Incentive Plans Keep Key Employees and Provide Opportunity for Owners to Exit
Owners rarely realize their compensation plans for key employees are inadequate until those employees decide to leave. The departure of one or more of these key employees not only complicates daily business but it can also have a dire effect on exit plans, rendering it sometimes nearly impossible for the owner to leave.
Key employees are aptly named not only because they are key to the efficient and profitable operation of your business; they are also key to your to departure. No one will want or be able to run your business without you, unless key management is in place.
Keeping Key Employees on Board
Many owners offer Incentive Plans to motivate key employees to stay, providing both business continuity and an opportunity for owners to achieve the goal of successfully exiting the business at the appropriate time. We have identified four characteristics common to successful bonus plans. They should be:
- Specific, clearly communicated, not arbitrary, and in writing
- Tied to performance standards
- Economically motivating, with substantial bonuses
- Designed to keep employees tied to your business
Let’s look at each briefly:
Clear Communication. Successful plans are communicated clearly by the employer and understood thoroughly by the employee. They are in writing and are based on determinable standards. Employees know the plan exists and how it works. Plans are explained in face-to-face meetings, often with the owner’s advisors present to answer any questions.
Performance Standards. AnIncentive Plan Bonus should be tied to performance standards. Owners often work closely with advisors to determine which performance standards should be used. The standards of performance the owner chooses must be ones that the employee’s activities can influence and that, when attained, increase the value of the company.
Substantial Bonuses. The size of the bonus must be substantial enough to motivate employees to reach their performance standards. As a rule of thumb, a plan should create a potential bonus of at least 30% of a key employee’s compensation. Anything less may not be sufficiently attractive to motivate employees to modify their behavior to make the company more valuable.
Tied to Business. The goal is to keep the employee with the company the day after, and even years after, the bonus is awarded. Owners typically use several techniques to create these binding agreements. Often referred to as Golden Handcuffs, these can include employee stock options that will not vest for several years, but are more often contractual obligations to give back lucrative bonuses or other compensation if the employee leaves for another company.
If you’re interested in learning more about this important topic, we have other incentive plan ideas to help you design a successful employee bonus plan that contributes directly to the success of your business exit.