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Trex CEO on lessons from a turnaround

In 2008, Ron Kaplan became CEO of Trex (TREX), a major manufacturer of wood-alternative decking and railing. He had his work cut out for him. At the time, he was tasked with turning around a company that was weathering a historical housing downturn -- and that was operating at a loss.

Since then, Kaplan has directed Trex to an increase of shareholder value of more than $670 million (with the stock price rising from $8 to $48). He has also managed to increase productivity by 30 percent and reduced inventory from $80 million to $18 million.

Housing's fitful rebound

Recently, CBS MoneyWatch talked to Kaplan about how he managed to create these dramatic changes in a relatively short spam of time.

CBS MoneyWatch: How did you facilitate this dramatic transition?

Ron Kaplan: The turnaround had three components. The first was reduction of overhead --straightforward, not particularly pleasant but necessary. We went from 11 VPs to five, and nine board members to seven. Another 35 executives ultimately left the company.

The second component was a complete overhaul of compensation systems. For example, the workers were getting paid on cost of conversion of raw materials, and management was being paid on personal goals that couldn't be measured. We decided that management was going to get paid on earnings per share and employees on per pound of [finished product].

The next was overall methods. Everyone was focused on the cost of conversion -- raw material into final products. The workers didn't have the basic tools to help them turn the 14 types of raw material into finished products. We developed a model so that no matter what type of materials we delivered to the plant, the men would automatically know how to adjust the variables on the product line.

MW: What is one tool you've found helpful to increase accountability?

RK: If you walk through our plant, you'll see several stations with a circular graph divided into 24-hour segments, a pie with 24 slices. Each slice becomes green or red at the end of the shift. Green slices pay between 15 and 20 percent of each person's wage that is added to their bi-weekly paycheck. An incentive needs to be simple, meaningful and have a quick payout. We have a highly motivated workforce now.

MW: If you could go back to 2008 and do something differently, what would it be?

RK: When I came on board, there was a great deal of concern about tech that we didn't have such as PVC, poly vinyl chloride. Everyone was pretty hysterical about our lack of this technology. We spent extraordinary time and effort pursuing relationship with subcontractors to make PVC on our behalf. We had the ability to compete internally with PVC and leapfrog it, which ultimately we did.

Had I taken the time to sit down with our research and development folks initially, we wouldn't have wasted this time and money.

MW: You received an MBA from the Wharton School. Do you recommend MBAs?

RK: I do if you can do it at a top 10 or 12 school. I find experience in general is more important than education. Five years after you get out of school, nobody cares where you went, [but] it can give you a foot in the door in your 20s.

MW: Do you have any advice for new executive-level employees?

RK: The day you show up for work, you better have a plan or at least a rough idea of what you're going to do and why. You have about 90 days to establish your credibility with your colleagues and your board. If it takes you longer, you lose momentum and their confidence.

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