Get More Bang For The Buck:
Use Cash Bonuses And Golden Handcuffs To Increase Business Value
Too often, owners only discover that the compensation plans they’ve put in place for key employees are sadly inadequate when those key employees leave their companies for greener pastures. The departure of one or more of these key employees not only complicates the owner’s daily business life, but it can slam shut the door on his or her exit plans. Without experienced management in place, owners may find it very difficult (if not impossible) to leave their businesses in style.
Key employees are aptly named not only because they are key to the efficient and profitable operation of a business, but because they are also key to an owner’s successful exit. No one will want or be able to run the business without the owner, unless key management remains after the owner’s departure.
How do owners keep key employees on board?
Rather than tie them to the mast, many owners install Employee Incentive Plans that motivate key people to stay. Incentive planning should motivate key employees to perform at a higher or different level, but most importantly, should help achieve one or more of an owner’s exit goals.
Infinite Variety, but Four Characteristics
The four characteristics common to successful bonus plans are:
- They are specific, not arbitrary, and are in writing.
- They use objective performance standards.
- They award substantial bonuses.
- They handcuff the key employee to the business.
Clear communication between employer and employee is best accomplished in writing. Owners, usually with advisors present to answer questions, inform employees (face-to-face) about the plan and explain how it works.
Objective Performance Standards
An Incentive Plan’s bonus should be tied to carefully considered, objective performance standards. Standards might be net revenues or taxable income above a certain threshold.
Whatever standards of performance the owner chooses it should be ones that the employee’s activities can influence and that, when attained, increase the value of the company. For owners, without transferable business value there is no financial security. Without financial security, there is no successful exit. The principal method of increasing value and cash flow is via management performance. Well-designed incentive plans that motivate (through rewards) management to increase cash flow and business value allow owners to exit successfully.
Third, the size of the employees’ bonus must be substantial enough to motivate them to reach their performance standards. Typical bonuses are 20 percent or more of annual compensation.
Handcuffs Employee to Business
In handcuffing the key employees to the business until and after the owner exits the business, the owner not only reaps their value-building contributions to the business, but also assures any buyer that the employees who made the company successful for one owner will likely stay and do so for new ownership. Since many buyers subject sale proceeds to earn-outs or require the former owner to carry a promissory note, it is in an owner’s best interest to make sure that the business’s cash flow after the owner exits is a healthy as possible. Again, retaining the key employees is the best guarantee that the cash flow is uninterrupted after the owner leaves.