Motivating the Millionaires

The business conglomerate was far in the future when James Buchanan Brady, otherwise known as Diamond Jim, founded U.S. Industries, Inc., in 1899. Today USI is a conglomerate with a difference that he would have appreciated. Since 1965, its sales have doubled, to $1.1 billion last year, and net profits have nearly tripled, to $63 million, a healthy 18% on invested capital. In the first quarter of 1970, when many other conglomerates were going through the wringer, USI raised its sales by 12% and its earnings by 16% over the same period of 1969.

USI is different in other ways as well. It never raids, exerts financial but not operating control over the companies that come into its fold, and has no desire to acquire large corporations. It owns 110 medium-sized companies in seven fields as disparate as health clubs, plastics, mobile homes, hosiery, industrial equipment, construction and real estate. Since no single member company provides more than 4% of USI's sales or pretax profits, it can weather a downturn better than most competitors.

Critical Peers. No less important is USI's management structure. Chief Executive I. (for Ignatius) John Billera calls it "a confederation of states." Each of USI's companies is run by its own president. He is almost always the man who built the company in the first place, then decided to go public to get money for expansion and the tax advantages of capital gains. USI offers him the same benefits in a tax-free exchange of stock, without the risks of going it alone. The managers thus own 40% of USI's outstanding stock, and many are millionaires. The performance of every president is matched against that of his peers--the presidents of other companies--who meet quarterly for mutual criticism. Each group reports to a Manhattan headquarters staff that numbers only 100, including secretaries.

USI learned the lesson of diversification the hard way. It was originally founded by Diamond Jim solely to manufacture freight cars, then went into presses and pressed steel--cyclical areas vulnerable to economic ups and downs. By the 1950s, USI was not doing well. Billera joined the company as treasurer in 1953 at the insistence of USI's bankers, and threatened to resign several times over what he considered to be the company's wrong-headed diversification policy. In 1965, Billera took over as president, and set out to put his own ideas into effect. He had already had a successfully diverse career. The son of an Italian immigrant tailor, Billera grew up on New York's Lower East Side, worked as a railway-station porter and semipro basketball and baseball player. He also attended night classes at City College of New York, earning a degree in business administration. Today his salary is $122,000 a year. "I stopped working for money years ago," he says. "I'd earned all I'll ever need. Now I work for fun."

In his first year as chief executive, USI survived a takeover attack by Sunshine Mining. The episode spurred Billera to set an ambitious goal: to double profits in three years. He began buying companies and within two years had acquired 18. "We want dynamic little companies," he says. "But more important, we want young companies." By young, he means at the same stage of growth as a man at the age of 30. "We don't want infants because we don't know where they're going. We don't want adolescents because they've really shown nothing in terms of durability. By the age of 30, you know whether a man is really interested in building, but he's still got most of his life ahead."

Billera looks for prosperous companies with annual sales of $10 million to $20 million and post-tax profits of $1,000,000 or more. Most of all, he insists that their management stay on for at least five years. "It's a bit like a ride in an airplane," he says. "If a guy offers you a ride and won't go up with you, you feel a bit nervous about climbing aboard. Moreover, if the guy running the company has built it up, it's a good bet he is its main strength, and to get rid of him would be a big mistake." USI offers a generous price but only puts part of the payment down. The rest is paid in five years--if the new member is growing by 15% annually and returning a gross profit of 20% on assets. If the acquired company does not meet that goal, USI is under no obligation to pay the rest of the purchase price. That is a powerful incentive for management to perform.

The Corn Is High. Once USI gains control of a company, it ignores the acquisition. Explains Billera: "The guy is expecting a wave of shock troops from the corporate headquarters to tell him how to run things. Then he begins to wonder why nothing's really changed." After about three months, says Billera, "he asks, 'Don't you love us now that you've got us?' By then he is over the feeling that he is a nobody again. After you've shown him he is really running the company, he becomes eager to grow once again."

Billera motivates his millionaires by what he admits is "sheer corn," including quarterly competitions for E-for-Excellence flags, and an annual bronze plaque for the member company that does best. Behind such techniques is a Billera blueprint for building USI into a 500-company empire within ten years, though he has slowed acquisitions this spring. Billera also intends to remain flexible in his own job. Last month he promoted Charles E. Selecman from executive vice president to president, in charge of day-to-day operations. Selecman is well steeped in the Billera philosophy. "We want to be a lot bigger," he says, "and a lot richer."

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