3G Capital of is a private equity firm in Brazil and often partners with Warren Buffett in acquiring companies. Jorge Paulo Lemann and his two partners have created an interesting methodology to successfully run their portfolio businesses. Their practice relies on two basic principles, when linked together can produce a formidable advantage:
- Hire and incentivise people well: they only hire "PSDs" -- poor, smart and determined. Their compensation structure is focused on a variable component directly linked to performance. Promotion in the organization is going from a bonus to a commission to a partnership stake, the variable component gaining more importance at each level.
- Return on equity: they break down the ROE into five components based on the DuPont formula, and then try to maximise each variable. The five variables, namely, the operating margin, tax burden, interest cost burden, asset turns and the leverage ratio. For most entrepreneurs, a single minded focus to improve operating margins by implementing a zero-based budgeting technique and sweating assets would improve results drastically.
"Get great people, give them big things to do and sustain a meritocratic ownership culture." According to them, it's that simple.