was 58 yrs. old and the companywide average tenure was approaching 19 yrs., which included a 25% turnover rate of the manufacturing crew. After cleaning out the back office, they donated the office equipment to the local museum including typewriters, copy machines, an old switchboard phone system, and several Apple II and Commodore 64 computers. The real treasure was the crate of Life Magazines from the 1970s.
The evaluation results:
- Underestimated the depth of the cultural problem
- Hired the wrong leader; the past President did not have a proven history of success solving entrenched cultural problems
- Undervalued the need for human resources support backing the President
The past President’s failures:
- Focused on evolving people who were between 35 and 55 yrs. old with an average tenure of 19 yrs.
- Did not hold top leaders accountable to new performance standards
- Did not follow the 20% “fresh blood” rule
What is the 20% fresh blood rule?
It is a critical step in driving change, 20% of the workforce must be new to the company and between 20-29 yrs. old. Hire hungry people. Leaders often make the mistake of thinking a few key new hires will make the impact desired, only to have the entrenched culture crush their spirits, forcing them into the fold or driving them out of the company. The subculture synergy needed will never develop a foothold with anything less than 20% fresh, hungry people. The old guard needs to feel pressure from the younger talent; their higher level of energy, hunger and synergy must be more powerful than the status quo.
It’s common for leaders to be overly optimistic about their abilities to drive change with the tenured employees of the organization. The historical behavioral patterns were rewarded for decades and have locked them into a state of inertia. To them, survival is doing everything possible to protect the homogeneous, indolent culture. Everyone agreed, for the President to be successful the organization needed 20% of the workforce to consist of new employees that are 20-29 yrs. old. Currently, with 180 people, the company needed to hire 36 new people to support the performance merit-based culture they envisioned. The goal was to create a competitive environment, identifying and rewarding high potentials – but the plan had to start with the ability to hire a lot of new talent. The owners agreed; the short-term higher payroll expense was well worth the investment to move the culture forward.
Who was the silver bullet?
The task of hiring 36 people was not something the benefits, payroll and safety focused HR team was capable of handling. It became quite clear the support the President needed was the right HR executive leader to deliver this critical part of the plan.
Scorecard for the HR leader:
- Must have led a company out of the 1974 Syndrome to success
- Must have built an effective, metrics-driven recruiting team
- Must have led a Best Place to Work objective
- Must have created and implemented a development program for high potentials
Everyone agreed, the administration, payroll, benefits and safety would be handled by the HR Manager, freeing up the VP of HR to focus on building a recruiting team and leading the cultural evolution.
Should the VP of HR come from the building materials distribution industry?
Our team was immediately concerned about the “Tallest Midget Syndrome”: a common recruiting mistake caused by limiting the search parameters, a specific industry segment or geography are the two most common limiting factors. In other words, setting up search parameters where the quality of a candidate might appear to be excellent due to the poor quality of the comparable candidates.
Our best tactic to guard against Tallest Midget Syndrome is recruiting two pools of talent, one within the tight parameters and one outside of the parameters. This gives our clients the power of comparison. Since the building materials distribution industry has been 10 yrs. behind the Best Place Work initiatives and cutting-edge recruiting practices, we were confident our talent pool would be much stronger with this dual search approach.
For the past 20 yrs. recruiting in our industry, a couple of things never made sense to me: there is a CEO, CFO, COO, CIO, CMO… but never a Chief Human Resources Officer? The VP of Sales might make $250,000 – $350,000; the VP of Operations and VP of Manufacturing over $200,000; but HR leaders’ compensation has stayed in the $90,000 – $120,000 range for most companies ranging from $50m to $300m in sales.
HR leaders are finally getting recognized for their economic impact on the business. The HR leaders guiding companies with 200-500 employees outside the building materials distribution industry, who are excellent at recruiting talent and proven successful at competing for the Best Place to Work award, have base compensations starting at $150,000, with clear metric-based incentives that bring them to $200,000 – $250,000. Leaders in other industries have clearly learned that the company with the right talent and culture generates the highest profits.
A quick survey of the HR leaders’ compensation at building materials distributors that are roughly the same size with 200-500 employees:
The low end was $80,000 with no bonus up to $115,000 with 25% bonus; this made up for 80% of the companies surveyed. There are several companies that have embraced the greater-US trend and are paying a base of $150,000 – $180,000 with a $50,000 – $70,000 bonus.
Owners/leaders – if you are happy with your profits, then change nothing and celebrate being a great business builder. If not, consider recognizing the innate abilities and thinking styles needed to be successful at recruiting and driving a culture change. How different are those abilities and thinking styles from the traditional administrative duties of most HR positions? Hire the right HR talent and free up HR leaders from the trap of administrative responsibilities; allow them to focus their efforts on the greatest challenges in your company – likely recruiting talent and cultural evolution.
HR leaders – if you are happy with your compensation, then change nothing and celebrate personal and professional alignment. If not, consider upgrading your recruiting skills, specifically your marketing and sales skills. Develop an expert-level understanding of Best Place to Work leadership and implementation. If your company will not support you in these efforts, reach out to our experienced team for a professional assessment and to confidentially help you locate a better-aligned career opportunity.
Hire smarter – Tony
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