Creative Compensation Tactics Help Forge a Company's Culture

Robert J. Shillman, Cognex Corp.'s chairman and chief executive, was ready to give staffers assembled at a hotel conference room their year-end bonuses in February 2004 when someone cried out, "We forgot to cut the bonus checks!"

As Dr. Shillman and two colleagues rushed from the room, an apparent live-action video tracked their moves. They drove to an armored truck parked nearby, distracted the driver and yanked 20 heavy cash bags from the rear of the truck. The executives' joke became clear when they rejoined the meeting and handed each person a bonus check.

Dr. Shillman is the offbeat head of the world's biggest maker of industrial vision systems, which automate manufacturing processes normally requiring vision, such as inspection of drug-package labels. And he often rewards his 762 employees and himself in unconventional ways -- from free films and refreshments at the local theater that Cognex rents Friday nights to company-paid trips abroad for long-serving employees and their friends. The company's biggest individual shareholder, he stopped taking a salary in April 2001 and bonus in 2004. His cash package peaked at $868,000 in 2000.

The creative compensation tactics have helped Dr. Shillman forge a strong corporate culture at Cognex, which the former Massachusetts Institute of Technology researcher launched 25 years ago by offering free bicycles to two graduate students. The result? The company enjoys low staff turnover and claims the highest profits in its industry.

Dr. Shillman, a ruddy-complexioned man with swept-back hair, aspired to be an actor until his father insisted he finish his MIT doctorate in computer science. But he remains a showman -- wrestling an alligator at a Cognex picnic, designing an annual report that resembled Mad magazine and declaring his gubernatorial candidacy as an April Fool's joke.

The 60-year-old CEO exhibited this dramatic flair during a recent interview in his "Director's Boardroom" at the company's headquarters here, where photos of him wearing wacky Halloween costumes fill a wall. Here are some excerpts:

Enough Money

THE WALL STREET JOURNAL: Your company motto is, "Work hard and play hard." Applied to you, it should be: "Work hard, play hard and forget the cash." Why do you do that?

DR. SHILLMAN: I don't need any more. Most people find that very strange. The analogy I give is that of having a restaurant meal with friends. You had drinks, dinner and dessert. The waitress comes over and says, "We are offering a special tonight. Here's another meal." Is that a good thing? Money is much the same thing.

WSJ: When did you decide that you had enough money?

DR. SHILLMAN: In 2001, the Internet bubble burst. Most high-tech companies suffered -- as we did. To try to save jobs, I decided senior people should take a 4% salary cut. I set a better example by taking zero salary. At that time, the board decided to give me extra stock options.

WSJ: Did you expect to resume your salary once business improved?

DR. SHILLMAN: In a capitalistic society, you should get paid for your efforts. But after 2001, I didn't miss the money. I said, "Well, if I don't miss it, then why should I keep taking it? Let's just give it to charity." [Cognex donated Mr. Shillman's 2004 and 2005 bonuses, totaling $517,000, to a public charity but hasn't donated his forgone salary since April 2001. At his request, the company will donate his 2006 salary and bonus.]

WSJ: Was it hard to sell your decision to the board? Certain experts think directors should give a founding CEO some cash because it increases the directors' control.

DR. SHILLMAN: I am uncontrollable anyway, money or not. The fact that I am giving up the cash means it wouldn't be useful to force me to take it. I don't measure my value by my bank account anymore. I measure my value by good deeds I do. I did not start this company for money. I started the company to be surrounded by intelligent people who don't work to make money, but because they like the creative juices that flow.

WSJ: At the end of 2005, you owned about 3.6 million shares -- representing a 7.6% stake that's now worth about $105 million. Will you eventually give away all your shares, too?

DR. SHILLMAN: The stock will likely go to charitable institutions.

WSJ: How many shares have you sold since going public?

DR. SHILLMAN: At least two million shares. So I've been able to go out and buy a big house, fast cars and some pieces of art. I also have donated more than $17.5 million worth of shares to charitable causes.

WSJ: You're a strong proponent of stock options. Who gets them here?

DR. SHILLMAN: Practically everyone. Full-time management employees get them when they join, and part-timers are eligible after a year. Nonmanagement employees can receive options based on performance and service.

Dinner and a Limo

WSJ: Let's explore your highly creative forms of compensation.

DR. SHILLMAN: We use creative compensation to get people to join. We never paid starting bonuses. It's morally corrupt. I am going to pay a starting bonus to an engineer who is going to sit next to [a person] who has been here 15 years. Where is the logic in that?

We pay people less than they are currently making to take a senior-level job. The most important thing the package includes is a great place to work. [And] I am going to give you a bonus and options package that will hopefully make you a multimillionaire someday. If you are coming for the short term, I don't want you here.

WSJ: In 1990, the year after Cognex went public and its share price tripled, you made almost every staffer "rich for a night" by treating them to dinner and a limousine ride. Why?

DR. SHILLMAN: Uniqueness is what people like about rewards. Rich for a night meant dinner for two at any restaurant of your choice, up to $150, and the limo for five hours, which was $250. They had a great time. The 108 North American employees [at the time] got it.

Give people $500, they put it in the bank and they won't remember it. We like to do memorable things that get a bang for the buck. At the annual employee meeting, I said, "We are all getting a bonus, but the bonus isn't going to make you rich. I can make you feel rich. You are going on a night on the town in a chauffeur-driven limousine."

