Your role. Owner. Director (aka General Manager). Employee. How many times do we see a person fulfilling all of these roles in a startup? Wait, no need to answer this one. Let’s just agree that it’s a lot.
Is fulfilling all roles, instead of one role, an issue?
That’s not the real issue. At the start of any new venture, this can be the case. And it’s actually OK for someone to have two of the three roles or even all three as a temporary solution. The real issue is something that we often brush aside. That these three roles (owner-director-employee) are completely distinct. And both the organization and its members must have a clear understanding of them.
More than that, the way you define, evaluate, and remunerate each role has its own set of criteria. It’s here where lack of clarity can become such a confusing and destructive force. The result? Steering straight off the cliff of failure and into the ravine of bankruptcy.
“More often than not, founders make the grave mistake of believing that they are greater than the sum of their business’s parts.”
Key roles in a business
The core fabric of any business is its people. Without their brilliant ideas, work ethic and professionalism, no business could succeed. Let’s look at the key roles and their most simplistic job descriptions:
- The Owner or Founder is basically the person who does three things. Initial investment, periodic – usually annual – targeting and strategic planning, as well as defining the management.
- The Director or General Manager is responsible for coordinating employees, as well as for the proper performance of procedures and systems. So that the outcome of the work is consistent with both the qualitative and operational criteria and the economic criteria and objectives, set by the organization.
- The employee must perform the necessary tasks. In order for the business to operate effectively towards the goals set by the organization.
Of course, for larger organizations, when there are multiple stakeholders, a board of directors is created. In this context, the main responsibility of the board is to define the appropriate management team. And formulate a strategy that will lead to an increase in the value of the organization (normally on a long-term and sustainable basis).
Avoiding growing pains
As mentioned earlier, in the case of startups and newly-formed businesses, it’s not uncommon for the same person to be the owner, manager and employee. This is perfectly okay under the premise that the person in question understands these roles distinctly and has the ability to switch between them.
But what about preparing for growth? You (hopefully) don’t just want to get your business off the ground and then stay where you are. But founders and owners can get too caught up in the immediate present to think about that. And they go for a ‘we’ll cross that bridge when we come to it’ philosophy. This can be a big mistake.
The key word here is clarity. If you have this on all three distinct roles, it makes it much easier to assign them to others when the business grows. Otherwise the business faces the risk of collapsing under the weight of its own success. The so called “growing pains”. Which is much more common than many think.
Now the roles are clear, how much do you pay and be paid for work? This is where the first problems start. Why? Because each role should correspond to three different types of remuneration. Surprise, surprise, it rarely follows such logic.
For a start, we must remunerate work in an objective manner, based on market prices. The reality is somewhat different, with many owners/founders creating many unhelpful distortions.
Why does this happen? Because the business is ‘their baby’, they (owners/founders) often allocate a very small, very large, or in some cases, no salary for themselves. This is a huge mistake as it alters their very own view of the business.
We should remunerate General Managers, based on goals. Often they’ll have a basic salary, as they are also employees. But we should base a large chunk of their pay, on achieving specific goals, as the owners set them.
Finally, owners should be paid from the profits. That is, after the company has fulfilled all its obligations and investments to keep the business viable in the future. From an economic perspective, such a concept is the only reason a business exists. A point of view directly contested by many right-minded people, but we’ll get back to that in another post.
In cases where a person has more than one role, the remuneration should be calculated independently. For example, just because and owner ‘will be paid from the profits’ doesn’t mean he should not have a ‘normal’, even humble, salary. Because whatever he or she takes from the profits (large or small amount) effects directly the company’s profitability.
Unfortunately, very few founders of start-ups link their pay properly as managers, i.e. to the achievement of goals. And, much worse, even fewer perceive that we should share profits only after we have met all obligations. Plus we have made all the necessary investments for the future.
We often hear stories about owners and/or directors of small and medium business (commercial managers, traders, brokers, etc.) who give themselves inflated bonus payments from the ‘profits’. This comes with tragic consequences, as the money they spent was not really theirs. Regrettably, the same phenomenon exists at startups who have received substantial funding.
Essentially, it’s about creating the right culture in the organization. That priceless set of unwritten rules that run each and every business. Paying fair salaries is one of them. And, very importantly – for the managers’ part, setting targets and making compensation dependent on their achievement.
Understand and act accordingly
As a final verdict, the message is clear. In order to create a better business and cultivate a stronger economy, aspiring owners and founders need to fully understand the role types. That of the owner, the director/general manager and the employee. Because these roles exist in every kind of business, whether profit-making or not.
If this is not the case, as alas is the general rule, the chances are that at a time when there is weak growth, these companies will fail to respond. Because when it’s ‘raining money’, even the worst businesses are able to grow.
The result? We’ll continue to see promising companies going out of business, due to poor management. Something we’ve been witnessing in Greece virtually non-stop for the last seven years.