When Meg Whitman started as Hewlett-Packard’s CEO in 2011, she received an annual salary of just $1.
Now, on one hand you might think that since Ms. Whitman was a self-made billionaire (at the time, she was one of only 5 female self-made billionaires in the world), she didn’t need the money. But clearly, working for $1 is not worth anyone’s time, let alone hers.
You see, Whitman expected to earn a ton more than $1 for her work. In fact, she hoped to earn up to $6 million per year from her role.
Here’s how. Along with her meager $1 annual salary, Whitman was to receive millions of options to purchase shares of HP. And if she was able to improve HP’s stock price, her annual salary could effectively go from $1 to several million.
Now, for HP and Whitman, I thought this was a great idea. Whitman would only get paid if she performed and improved the company’s stock price. And if she did a great job, she would truly get an amazing salary. As it turns out, she did. She ended up earning $15.3 million in 2012 and $17.6 million in 2013. This is classic performance-based compensation.
However, for entrepreneurs and heads of non-public companies, I hate this compensation structure. Here’s why.
To begin, your stock price is far from a perfect indicator of the value of your company. For a public company, the stock price often reflects short term revenues and profits. So, when a company reaches its quarterly sales and profit goals, its stock price goes up.
Importantly, simply building your revenues and profits (particularly just in the short-term) are not a perfect indicator of the value of your company.
So, what is the perfect indicator of the value of your company? Well, the answer differs for every specific company. And that’s why it’s critical to determine how YOUR company might be valued.
Your company could be valued on many things. Sure, your revenues and profits will factor into your valuation, but what about things like:
- The quality of your team: do you have well trained employees that expertly perform?
- The quality of your revenues and customers: do you have a handful of huge clients versus tons of smaller clients? Do you need to re-sell tons of new clients every month, or do you have residuals (clients that pay you month-after-month)?
- The quality of your systems: do you have systems in your organization that enables it to run without you? Do your systems ensure consistent and high quality production? Do your systems provide cost or time advantages versus competition?
- The quality of your product or service portfolio: do you have a portfolio of products or services that would be challenging for your competitors to also create and/or offer?
- The quality of your partnerships: do you have marketing or production partnerships that you can leverage to more expertly serve or gain new customers?
I hope you answered “yes” to most if not all of these questions. While answering “yes” doesn’t ensure that you’re optimizing revenues and profits today, it does ensure that you have and are building ASSETS that will enable you to be more successful in the future.
And that’s what you as an entrepreneur need to care more about; not just how much revenue and profits you generated last month, quarter, or year. But rather, what you BUILT in the last month, quarter, or year that will allow you to outperform the competition and generate significant profits in the NEXT month, quarter, and year(s).
Now, I’m not saying that you shouldn’t set periodic (e.g., monthly, quarterly, annual) goals for metrics like revenues and profits. You should. And ideally, you will achieve them.
But what I’m saying is that you must ALSO set ASSET goals. Building new business assets (like better or residual customers, like partnerships, like systems, etc.) build the VALUE of your business. Value that will allow your company to generate significant revenues and profits in the future. And value which will make lots of other companies want to buy you for millions.
So, let’s get started on this process. Write down one business asset, that if built within the next 12 months, would significantly increase the value of your business. Next, write down the key steps that will be required to build this asset. Finally, put the first step(s) into your list of goals for this month. And make sure you put the remaining steps in future month’s goals until the new business asset is attained.
Importantly, doing this doesn’t yield as much short-term satisfaction as having a great sales month. But longer-term, you’ll be much more successful. And ultra-successful entrepreneurs are ALWAYS in it for the long-term. Like self-made billionaire Meg Whitman, who ran eBay from 1998 to 2007.
The Secret Formula to
Building a $10 Million Company
If you want to build a $10 million+ company, you must focus on building Value. And to build Value, you need to follow a specific formula.
As you scroll down the page, you’ll see the important schematic below:
Don’t be overwhelmed by its complexity, by the time you see it, it’ll make perfect sense. And you’ll be able to follow it to dramatically grow your business.