As an executive onboarding into a new role, due diligence is a critical part of mitigating risk before accepting a job. The three main risks are always organizational, role and personal. But the components of those risks vary across roles with different compensation compositions.
- Regular. When salary and benefits are primary, you care most about the reliability of the organization’s cash flow.
- Variable. With commission, bonus or other compensation based on results, you care most about the organization’s ability to deliver revenue and profits.
- Equity. For equity appreciation, you care most about organizational value creation.
As I’ve said throughout this series, executive onboarding is the key to accelerating success and reducing risk in a new job. People generally fail in new executive roles because of poor fit, poor delivery or poor adjustment to a change down the road. They accelerate success by 1) getting a head start, 2) managing the message, 3) setting direction and building the team and 4) sustaining momentum and delivering results.
While fit, delivery and adjustment risks apply to everyone, they are biased across regular, variable and equity as well. Those earning regular compensation are most prone to fit risks. Those earning variable compensation are most exposed to delivery risk. Those looking for equity appreciation are most exposed to changes down the road.
Simplifying and over-generalizing to make the point:
These will tend to be production, delivery and support jobs in a stable culture or sub-culture. Those going into these jobs with regular salary and benefits will be on the risk-averse side and looking for organizations that will have a steady enough cash flow to pay their regular salary and benefits.
Key questions to look at include:
- How sustainable is the strategy?
- How stable is the organization?
- How reliable are the operations?
These may be service or marketing/selling roles in a flexible culture or sub-culture. People in these jobs want line of site linkages between their own performance and compensation. They will prefer organizations with P&L mindsets – prepared to invest to win during the current planning horizon.
- What’s the strategic competitive advantage?
- Will the organization allow me to flex – to win?
- Will the operations support my commitments?
These organizations will be going through a point of inflection. It’s critical to check the alignment of key players’ ambitions to make sure they have a balance sheet mindset – willing to invest how to win over time.
- Can they jump-shift to a new, single, overarching strategy?
- Can the organization shift in line with the strategy?
- Can operations shift to support the new strategy?
If a large part of your compensation is based on equity, do the same due diligence you’d do if you were making an investment in a company. You are. Use one of the many checklists people have created to guide your do diligence. The one Richard Harroch and David Lipkin published in Forbes is a good start. In general, look at strategic, organizational and regulatory risks:
Strategic & Cultural
- Owners’ ambitions: cash flow, profitability, value creation.
- 5Cs: Customers, Collaborators, Capabilities/culture, Competitors, Conditions (history, trends, assumptions) leading into a SWOT to get at competitive advantage with a special emphasis on technical/intellectual property.
- Strategy and priorities.
Organizational & Regulatory
- Organizational structure, management organization chart (charter documents, tax certificates, stock agreements, related party transactions.)
- Legacy contracts, agreements, equity investors, employment agreements, compensation (cash and non-cash) with founders, executives, staff and directors’ minutes and communication.
- Legal issues, litigation, compliance, contractors vs. employees, contracts or the like (guarantees, loans, LLCs, settlement agreements, past acquisition agreements, equipment leases, indemnifications, employment agreements, exclusivity agreements, operating restrictions, etc.)
Operational & Financial
- Customers: top 20/revenue percentages (customer concentration issues – sustainability of relationships/satisfaction), warranty issues, backlog, pipeline, sales terms, sales compensation, seasonality/working capital requirements.
- Infrastructure (human, financial, physical, technical, operational) condition of assets, environmental issues.
- Cash flow, income statement or balance sheet as appropriate. Look at historical performance, trends, projections, assumptions, capital/working capital needs and the like.