In The Trenches: Leveraged buyout payoff teaches Acme a harsh lesson

Jan. 4, 2008
In this edition of In the Trenches, Acme learns that a leveraged buyout is not as simple as they had imaged.

Acme Associates is a maintenance consulting firm with a client base that includes mega-malls, high-rise office buildings and other such large commercial facilities. Recently, the company realized there were possible opportunities in the industrial market. Acme knew how to consult and run an outsourced maintenance management operation, but, unfortunately, it had no industrial experience.

Through some creative financing maneuvers, Acme Associates was able to buy Nadir Consulting, an established, privately held maintenance consulting firm that had been operating in the industrial market for years. The owners already were secure financially and wanted to get out from under the daily grind. What attracted Acme was Nadir’s loyal client base. This buyout would give Acme instant credibility in the marketplace.

Acme established a subsidiary, Acme Industrial, to serve Nadir’s former customers and other industrial manufacturing clients it identified. Acme began staffing its new subsidiary with its own employees who either had long expressed an interest in working the industrial arena or had no realistic promotion path within the Acme Associates hierarchy.

Only then did Acme discuss employment opportunities with the few members of Nadir’s established consulting team who possessed what it saw as the two critical skills: First, they had proved they could bring in new work and, second, they could generate sufficient billable hours on existing contracts to justify keeping them on the payroll. One of the non-union Nadir employees Acme considered was Dawn Keyotey, a female maintenance reliability consultant with a dozen years worth of experience in the traditionally male-dominated field.

To make the buyout work, Acme had to keep costs low. Its negotiations with the former Nadir employees generally resulted in compensation packages that were less favorable than what they had enjoyed while working for Nadir. For example, the rates they received were generally below what Acme paid its own employees, even though clients were billed at the same rate across the board. Nevertheless, Dawn accepted a position with Acme Industrial even though it hadn’t finalized the commission schedule for any new work she might secure.

Despite that income uncertainty, Dawn continued to be a leader in racking up billable hours on existing contracts and finding new work within the plants she handled. A few months later, when Dawn finally received a copy of the commission schedule that would apply to any new business she might uncover, she was shocked to learn that Acme would be compensating such a seasoned consultant at a rate significantly less than what Nadir would have paid. She contacted the other former Nadir consultants on the Acme payroll and learned that they, too, were given lower rates.

After giving the matter some thought, Dawn sent an e-mail to the Acme executive team on her behalf and that of her Nadir colleagues to report their collective opinion that the new commission schedules are much too low for people with this much skill and experience in the industry. She also sent a copy of the e-mail to Al Geeblume, the Acme manager responsible for the geographic region in which Dawn operated. On both of these memos, Dawn signed off as “union president.”

Dawn then repeatedly asked Emma Rilldile, Acme’s HR manager, to meet with her and the rest of the Nadir group to discuss their concerns about compensation and other issues. When it became clear that Dawn wasn’t going to get a response to her requests, she changed her approach. At each of the weekly field consultant meetings, Dawn raised compensation matters on behalf of her Nadir colleagues. With that cat now out of the bag in a public way, the other Nadirites became more emboldened to voice their complaints about the way Acme was treating them, Acme’s management structure, and the executives who constitute that structure. Then, when Dawn received her first commission check under the new plan, she found that the amount was incorrectly calculated. This only gave her more complaint fodder. Nevertheless, it didn’t dampen her motivation to continue searching out even more new business. She needed the money.

Two months after she sent her initial pair of e-mails, Al and Emma met with Dawn in what she thought was going to be a reconciliation of financial injustices and celebration of her success as a rainmaker. But she was tragically wrong. In vicious retaliation for her endless carping, Al and Emma fired her without warning, then danced a jig of victory with her confiscated Nadir company laptop. Now the remaining former Nadir consultants could complain about her termination, which wasn’t done in accordance with the progressive disciplinary process outlined in Acme’s own employee handbook.

