Best of 2023: How To Hire A CEO, The Most Important Number That CEOs Rarely Measure & Why To Avoid Incentivising Salespeople For Discounting
7 January 2024 Newsletter
“Feedback is a gift but most of us don’t know how to unwrap it” Angela Duckworth
Hope you’re Thriving!
I hope your New Year is off to a good start.
Over the holiday season, I’ve collected some of my favourite articles and podcasts from the year to share with you. Kind of like a best-of from 2023.
Couple this with my recommended reading list and hopefully, there is something of real interest and value for you each week.
I’m keeping them short and sharp.
Enjoy your holidays and stay safe.
How to Hire a CEO
This week I came across one of the greatest application processes that I’ve ever seen. It’s from Chess.com and is open to anyone interested in leading the world’s largest chess community.
Applicants must be rated at least 1600 in online chess, have 10+ years of management experience in tech or gaming, and not have an MBA from Harvard.
But then we get to the process of filtering applicants. And that’s where the special sauce is applied.
Here’s a question to begin with:
“The American business environment has fundamentally changed, following the insider trading and savings and loan scandals (of the 1980s and 90s). Explain business ethics and how they’re applied today (required)”
Now perhaps that’s what you might anticipate for a CEO role. But let’s now take a look at another question:
“What is your earliest chess memory? (required)”
OK, that could be legitimate for the CEO of a chess company. Then things get a little different – remember this is an application only. Many people use quirky questions, but only during interviews.
“Describe in single words only the good things that come into your mind about your mother (required)”
Take a look at the next couple of questions (below). It’s an awesome filter. And yes, people may need to ‘trawl’ through lots of resumes – remember anyone can apply – and in fact, they’ve now closed the job because it got so much attention.
But they are now certain to have some outstanding candidates to select from.
Here are three things I love about the process:
- It’s prequalifying candidates’ purpose alignment with questions like ‘Who is the world champion of chess?’ and ‘What is your earliest chess memory?’
- It’s looking for values fit by asking for single, good things about your mother and about the American business environment.
- It’s looking for creativity and problem-solving with questions like “Did you just hear something upstairs?”
As noted above, this is an excellent applicant filtering system and the job has expired now, but you can see their job board here.
Why to Avoid Incentivising Salespeople for Discounting
Last week I spent time with a CEO who remunerated his team with a revenue-based commission.
Unfortunately, he was breaking the number one rule of sales compensation, that salespeople must be compensated on Gross Profit, not Sales Revenue. Even worse is when salespeople are paid on revenue and can discount to “get the deal”.
I recently found some statistics on salespeople in software businesses from ProfitWell.
• 77% of salespeople think discounts are crucial to close
• Most salespeople want to give 25%+ discounts
• 32% give discounts on 1st calls
Here’s the scary graph. 50% of salespeople think a discount of 25% to 50% is needed to get a customer to convert, and 27% believe that a discount of greater than 51% is required for a customer to convert.
The problem is that discounting is lazy. It’s the path of least resistance.
When comparing conversion rates between deals that were discounted and those that weren’t, discounted deals converted less than 5% more. So there’s basically no difference, except you get 10% to 30% less revenue.
Oh, and one other thing, those customers who receive a discount greater than 20% are more likely to churn. They are terrible customers!
So what can you do?
• Look at your sales team’s remuneration. How can you align it with the overall business’s profit goals instead of revenue to avoid incentivising discounting?
• Document your discounting policy. List the amount that a salesperson can discount to get a deal (e.g. 5%), when they need the sales manager’s approval (e.g. 10%), and when they need the CEO’s approval (e.g. >15%).
• Document the amount of money your firm and each salesperson discounts per year. If you had a scoreboard on the wall saying you’ve discounted $1.3m in the past nine months, which is essentially gifting profit, people’s mindset would change.
• List a time constraint for a discount. E.g. 10% off for seven days only.
The job of the salesperson is to retain the profit. Selling at full price is the profession.
If discounting is the norm at your firm, you don’t have a sales team; you have an order-taking team.
Listen to our podcast about Gross Margin- Understanding the most important number in your business.
The Most Important Number That CEOs Rarely Measure
In my book Made to Thrive, section 5.4 prescribes that all decisions on new opportunities are evaluated against documented criteria.
This speaks to the importance of investment decisions. In this week’s podcast, Kevin and I discuss the most important number CEOs rarely measure: Return On Invested Capital (ROIC) – more on that below.
In our podcast, we discuss the book The Outsiders by William N. Thorndike. I like this book a lot because it focuses on this KPI as the primary measure of a CEO and their efficacy. It also tracks unconventional CEOs who focused their energies on making the right investment decisions.
Here are four key takeaways:
- The press focuses too much on a company’s growth in revenue and profits
- The correct measure of CEO success should be the increase in a company’s per-share value, especially as compared to peers in the market
- Capital allocation is a CEO’s most important job
- Cash flow determines long-term value
In order to understand the principles within the book, we first must understand the author’s definition of investing, which is the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders.
This means that CEOs have to do two things:
1. Run the business well enough to generate cash
2. Deploy said profits, aka capital allocation
Warren Buffet states that very few CEOs are prepared to invest in their business.
“The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration, or sometimes, institutional politics. Once they become CEOs, they must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch the point, it’s as if the final step for a highly talented musician was not to perform at Carnegie Hall, but instead, to be named Chairman of the Federal Reserve.”
Berkshire Hathaway annual reports, 1987
CEOs have three options to raise capital: internal cash flow, issuing debt, and raising equity.
There are then five choices for investing:
1. Investing in existing operations
2. Acquiring other businesses
3. Issuing dividends
4. Paying down debt
5. Repurchasing stock
If Banks Were Flowers…
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