Employees are Turning the Tables — How Entrepreneurs Should Change Their Annual Employee Reviews

I love it when an employee turns the tables on me.

It's part of my life's work to spread the value acceleration mindset, helping businesses that might be successful become significant as well. Simply put, the Value Acceleration Methodology is a value management system that gives you a strategic framework for exit planning — and, therefore, business planning. Income is important to a business owner, sure, but the real focus needs to be on creating value — more on that later — so the owner is well-positioned when an exit comes to harvest the wealth they've been building.

Yet, here I sat, in an annual review with a young, dynamic employee talking about the same old things we discussed in annual reviews: hitting goals, creating revenue, etc.

Until she turned the tables on me.

The review had gone well. She'd hit all of her goals, and I was offering a generous raise as a result.

Until she wanted to talk about value, too.

Turns out, the Value Acceleration Methodology we espouse at my business, Exit Planning Institute, was ingrained in her.

Related: It's Time to Prioritize Regular Performance Reviews—Here's Why Reviews Are Essential for Employee and Company Growth

Value from the intangible

Creating value depends on the four intangible capitals that every business has:

• Human capital : The strength of your people, how they execute, adapt and innovate, and how they can deploy themselves independent of you, the business owner.
• Customer capital : The strength of your relationships throughout your supply chain, with open communication and shared goals and benefits.
• Structural capital : The strength of your strategy, systems, processes and financial structure — and how well they're documented, proven, scalable and transferrable.
• Social capital : The strength of your culture, creating a rhythm that keeps going and elevates your company.

So, after we were done talking about the revenue goals she was able to help us hit — a sign of success — she wanted to talk about the intangible capital and value she was able to grow over the past year — a sign of significance.

Here's an example: She documented the elements of her strategy from last year and how she delivered on each of the organization's success factors. She produced more leads, resulting in more closed business, generating more revenue, and creating a bigger and better brand.

But what she wanted to talk about was value. She had prepared a value sheet showing how the strategy and success factors contributed to the four intangible capitals and, therefore, the value of the business. She highlighted how she made the business scalable and predictable and how she could decentralize me from her department. Bottom line: She created value .

In our line of work, value is a multiplier. Value helps businesses sell for 12 times the net profit instead of five, for example. It also helps owners harvest wealth when it's time to sell.

Related: Want Customers to Love You? Treat Every Customer Like They're Your Only Customer

Changing the employee review

That one meeting changed the way we do our annual reviews. As an entrepreneur, I'm focused on income. But income year over year isn't the real wealth I'm creating in my business — it's the wealth I'll be able to harvest when I exit. It's not a process that starts right before the sale — you have to be creating value constantly. And getting employees to own value — and therefore drive value—is one of my chief priorities. We did it by changing the performance review from the metrics an employee hit to how much value they created.

How should you do it?

Step 1: Define your values

We have seven core values in our organization, and they're based on the four intangible capitals I mentioned earlier, as well as other items that drive value for our business. We define them and use them as a roadmap in our reviews.

Step 2: Rate your values

We have managers rate their employees on how well they're meeting that value—with examples. Employees earn a D for "demonstrating" or a V for "visit."

If the employee can't draw any examples of how they created value within the core value, it's a V. They believe in it, but they're not demonstrating it. Employees have to articulate how what they did — and the goals they hit — drove value for the company. It doesn't have to be quantitative, and often it's not. It can be about creating processes or how hitting a goal decentralized me as the owner so I can focus on higher-order items.

Step 3: Reward value

Instead of a performance incentive for generating revenue, have a bonus structure that rewards driving value. It tells employees what really matters, and in the end, it's what makes your company significant (and makes you more money in the end).

Related: The Definition of Value Is Changing—Here's What Entrepreneurs Need to Know to Survive the Shifting Global Trends

Beyond the review: Overall value

Every industry has a code that the U.S. government uses to classify your business type. When you work with an exit planner who's a CEPA, they can look up businesses like yours and tell you what multiple of net profit they're selling for.

Let's say the range for your classification is three to eight times net profit. The businesses selling for three times net profit likely didn't focus very much on driving value, instead worrying about revenue.

In the end, when you can exit your company on your terms, your year-over-year revenue will matter, but not as much as value. If your business is transferable, you have a great product, your culture is excellent, and you have good customer relationships, you've created value. And that value is what the next owner is looking to buy — and will pay for.