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HRCC CASE STUDY

Giridhar Nemani, promoter of loss-making Kellapp Industries, faced a question: can a new chief operaing officer ask for a share of future profits? Girdhar Nemani watched the hour glass fill with the glitter, drop by drop. When it was done, he turned it around and let it start all over again. He had been at it for the last 45 minutes, while his mind brimmed with the meeting he had just concluded with Adip Rai, partner at headhunter firm Cornwell Search. Rai's recommendation had shaken up his restructuring plans. Nemani was the promoter and managing director of Kellapp Industries, which manufactured an industrial speciality product, Sirrug-32. The product was recently had been deregulated by the Indian government. Due to intense competition at home and surplus capacities in the global market, the last two years had seen unprecedented losses at Kellapp. The company was sound on technology and clued into the global market, but Sirrug-32 was a commodity product range and was affected by global pricing. When he set up his business 15 years ago, little did Nemani realise that it would grow the way it did. 'You can't be in this category and remain small. Success lies in big capacities, volumes and investments,; he told his advisors, Bright & Thakur, which he had hired last year to examine the company's losses. But Nemani was optimistic since the market was huge and the demand for Sirrug-32 variants high. He proposed additional capacities that would take Kellapp's turnover from Rs 1,600 crore to Rs 6,000 crore. Bright & Thakur's diagnosis was tough on Nemani: Kellapp had not invested in professional management, had suffered from a lack of systems and processes and had mismanaged margins in the international markets. Sirrug-32 was competitive in quality, but quality was not the only determinant. There were other values that Kellapp needed to deliver. Another grey area was buying. Kellapp's key raw material was also a commodity, so buying was large and speculative. The company did not have a clear positioning for Sirrug-32, or a plan to increase value delivery. ;When you are in industrial products, you are actually a service-led company,; said Bright & Thakur. ;Products require different dimensions of servicing, in packaging, distribution, logistics, availability. It is a customer service-led market and you need strategic business units (SBUs).; Nemani had agreed, and Bright & Thakur created SBUs under the

managing director. Kellapp now needed to hire business heads to manage the business units, since people of the calibre needed to drive the business were not available in-house. ;I am not a professional, I am the owner, I understand the business in the international context, but I do not have the management capability to drive that in the organisational sense. The functional heads are professionals but are not people of the quality to push the business beyond a point. They come from within the industry but the industry itself, if you see how it has evolved, has not harboured quality people.; That was how Nemani hired Cornwell Search, known to have hired the best CEOs in the country. Nemani needed two business heads, one of whom he wanted to groom as the managing director. ;I do wish to retire,; Nemani had confided to Adip Puri of Cornwell, ;though that is just a dream and with the business going great guns, I certainly don't see myself being able to spearhead all that. It is time I looked around for a successor, but there is time for that, at least three years, for that is when the capacities come up in full swing.; But Cornwell did not think three years was enough time. Hiring business heads would only address the short-term mandate of leading the company into a profit situation. The long-term mandate was to build the organisation to manage a growth of Rs 6,000 crore. Rai asked: ;Having hired the business heads, how are you going to move the business forward? The business heads will change the capability of these jobs, and the drive of the other functions. So, let's say you will soon have a well run financial management, marketing management, buying management. But does all this add up to a total organisation which is now to make a quantum leap from Rs 1,600 crore to Rs 6,000 crore? ; Putting the capacities in place is part of the process, but going out there and developing the market and selling is another. The traditional processes of market development are not going to lead you there. There are some very cutting-edge management issues which I can see will impact the success of your business. And that can happen only if you create a layer in between the managing director and the rest of the organisation today.; Ideally, as Cornwell saw it, there was a job at the top, above the business and functional heads. A chief operating officer. And that job had to be manned today, not three years hence. ;The business head you hire today has a long way to go,; said Adip. ;First he will have to prove himself on the job, then he will have to prove himself in the managing director's job. And you are talking of a time-frame of 3-4 years, but you don't have that kind of time! The next 3-4 years are very critical. Your