WSJ: How do these surprise rewards build loyalty?

DR. SHILLMAN: We are the most profitable company in our field -- because of the longevity of people in the company.

WSJ: What's your voluntary turnover rate?

DR. SHILLMAN: It has averaged about 6% a year since 2001. It hit a high of 18% during 1999 when we had people recruited away.

WSJ: When overall turnover increased, did it also rise among top executives?

DR. SHILLMAN: No. Some senior people retire. Almost nobody leaves. They like the management style. I am meticulous about hiring, and then I'm hands-off.

Treats to Remember

WSJ: Like Cognex, many high-tech companies are fun places to work, offering options, a game room and an Ultimate Frisbee field. But I don't know whether such goodies keep people committed. How does your approach foster your unique culture?

DR. SHILLMAN: Small perks show you care. Anybody can put a bonus plan in place. We do crazy things out of the blue. I drive up in an ice-cream truck and give everybody ice cream. My hat says "Cognex Good Humor Man." I come and ring the bell every summer on a surprise date in July. It shows that management thinks about the people and loves them.

WSJ: Wouldn't most people prefer $100 bills over ice cream?

DR. SHILLMAN: They wouldn't remember that! Where did I get the idea to send everybody a "Cogfee" cake? When we built this addition, the contractor sent me a wonderful cake from Boston Coffee Cake Co. I took that home. On each North American staffer's birthday and Thanksgiving, we send a Cogfee cake to their homes. I get more thank-you notes [and] emails from that than from stock options or bonuses.

WSJ: Tell me about your offbeat cultural practices.

DR. SHILLMAN: We don't just have a culture, we have a cult. We have our own salute. [Imitating Curly from the Three Stooges, Mr. Shillman stands up and holds his upright thumb and palm parallel to the front of his nose.]

When every company meeting ends, we all stand up and say, "To preserve and enhance vision." We are speaking about the vision of a highly successful company that treats all of its stakeholders with ethics and respect.

WSJ: During the 2001 downturn, you laid off people for the first time since going public. You dropped your family summer outing and scaled back year-end and Halloween celebrations. Why?

DR. SHILLMAN: It was the wrong thing to be celebrating, to spend money in a generous fashion when people were losing their jobs. We said we were cutting back because of this downturn.

WSJ: Were people unhappy about the reduced perks?

DR. SHILLMAN: No. They understood. They appreciated it. They would have been upset if we had had the canceled parties.

WSJ: Why didn't you also drop free trips for long-term employees to places like the Great Wall of China?

DR. SHILLMAN: These are perseverance awards. One of our 10 values is perseverance, the ability and willingness to keep working on a difficult issue for an extended period. Most companies and people who are successful have that trait.

After three years of service, you get a very nice-looking watch engraved on the back with the date you started. At five years, you get a gold pin and extra weekend vacation someplace. The 15-year perseverance award is a trip for you and your spouse to one of the wonders of the world, like the Great Wall of China. All you do is show up. You get $1,000 in spending money and an extra week vacation. After 20 years, it's the same thing with eight of your best friends plus your spouse and $1,500 in spending money.

WSJ: Not everybody wants to see the wonders of the world. Some would rather have the trip money.

DR. SHILLMAN: We have had that request. We wouldn't do that. We want them to have a memorable experience. Money is not that.

WSJ: If memorable rewards like this don't strengthen staff loyalty, why offer them?

DR. SHILLMAN: I like to do nice things and reward nice people. Not that everybody here is nice. But that's what we shoot for.

WSJ: What could you possibly do for 25 years' service? Give that employee one of your cars?

DR. SHILLMAN: I don't have enough cars to give away. Besides, not everybody wants a car.

For 25 years' service, we set up a charitable-gift account and make the employee the trustee. We put $25,000 in, and they can contribute it to any IRS-approved charity anytime in any amount. I want them to feel the joy of giving.

I enjoyed the experience of philanthropy. I got so much positive feedback from people saying, "What a fabulous thing." How many people get to be a philanthropist? Most people never give away $25,000 in a lifetime. I care more about morale below the top.

Bonus for All

WSJ: But after you trimmed top executives' pay in 2001, Cognex instituted a quarterly bonus -- which seems unjustified since no one at any level was going to get an annual bonus in 2002.

DR. SHILLMAN: I don't believe in quarterly bonuses. But there had been layoffs, people went without raises and we had a shutdown for a few weeks. People had to use up all their sick and vacation days to be paid. The board felt a quarterly payout would be appropriate based on quarterly goals. Except for that year, it has always been an annual goal.

WSJ: Who can get a bonus?

DR. SHILLMAN: Bonuses are offered to every full- and part-time employee.

WSJ: Are executive perks a good idea?

DR. SHILLMAN: When [President] Jim Hoffmaster joined the company five years ago, he said, "What kind of company car can I buy?" I said, "The company's U.S. policy is that you can buy whatever car you want out of your own money." And that's my policy on perks.

WSJ: So senior Cognex executives don't enjoy perks like country-club memberships, business-club dues, an executive dining room or corporate jet?

DR. SHILLMAN: None. I have a bigger house, more cars, more money. Anybody can have that, too. You just have to earn it. I don't want the kind of executives who want perks.

WSJ: Have you lost anyone because of that attitude?

DR. SHILLMAN: I would be happy to lose those people.