How could this situation have been avoided? Should employees have any say in their own compensation packages? Can Dawn’s actions on behalf of the other Nadirites justify her claim to be a “union president?” Does it make sense for Acme Industrial to have different compensation packages for its own consultants and those it cherry-picked from the Nadir lineup?

An attorney says:

Employers sometimes think they don't have any concerns under the National Labor Relations Act when they are dealing with non-union employees. Such isn’t the case.

The NLRA gives employees the right to engage in "concerted" activity for the purpose of collective bargaining or other mutual aid or protection. "Concerted" means a group of employees or even one employee, such as Dawn, who is speaking on behalf of her colleagues. The NLRA further prohibits employers from in any way interfering with an employee's right to engage in protected concerted activity. Put in simpler terms, an employer can’t terminate an employee for speaking out on behalf of a group of employees in an effort to better their compensation or working conditions. This is exactly what Acme Industrial did in this case.

Was Dawn a union president? No. At the outset, there was no union, that is, the employer didn’t voluntary recognize a union as the representative of its employees, and the National Labor Relations Board didn’t certify that a union represented Acme Industrial's employees. If there was no union, Dawn could not have been its president.

Apart from the termination of Dawn "in vicious retaliation for her endless carping," Acme Industrial was free to offer its employees any commission scheme it wished, fair or unfair, higher or lower than the commission scheme offered by Nadir. If an employee doesn’t wish to work for the compensation the employer offers, she is always free to decline the offer of employment.

That isn’t to say that employees don’t have a say in their compensation. Applicants for employment negotiate for more salary and benefits all the time. But the best time to negotiate compensation and benefits is when an offer of employment has been made and the employee hasn’t yet accepted the offer. Dawn was either naive or precipitous in accepting an offer of employment without knowing the commission arrangement. For the protection of both employer and employee, commission arrangements should always be put in writing.

It doesn't make any sense for Acme to pay its own employees working for Acme Industrial at a higher rate than it pays the employees it hired from Nadir Consulting. That unwise decision sparked the chain of events that will no doubt result in Acme Industrial reinstating Dawn to her position and paying her back pay.

Julie Badel, partner
Epstein Becker & Green, P.C.
(312) 499-1418
[email protected]

A corporate consultant says:

There are two issues that probably caused this situation. First, Acme should have done a better job in understanding the industrial consulting business. Creative financing is the first clue that due diligence wasn’t done. Proven performers with strong client relationships are crucial and should be embraced and cultivated. Second, the way to foster engaged and productive team members is through excellence in communication and building trust by acting with integrity. This is particularly true for virtual offices and when merging cultures. Neither party communicated well, nor did either party act with integrity.

Dawn’s actions were off-target. She could have engaged in productive dialogue. The former Nadir group could have presented a logical, rational business case for their position. Certainly business results would likely take a major hit if the productive former Nadir consultants were to no longer be servicing their customers. Good managers and executives much prefer subordinates who bring solutions with the issues they raise. Putting together a plan for resolving the compensation issue would have been a positive step toward improving communication and trust.

Employees should, of course, negotiate their specific compensation package. Most businesses have a corporate policy that provides some latitude on various aspects of compensation. Employees can be an important part of the solution if they’re educated and knowledgeable regarding business performance drivers and market issues. Had a productive dialog taken place, the former Nadir employees might have accepted greater risk in return for increased bonus potential for meeting or exceeding revenue targets.

Acme lost a productive consultant, who continued to produce in the face of compensation ambiguities. Seeing the colleague squashed most likely caused the other former Nadir employees to dust off their resumes, back up their laptop data and begin floating interest with other employers.

