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Reader Profile

Richard Eichen, Managing Principal, Return on Efficiency LLC &
Audra L. Schwartz, Fellig, Feingold, Edelblum & Schwartz LLC

Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase.

You’ve focused on the “up or out” concept, patterned after the Military’s Time in Grade structure, to deal with distressed companies – what exactly is this concept?

Most companies we deal with on a daily basis pride themselves on low employee turnover, but does this promote growth, or complacency and an inward focus? Many companies under stress in the recession have long-tenured employees (including C-level) who don’t know any way but “our way” and that’s not working today and won’t in the future. Similarly, companies are bringing in new leaders, but these new C-level executives have to combat strong internal cultures before they can get anything done.

The military, and many professional services companies such as auditing and law firms, use an up or out approach to ensure the highest quality personnel at each level. Realistic goals and skills, and the time within which they are to be achieved, are set for each employee level. As discussed in our whitepaper on the subject, the military says you can be at each rank for only a predefined number of years, and the next level of promotion is drawn from an increasingly smaller pool of potential candidates, further refining the quality. Anyone passed over for promotion twice has to resign or is asked to leave. Many professional services firms use a similar approach, only they tend to give their non-promotable employees a soft landing in the hopes of goodwill. Bottom line – where outward focus, creativity and competency are of utmost importance, each level is staffed with only the most promotable, highest achievers. Doing the same job for 20 years is out of the question.

Why is now the time for Boards to make such radical changes to the way companies hire C-Level executives and set Board - CEO expectations?

Boards have to realize that their long tenured C-Level executives are part of the problem and that replacing them with new talent, is not a good enough solution. In many cases, Boards have unrealistic and overly aggressive expectations about their new CEOs and their teams, usually ending in contentious Board meetings 6 or 12 months down the road. Instead, Boards and CEOs have to work together to identify, up front, realistic goals and timeframes that are fluid enough to accommodate practical realities without loosing sight of the goal. Many new CEOs are shocked at what they find once onsite. If they are bound by tight, rigid timeframes, all they can do is form plans to fix what they can in the short term. These quick fixes may address low hanging, publicly visible fruit, but almost never fix the root causes of the problems. Given pressures on businesses today, unless root causes are fixed, anything short of that is just putting a band-aid on a tumor. Fixing root causes takes understanding and fundamental change, and this requires more time than most CEOs are now implicitly granted. Even worse, many company employees are skeptical of new C-Level executives (we often hear them being referred to as “today’s miracle worker” ) and by addressing only the most short term issues, new C-Level executives further erode their political capital, hindering their ability to succeed. Potentially worse, long-tenured senior executives loose objectivity and perspective and so cannot realistically uncover the root causes for their organization’s problems.

Is it all or nothing, i.e. can a Board implement the Time in Grade concept in stages?

We recommend picking the lowest level of significant executive and using that as the starting point, for example, Divisional or Business Unit VP. Once implemented, it should be brought down as low into the organization as possible, since it provides internally for the best possible promotion candidates and externally, demonstrates to your customers and competitors you’re an elite organization. That’s not a bad thing to signal these days. Since culture, compensation and HR models are all affected, this process is very implementable assuming it is done in a structured fashion.

Has this been implemented elsewhere?

In addition to the military and professional services firms, Silicon Valley has implemented a version of Time In Grade for quite a while, via 48 month vesting periods for Stock Options. If someone is not promoted, they do not receive additional options (with their own vesting periods), the ‘golden handcuffs’ are off after 48 months and the employee is then ‘free’ to leave.

What are the legal ramifications of moving to a Time in Grade structure?

The up or out model means higher turnover of employees but doesn’t necessarily mean higher wrongful termination claims – in fact, these claims should decrease. Both management and labor will understand what skills and goals must be achieved within certain time frames, that performance will be measured against those requirements and will be well documented, and that failure to achieve will lead to termination. Consistent implementation of this structure often eliminates many of the danger zones that lead to costly wrongful termination claims, like discriminatory decision making, favoritism/nepotism and management’s inability to prove legitimate business reasons for terminations.

Richard Eichen, a Managing Principal of Return on Efficiency, LLC, located in Leonia, NJ, works with companies experiencing financial distress, pending Bankruptcy, operational issues, key technology implementations and the need for Interim and/or Restructuring leadership. He can be reached at richard.eichen@growroe.com. HIs website is http://www.growroe.com and blog: http://www.growroe.wordpress.com.

Audra L. Schwartz, Esq., member of Fellig, Feingold, Edelblum & Schwartz, LLC, located in Hackensack, New Jersey, represents management and high level executives as to legal issues and disputes that arise under New Jersey and New York employment laws. She can be reached at aschwartz@felliglaw.com. Her website is http://www.felliglaw.com.