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Groupon puts Employees—and Investors—on Notice as IPO Nears

October 28, 2011

One of Andrew Mason's tasks on Groupon Inc.'s continuing road show toward its initial public offering is to demonstrate to investors that the 3-year-old startup is growing up and is capable of acting like a public company.

Firing underperformers is one way. Mason, the founder of the Chicago-based website offering deep discounts on local businesses, told investors Oct. 26 during a presentation in Boston that the company is replacing the weakest 10 percent of its sales force.

It's not laying off workers or reducing the size of the staff, a spokeswoman stressed in a statement Oct. 27. But Groupon has been more aggressive in doing performance reviews, starting earlier this year. It raised quotas and began holding employees more accountable to those targets and forcing out those who couldn't hit them.

"Andrew Mason is talking about a performance-review process for managing out and replacing low performers that is common among the most efficient sales organizations," a spokeswoman says.

The company also changed its commission structure a few months ago, cutting it by two-thirds, insiders say. Sales staff used to be paid 2.5 percent of gross revenue from the daily deals they lined up, in addition to their annual base salary of $32,500.

That commission was reduced to 1.5 percent earlier this year, causing still more sales staff to leave. While the move could trim Groupon's overhead costs, it will make it harder to motivate and retain the staff that Mason says are a competitive advantage.

A spokesman declined to comment on the specifics.

It's all part of the growing pains Groupon experienced as it exploded from about 200 staffers in early 2010 to more than 10,000 today. As a startup, it mostly hired new college grads from around the Midwest to cold-call merchants, and it added staff at a blistering pace.

Like many tech startups, the early days were characterized by a loose, free-wheeling culture—and lots of inexperience. That started to change in recent months as Mason surrounded himself with managers from big companies, such as Cisco Systems Inc., Amazon.com Inc., Google Inc. and Salesforce.com Inc., in preparation for the IPO. Margo Georgiadis, a former McKinsey & Co. consultant, ramped up the transition in her five months as chief operating officer before leaving in late September to return to Google.

It's a common problem for fast-growing startups as they make the leap to big companies, putting more formal systems in place for hiring, firing and promotions, as well as upgrading management talent.

In his road-show presentation, Mason has stressed that Groupon's sales force, much of which works the phones from Chicago, is the company's key line of defense against thousands of copycat deal-of-the-day sites.

"We have 10,000 people who wake up in the morning and go to bed at night thinking about nothing other than how to get great deals in front of our customers," Mason said in a preview of the roadshow presentation circulated last week online. "This is not a hobby; this is not a side project. The way our deals are made is our secret sauce."

But with more competitors than ever chasing every restaurant and nail salon, that job is getting harder. Groupon also is under pressure to get its overhead costs down as it tries to turn a profit.

Investors have worried since Groupon filed a prospectus in June that its business model is too heavy on fixed costs, such as sales. Groupon's sales per employee were $41,290 in the third quarter, compared with $54,437 for AOL and $322,730 for Amazon.

Filed by John Pletz of Crain's Chicago Business, a sister publication of Workforce Management. To comment, email editors@workforce.com.

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