President and CEO of Kleinschmidt (Best Firm #34 Multi-Discipline for 2018), a 140-person environmental consulting firm.
By Liisa Andreassen Correspondant
Christensen has been with Kleinschmidt for more than 30 years. He began as a licensing project manager and worked his way up to CFO. After 10 years in that role, he was promoted to CEO.
“Our core values include integrity and creating loyal relationships with our employees,” Christensen says. “Integrity relative to loyalty means we often take extraordinary steps to help long-time employees succeed.”
A conversation with Jon Christensen.
The Zweig Letter: Do you tie compensation to performance for your top leaders?
Jon Christensen: For most employees, we target salary around the 60th-75th percentile of the industry and pay routine bonuses. For leaders, however, we are closer to median salaries, but with the chance to reach 75 percent of total compensation when we perform well. As a team, this motivates us to perform as well as or better than peers. We individually and collectively define measurable goals, and measure against those with a clear understanding of how that can affect our total compensation.
TZL: Do you share base salary or bonus amounts with your entire staff?
JC: We publish salary ranges and detailed job advancement charts that define both the technical skills and the behaviors (e.g. project delivery, management, leadership) we expect from employees at each level. Staff can work with their supervisor to chart a progression that works for them. We also publish and communicate the key factors that affect individual bonuses (company profits first, of course), and provide a range of what folks can expect based on their level within the organization and their personal performance.
TZL: What actions do you take to address a geographic office or specific discipline in the event of non-performance?
JC: Our core values include integrity and creating loyal relationships with our employees. Integrity relative to loyalty means we often take extraordinary steps to help long-time employees succeed. For example, we separated with a principal in 2018, but only after we moved him into two different senior level positions, offered executive coaching, and worked with him through mentor relationships. In the end, what he loved to do (business development) was not what he was great at and what he was great at (technical work) was not what he wanted to do. We struggled with the decision, as he had been with us for 20 years and we fervently believe our people deserve every chance to succeed, but we knew we handled it well and made the right decision.
TZL: How many years of experience – or large enough book of business – is enough to become a principal in your firm? Are you naming principals in their 20s or 30s?
JC: When we were smaller, principals needed a deep understanding of all our career paths: firm management, business development, project management, and strong technical expertise. Comprehensive skills in all these areas took decades to develop. Over time, to remain relevant with expectations of new generations we have revised our principal role. The role continues to evolve, and, in 2019, I envision a higher hurdle relative to technical capabilities in a specific career path than in recent years. However, by creating an opportunity in a single career path, it should be attainable at a younger age going forward.
TZL: Internal transition is expensive. How do you “sell” this investment opportunity to your next generation of principals? How do you prepare them for the next step?
JC: As with many companies our size, we are having this discussion today as our largest shareholders retire. Fortunately, we’ve experienced similar large transitions before, so we have some “lessons learned.” Most importantly, we provide leadership opportunities and actively recruit staff who want to work as a team to “own their future.” To encourage that spirit, we communicate the benefits of ownership, and we emphasize the culture and our core values, one of which includes remaining a privately-held, employee-owned company.
TZL: How do you promote young and new leaders as the firm grows?
JC: Creating four separate career paths (technical, BD, PM, and management) gives us the opportunity to play to an individual’s strengths, rather than assuming everyone has the interest (or ability) to excel at all parts of the business. Additionally, this creates opportunities for people to play a leadership role in the company that fits with those interests and abilities. You can become a discipline leader, for instance, after you have mastered your technical discipline, but before you have the decades of experience required to manage firm operations. This provides several avenues for upward or lateral movement while employees pursue new skills.
TZL: In one word or phrase, what do you describe as your number one job responsibility as CEO?
JC: Gain alignment through two-way communication.
My brother was COO at a Fortune 500 company and said the primary difference between his role and the CEO role was the amount of time spent with stakeholders. I thought I would have an easier time of it (and told him as much), because we were a small, closely held company. Wow, was I wrong! Listening, clarifying, and creating and reinforcing a vision comprises my most time-consuming responsibility.
TZL: With technology reducing the time it takes to complete design work, how do you get the AEC industry to start pricing on value instead of hours?
JC: I encourage anyone who can answer this to write a book! We use both internal and external techniques. Externally, getting closer to our key clients’ “business” decision-makers and understanding their needs allows us to propose projects differently than we would when reacting to RFPs from the “project” decision-makers. Internally, we communicate continually about value, pricing, and the benefits of bidding projects in lump sum. Not new techniques, but we need to teach them to every new generation of project manager – you are more valuable than you understand!