capacities will be up and ready by 2001; by that time, the business needs to be of a particular capability to manage those volumes.; Adip saw a serious issue. The kind of person Kellapp needed as the managing director or even as the COO was not available within the industry, the protected environment had not allowed capabilities to develop. Therefore, such a person would have to be hired from outside the industry and he would be on the learning curve till he learnt the business. It was a complex situation. Nemani wanted to hire two business heads now, one of whom would move up as the managing director in three years. As far as Cornwell was concerned, the learning curve was a given, wherever the person was hired. But Nemani's plan was sub-optimal, it felt. ;The next three years are very critical for you. A business head hired today will be on the learning curve for 2-3 years, during which period the company is also growing, the capacities are being built and you will need somebody who can pick up the baton and run!; Nemani now came up with a new plan. ;Let us hire a COO as you suggest, and only one business head. I will rather hire two senior operating persons internally and run the SBU myself than hire a business head. Thus, at the end of three eyars, one of these senior managers moves up as the business head, the COO we hire will become the managing director and I will retire. That structure is very viable. You have done succession planning, you have built the organisational capability and the people's roles are in place.; That agreed on, Adip now brought up compensation. Nemani was willing to pay the business head Rs 35-40 lakh. ;The COO can be paid 25% more. How does that sound?; he asked. ;I can't tell you that you cannot hire a COO at Rs 50-60 lakh,; said Adip. ;But what are your expectations of the COO? What capabilities are you seeking? You want him to be a totally different person. He is not a person who is 20% better than the business head, right? Then don't relate the COO's compensation to the business head's. They are entirely different jobs, with different mindsets, approaches and capabilities.; Three weeks later, Adip placed before Nemani the resume of three stunning candidates for the post of business heads. Nemani was impressed by all of them, each of whom, he felt, had the potential to become the managing director. However, their current compensation was higher than what he was offering for the post of business head. ;If you hire any one of them, understand you will have to pay higher than what you are offering now. Which means between Rs 60-70 lakh,; said Adip. Nemani shuddered. The amount was far beyond his imagination. If that was the

price for a business head, what would a COO cost, he wondered. ;You need to clarify today if you will be prepared to pay what it takes to hire a COO and in our assessment it looks like Rs 1 crore or higher,; said Adip, even as Nemani's jaw dropped. ;You may even find someone at Rs 60 lakh,; said Adip. ;It is possible to find someone who is earning Rs 45 lakh and offer him Rs 60 lakh. But do you want to hire cheap, or do you want to start by putting a value to this COO job? If you want my advice, you might want to hire the person at a lower fixed component today, because you are making losses today -- but you might like to build a large variable component and let him catch up, based on the success of the business and gradually attain the market value of this job. That approach tackles both attractiveness and retention issues,; said Adip. Nemani was perplexed. At that kind of salary, where was there any doubt about retention? Why would such a person want to leave Kellapp? ;People also build up their own market value,; said Adip. ;You will be helping him learn a commodity business, a skill not readily available in your industry,; explained Adip. ;With the commodity sector opening up, in three years, he could have good value in the market. We saw this happening in the telecom sector.; Nemani was unsure, but he was willing to play along. ; So, what kind of person do you want as the COO? Look at successful businesses, and at ones that were once where you are today and are already where you want to be. Look at the people who did all that. Let us not discuss compensation yet.; said Adip. Nemani was amused, but it sounded like a good way to talk about his dreams. ;Like someone who built Hindustan Lever Ltd's (HLL) detergents business, or Pepsi's bottling operations. I want someone like the person who built Citibank's credit card business, grew it and defined the market norms for quality, product expansion, who gave the category its width and recognition, changed marketing norms. Like someone who led SRF, slowly and steadily built its category leadership;, went on Nemani, slowly warming up to his prospective managing director. ; Wonderful,; said Adip. ;Now, before we decide on their compensation, let us put down the qualities in these people that attract you.; ; People who are strivers, who have the breadth of vision to know where they want to take their businesses and how to get there. People who will not settle for half measures. People who can haul a business up a mountain and have the emotional stamina to do so, who can chalk out independent gameplans and have the guts to

achieve,; said Nemani. ;