Dawn’s actions on behalf of the other Nadirites can’t justify her claim to be a “union president.” Regardless of the intention of using the term “union president” (joking or provoking), the connotation assuredly resulted in a defensive posture by management. This illustrates an important issue: Be professional while building a rapport; over-familiarization can lead to unintended consequences. Management’s defensive posture didn’t promote communication or trust. Additionally, Dawn’s self-appointment signaled that former Nadir employees had the predilection to be disruptive to the business. Acme’s management chose to not proactively engage. When communication and trust are low or known to be poor, it’s best to act with integrity.

Dawn might not have used the best judgment in addressing her e-mails to corporate executives, as opposed to first going through her “chain of command.” The regional manager might have been her ally had she approached the manager instead of going over his head. That probably put Al in the uncomfortable position of having to explain why one of his people was disrupting the organization.

It makes no sense for Acme Industrial to have different compensation packages for its own consultants and those it cherry-picked from the Nadir lineup. It’s perfectly legitimate to have tiers or bands of job classifications based on experience and education, but there shouldn’t be differences between legacy and new employees if you want to build a team. Equal pay for equal responsibility and capability should be the norm. Acme selected the former Nadir employees based on their proven record of delivering results and upselling more services. It makes no sense to start the relationship with conflict. This is particularly true when legacy Acme employees lacked the industrial consulting experience of the former Nadir staff members.

Tom Moriarty, PE, CMRP
Organizational Reliability Professional Services Consultant
(321) 773-3356
[email protected]

An academician says:

One of the major determinants of job satisfaction is fairness or equity. People simply want to be treated fairly and are upset (as the case illustrates) if they perceive that they’re being treated unfairly. In fact, fairness, or lack thereof, is a strong predictor of absenteeism, quitting and even work sabotage.

Fairness has a couple of important dimensions. The first is that employees want to know that they’re being treated like everyone else in their position. That is, if Mary and Sam do the same work, then Mary and Sam should receive the same pay and benefits.

Secondly, employees want to know that the pay they receive is “fair” given their training, experience or work output. This is a bit more subjective than the first point above, but employees usually compare themselves with others who do similar work or who have similar training and experience. This comparison might be with others inside or outside the organization. The classic case here is of the (female) hospital nurses with extensive training who were paid considerably less than the (male) building supervisors, many of whom didn’t even have a high school diploma.

By either of the above criteria, Acme Industrial is off the mark in its payment of the former Nadir consultants. One could easily see problems arising on this one. Sooner or later, the Nadir people would find out that they are second-class citizens at Acme. This was simply a dumb move by Acme. It should have quickly integrated the two consulting groups, shared their knowledge and resources, used the same pay and benefits structure, and in that way reaped the benefits of the acquisition.

Acme should have paid its consultants the same rate at the time of the acquisition. It didn’t, but had an opportunity to correct the error with Dawn’s complaint. Again, it didn’t correct the problem; rather it compounded the problem by firing Dawn. Acme needs to hire a consultant to explain to it how to run an effective consulting firm.

Professor Homer H. Johnson, Ph.D.
Loyola University Chicago
(312) 915-6682
[email protected]

Every month since late 1994, Francie Dalton has been offering her practical wisdom and penetrating insights to the hapless characters working at Acme. At the end of 2007, she told us she felt this was a good time to step out and present an opportunity for some fresh perspective to tackle those "In the Trenches" HR issues. We appreciate every word she’s written during her long tenure as a contributor to one of the most popular features in Plant Services. We wish her the best.

Our new correspondent, Tom Moriarty, PE, CMRP, is president of Alidade MER, Inc. and an organizational reliability professional specializing in industrial maintenance, reliability and leadership development. During his more than 28 years of experience, Tom has garnered credentials, including Certified Maintenance and Reliability Professional (CMRP) and registered Professional Engineer (PE) in both Virginia and Florida with a Bachelor of Science in Mechanical Engineering and a Professional Master of Business Administration. He is active in the Society of Maintenance and Reliability Professionals, a Past Chair of the Canaveral, Fla., Section of the American Society of Mechanical Engineers, and a member of the Navy League and Military Officers Association of America.

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