Why smaller companies are investing big in chief operating officers

How much should a lower middle-market company be willing to pay for a chief operating officer?

For some, the answer is more than $400,000 in annual cash compensation, plus equity.

That’s a significant investment for a smaller business, especially one with a leadership team that’s already managing day-to-day operations effectively.

So, why are companies willing to pay this much? The answer comes down to what an experienced chief operating officer can accomplish and how they can prepare a business for long-term growth.

What does a chief operating officer actually do?

A chief operating officer (COO) is generally responsible for turning a company’s strategic goals into operational results.

They oversee the people, processes and systems that keep the business running. They also find ways to improve efficiency, increase profitability and support growth.

At a large company, a COO may manage several layers of leadership across multiple business units.

At a smaller company, the role is more hands-on. The COO may be directly responsible for building the infrastructure needed to support the company’s next stage of growth.

Hiring for the company you want to become

One reason smaller companies are willing to pay top dollar for an experienced COO is simple: They’re hiring for the company they want to become, not just the one they are today.

Consider a business generating $30 million in annual revenue with plans to double or triple in size. Its current leadership team may be fully capable of managing today’s operations. However, that doesn’t mean they’re prepared for the challenges that come with significant growth.

In many smaller companies, the executives responsible for driving revenue are also managing day-to-day operations. As the business grows, these operational responsibilities demand more of their time, pulling their attention away from sales, customer relationships and other activities that generate revenue.

More employees, additional locations and more complex business processes only create new demands. Without the right leadership, these challenges can quickly slow a company’s progress.

Hiring an experienced COO early allows the business to prepare before these challenges become serious problems.

That might mean bringing in someone who has already scaled a similarly sized company, managed a much larger organization or led a major operational transformation.

With this experience in place, the company can begin building the systems and processes it will need to reach its growth targets while allowing its commercial leaders to focus on generating revenue.

Growth isn’t always the only motivation, either.

Some companies hire a COO to prepare for an eventual sale. In these cases, the COO is responsible for improving operations, strengthening profitability and positioning the business for a successful transaction. Their ability to build value can have a direct impact on the eventual payout for owners and other equity holders.

In other cases, a COO may be hired as a potential successor to an owner, CEO or president who plans to step away from the business. Bringing this leader on board early creates time to learn the organization, build relationships and prepare for a smooth leadership transition.

While the circumstances may differ, the goal is the same: Bring in a leader whose experience can help the business reach its next major milestone.

Where an experienced COO creates the most value

An experienced COO can have an especially strong impact at a smaller company.

These businesses often have an advantage over larger competitors: They can move quickly. With fewer layers of management, decisions can be made and implemented without lengthy approval processes.

However, smaller companies also tend to have tighter margins and fewer resources. That makes improving efficiency and avoiding costly mistakes especially important.

An experienced COO can help by leading major projects that might otherwise overwhelm the existing leadership team.

For example, a business expanding into new geographic markets may need someone who knows how to establish operations in unfamiliar territories without disrupting existing locations.

Another company may need to replace outdated systems or processes that worked well when the business was smaller but now limit its ability to grow.

In both cases, the COO brings experience that the company’s existing leadership team may not have, but the goal is the same: Build a business that can operate efficiently and profitably at a much larger scale.

Looking beyond the salary

Paying a COO $400,000 in annual cash compensation is a major expense for a business generating under $100 million in revenue. But evaluating this investment based on salary alone misses the bigger picture.

The right COO can help a company address operational weaknesses, free up its commercial leaders to focus on revenue growth and prepare for major milestones like a sale or leadership transition.

For smaller companies with ambitious plans, a highly compensated COO can be the investment they need to reach the next stage of growth.