Now that we have benchmarked the quality of

performance you are seeking, look at the remuneration that went with the job and look at the successful companies they belong to,; prompted Adip. For Adip knew he was not drawing an HLL manager for a Coke, or a Pepsi manager for a Dabur. First, he was hiring for Kellapp which was not known as the best of employers. Second, Kellapp was making losses. ;Third,; he said to Nemani, ;you have a full CEO agenda and you are asking the incumbent to build value in the business. How much of the value addition are you willing to share with him?; Gone are the days when an employer could say, this is the job, this is what I want, but we won't pay this much because the employment market says this is the going rate. Today, compensation had to be a variable, linked to what the manager can deliver to the business. As he said to Nemani: ;Today, if your share price and market capitalisation rise substantially, doesn't the incumbent have a role in attaining that? Shouldn't he get a share of that?; Nemani would have to loosen his mind a bit, felt Adip, he was still caught up somewhere in the early 1980s, viewing managers as employees, viewing valuesharing as compensation, viewing partnering as hiring. Today's market was no more about jobs, salaries or employment. The managers today saw the whole market as a huge business opportunity, almost like a consulting firm, where they steered your business and shared in your value addition. But Nemani was not in sync. Today, the biggest problem that Nemani had was that he was the owner of the business and he held the ownership. The COO would have to share the ownership and reciprocally Nemani would have to share his profits with him. Nemani said: "You are trying to drive the compensation higher and making it very expensive for me." "Its not a question of compensation," said Adip. "It's about sweat equity. People are adding value to your organisation." Nemani could see the point Adip was making. Even so, he was rattled by the asking price. Adip tried again: "A ceiling to your offer will cut off people above that, and limit the talent you can attract. In my opinion, the person you are looking for may not lie in this bracket of Rs 60-70 lakh, but, probably in the next level, Rs 80 lakh-Rs 1 crore." "Naturally," said Nemani, "you could also find someone in the level below." "May be," agreed Adip, "but should you be paying lower because the incumbent comes from a lower remuneration category? Please understand, compensation is a way to position a job, not compensate in the real sense of the word." Adip was trying hard to

reach into Nemani's mind. "I am not willing to pay that kind of money," interjected Nemani conclusively. "It's really a lot and I don't even know if he will deliver. I am willing to let the guy earn the money as he goes along. Therefore, I would suggest a very high component of variables and a lower fixed compensation." "But we cannot drag the fixed below his current fixed, " said Adip, "Why should he come? You are giving him a loss-making business, which he has to turn around, change and expand. You must offer him a fixed component which is higher than what he is getting, and a small variable which can grow fast. But you can't change entry compensation." The tussle was now over two issues. One, how much to pay now, and two, how to keep the incumbent involved and growing over time. Adip felt the COO's compensation must be between Rs 80 lakh-Rs 1 crore, with a definite plan for growing the variable component over the next three years. Nemani, however, was insisting it should be between Rs 60-65 lakh with an assurance to build it up to between Rs 80 lakh-Rs 1 crore in the next three years. Adip said: "You are running the business, so you must take the risk. Why should an incumbent do so? You are saying, come to my parlour, never mind that you are selling toothpaste today, but do come and sell chemicals, make me profitable, grow my base to Rs 6,000 crore, make me globally competitive, my company is in a mess. The incumbent is risking his reputation by coming to a loss-making company which is not considered a premium employer, and it's style is neither proven nor successful. You must take the risk on compensation." "The value that you will place on the job will depend on whether your business is going to be in the big league in 2001. The COO has to come in today, not three years from now. The next few years are going to build the big league for you. Therefore, he cannot be 20% over the business head, he simply cannot be seen in relation to the business heads. You have to position him differently, price him differently and there's got to be this halo of exclusivity around him." "Am I paying Rs 1 crore or Rs 80 lakh for a trainee managing director?," asked Nemani. Adip replied: "Please understand, Kellapp is a Rs 2,000-crore company going up to Rs 6,000 crore. It's a different dimension altogether. This leads to other dimensions in functional and market services. The transition you are seeking is your mandate. His task is to deliver this mandate because you are not going to do it. You are going to invest and build the capacities. You are going to find the funds. Why, this man is

going to play a very important role in that. Often, funds come because of the perceived quality of management. Today your company is a risk according to the financial institutions. When you have the right person, what you are communicating is, `we are gearing up and seriously.' Now, if this guy is to drive all that, how can he be priced at 20% over the business head?" "When your Coke and Pepsi and Kellogg's came in, they came with empty balancesheets. No numbers. Just a forecast and a determination to reach those figures. Didn't they place the right man to take them to those heights, commensurate with the goals they sought? What defined their CEO's price was the value of their desire to take the brand to a certain level of performance and growth. That is what you have to do." For Nemani it was a mindset problem. He had never thought of paying employees' in tens of lakh. Neither had he imagined he would grow from Rs 750 crore to Rs 2,000 crore in two years. He was nervous coping with four-digit sales. But he was beginning to see how the business had suffered due to a lack of understanding of the needs of the organisation. He was in the red, and so he stood a greater risk of attrition which he could ill-afford. But whether he could make the transition depended a lot on his ability to shift gears. Compensation was his big hurdle which he still could not see as placing a value on a job and positioning it correctly. Instead, he now wondered, should he really hire a COO?

What should Nemani do ? and Why ?

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