TZL: If the worker shortage continues, do you see wages increasing to encourage more talent to enter the AEC space, or will technology be used to counter the reduced workforce?
JC: With our attitude to find the best, pay well, and expect much, we’ve already experienced significant increases in salary over the last several years. At the same time, technology continues to dramatically improve efficiency. I anticipate both these trends continuing, so our leaders must navigate them both in a way that keeps the firm vibrant and growing.
TZL: There is no substitute for experience, but there is pressure to give responsibility to younger staff. What are you doing to address the risk while pursuing the opportunity to develop your team?
JC: We use a technique we’ve dubbed “managing by exception.” We discuss risk factors early and often on every project. Clearly defining levels of authority, using both objective and subjective criteria, empowers staff to make their own decisions, but requires them to obtain approval on anything out of the norm. So, working for an existing client on a project type you’ve managed several times, you may have significant financial authority to commit to the firm. But, even on a small project where the risk is high, or the client/project is unusual, we require senior oversight.
TZL: Engineers love being engineers, but what are you doing to instill a business culture in your firm?
JC: We have constant, one-on-one conversations to create an understanding of the “business of running the business.” We start with a focus on the basic building blocks of a business culture: accountability and responsiveness. When technical professionals have a good understanding of their roles and are accountable to each other, they create a great foundation. From there, we provide business education to staff at all levels, including our “Leadership Academy” (featuring June Jewell’s Find the Lost Dollars training) which exposes existing and upcoming leaders to the best industry practices. We also publish our financials and provide lunch-and-learn workshops, seminars (internal and external), and shareholder education where everyone in the company is welcome.
TZL: The seller-doer model is very successful, but with growth you need to adapt to new models. What is your program?
JC: We’ve developed a matrix organization, where people who are interested in and excel at business development spend more of their time and energy pursuing new clients and projects. At the same time, individuals in the operations part of the business continue to develop the lasting relationships that any technical services firm relies on for long-term success. This balance is delicate, but when we are successfully collaborating among the matrix, we cross-sell better to expand our services, and we are more successful pursuing competitive large and complex projects.
TZL: Diversity and inclusion is lacking. What steps are you taking to address the issue?
JC: Globally, we have some powerful female role models and support their engagement in industry associations that support women and minorities. More tactically, new entrants to the industry are more diverse today, so we were able to recruit a more diverse workforce. Once created, it was just a matter of time and open-minded review of candidates before we promoted several capable women to firm leadership roles in 2017. Additionally, leadership opportunities in the multiple career paths mentioned above provide other avenues for women and minorities to seek advancement, as several have. This atmosphere has created a more inclusive leadership pipeline, although I still count this as a work in progress.
TZL: A firm’s longevity is valuable. What are you doing to encourage your staff to stick around?
JC: Kleinschmidt promotes loyalty to our employees, and we have financial incentives that are geared exclusively to the long-term. Actively stating that we are loyal to our employees differentiates us from many, especially larger companies, and creates a team and ownership mentality. Working in the team environment, individuals who stick with the company recognize significant benefits from ownership and from our very strong 401(k) contributions. We are constantly balancing this longer view against the pressures for immediate rewards and the need to constantly communicate and reinforce why we do this.
TZL: How are the tax cuts impacting your business? Have salaries and bonuses increased?
JC: We can retain more without a tax penalty. The tax cuts also increased the appeal of dividends. We are a C-corp and traditionally avoided the tax consequences of retaining cash for future distributions because they were doubly taxed. In 2019, however, the corporate taxes plus dividend taxes (capital gains) will be lower than the marginal individual tax rates. This makes dividends a more tax-efficient way to distribute earnings and it ties directly to shareholdings, whereas we avoid that connection with bonus distributions. We expect this to add incentive to those owners contemplating a purchase.
TZL: How have the tax cuts impacted your firm’s valuation? Do you plan to perform another valuation due to the tax cuts?
JC: We pay taxes on a cash basis, so the tax code changes moved significant deferred taxes to retained earnings. Since these are future taxes, there was no cash that followed this transaction. That should influence the valuation, as well as the lower tax rate affecting the longer-term cash flow of the company. Accordingly, we expect the valuation to increase based on those pressures.
TZL: Are you currently pursuing the R&D tax credit?
JC: Absolutely.