There is a clear difference between good employees and key employees. Good employees, as good as they may be, are replaceable.
Key employees, on the other hand, are much more difficult to replace. Good employees are satisfied with just a paycheck, putting in a good day’s work and going home.
Key employees are different – they tend to think and act more like the owner. Key employees are not at your company to merely receive a paycheck and put in a good day’s work, they are driven by more – better quality of customer service, better products or services, creative ways to reach more customers and much more.
In short, key employees want to see that business improves and succeeds. These people are often difficult to find and can be even more difficult to keep.
Successful owners understand that they cannot – nor should they – do it all, especially if they are to one day sell to a third party or transfer to an insider. They must surround themselves with key people who are motivated to see the business grow and committed to the business long term.
To accomplish this, business owners should consider how they will design an incentive plan that keeps their company competitive in the marketplace through attracting, motivating, retaining and rewarding top talent.
Here are five reasons why it is imperative your company creates and implements the right plan:
If properly designed, key employee incentive plans will focus your best people on the right value drivers in your business that will, in turn, increase business value. Some examples of performance-based benchmarks could be gross profit, cash flow or net income improvement, increased diversification of customer base or expansion of market footprint.
Key employee retention
Key employee incentive plans should be designed so that key employees will be able to immediately partake in some of the value they helped create (cash year-end award) yet incorporate a retention component through an intentional vesting schedule (deferred award) that retains the employee long-term.
An example could be a 50/50 split of the award where 50 percent is awarded in a cash bonus while the other 50 percent is deferred into a vehicle with a three-year rolling vesting schedule.
This way, if key employees were to leave the company, they would forfeit and leave three years of future bonus on the table.
To someday sell to a third party, you must consider how you are retaining the right people to stay on and run the business without you.
To maximize business value, you must create and implement a plan that passes responsibility and leadership on to competent management that will be motivated to see your business grow and stay on with the business before, during and after the sale.
Transferable value is difficult to have without an incentive plan that rewards key employees for the value they helped create and handcuffs them to the business long term.
Having a plan that will retain and reward key employees is especially helpful in family transitions from parents to children.
In many cases, even though the son or daughter may be grown and fully capable of running the company, management may be loyal to the parent and not necessarily to the son or daughter.
To ensure a smoother transition that keeps the business within the family and preserves business legacy, an incentive plan that intentionally vests and rewards management several years after transfer is complete will provide the parent and the son or daughter peace of mind that the business’s key employees will stay on.
When most business owners think about incentive plans that motivate and retain their key employees, they rarely think about how it relates to their business continuity plan. The truth is, if there is no plan that retains your best people long- term, there will be little reason for them to stay with the business should you pass away.
The last thing you want is to assume your best people will stay on with the business because they feel bad for your family. If they leave, who will have the competency and drive to run the business? Most likely, the business will decline in value or, even worse, fall apart.
How will this scenario impact your estate plan? In some cases, the estate may owe money due to negative liquidation value.
Having a properly designed plan that handcuffs your key people to the business long-term can help insulate against the loss of the owner and provides your family/trustee time to figure out what to do with the business.
Key employee reward and retention plans do not always have to be performance based.
Employers can elect to award a bonus to employees through a time-based program (i.e. stay bonus) that intentionally vests in the future.
The purpose of these plans is retention only, and there are several variations of stay bonus programs.
Brenton Saba is the director of business services at Apollon, a Charleston-based wealth management and business consulting firm with branch offices in Charlotte, North Carolina; Augusta, Georgia; and Aiken, South Carolina. Brent can be reached at firstname.lastname@example.org or 843-277-3495.
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