Understanding Intrinsic vs. Transaction Value in Business Valuation

Today’s episode is all about designing the most effective executive compensation structures while avoiding the most common mistakes. Craig shares how to come up with the perfect formula (designed off the financials and not some insurance product) that rewards employees in the short- and long-term, increases the value of your company, and pays for itself.

What You Will Learn In Today's Podcast Interview

• What phantom stock or stock appreciation rights (SAR) plans are and how to make them work for you.
• How to transform employees into growth partners.
• Why it’s important to discover your employees’ ideal compensation structure.
• The benefits of using long-term planning when looking at appreciation awards and why normalized EBITDA is often the best evaluation metric.
• How to transaction-proof (plan for both a transaction OR keeping the business) your compensation plans.
• The strength of an abundance mindset over a scarcity mindset.
• How to account for phantom stock liability and protect all parties, as well as learn the difference between funded and naked liability.
• The value of communication and transparency during planning to draw in the most qualified people who will help you smash through your ceiling.
• How to build and sustain a high-performing culture while getting your executives to pay for themselves.
• The most common valuation metric for compensation plans is EBITDA x multiple - debt + cash.

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Podcast Summary

Today’s episode is all about designing the most effective executive compensation structures and how you, as a business owner, can come up with the perfect formula that rewards employees in both the short- and long-term, increases the value of your company, and pays for itself.

Craig Rutledge, alongside his company VisionLink, has been designing executive compensation plans for over two decades. He details multiple ways you can reward top performers with (phantom) equity that vests over time, based on the growth in the value of the business.

Not only will Craig’s examples highlight the incredible benefits to your business of awarding short- and long-term achievement, he’ll also talk about the potential pitfalls equity-based compensation plans open you up to, as well as how to protect yourself from them. 

The right exec comp packages will not:

• Award equity without increasing company value
• Vest too fast
• Require an unnecessary amount of insurance
• Use the wrong financial data and measurement metrics, resulting in conflict and tension
• Have glaring omissions in their contingency plans (like what happens if the employee leaves or the business transitions)

An executive compensation plan done right essentially gets the employee you’re rewarding to pay for their own achievements and bonuses through value creation. It’s the ultimate win-win when all the cards are on the table and you’ve established trust. 

You can’t grow your company without the right people in place, so draw them to you with a phantom stock plan. You’ll soon find the easiest check to write is the one you give to your employees when they hit their bonuses. Plus, you can be incredibly flexible on when and how you pay out compensation structures so you don’t detract from your market value or otherwise jeopardize your ability to continue operating your business.

As Craig says, “Link the vision of your organization with the vision your people have for professional growth and reward.” If you take the time to have a frank discussion about what your employees can achieve, how they’ll be compensated for it, and what factors measure into their evaluation metrics, you can draw the best of the best to work with you and help you achieve goals currently beyond your grasp.

About the Guest:

Craig has been working with businesses and their executives in a compensation consulting role for over 25 years.  He currently serves as the lead consultant on many of VisionLink’s projects, specializing in long-term incentive plans and executive benefit programs.  In addition, Craig oversees our funding analysis and implementation for the long-term incentive plans VisionLink designs for clients.

Quotes:

13:03 - “How does this business create value? And then ultimately you can develop plans that share that value.” - Craig Rutledge

26:20 - “Our philosophy is that there is one plan with two performance periods.” - Craig Rutledge

28:40 - “The annual incentive plan speaks to driving annual profitability, revenue growth forth and it speaks to those things.” - Craig Rutledge

30:17 - “The perfect formula for these plans are EBITDA times a multiple, minus debt, plus cash. You know? So pretty common valuation metric for the plan.” - Craig Rutledge

46:00 - “In theory if we’ve got our formula value, conservative to the market value, and we based it on EBITDA, I should have the value to pay that person.” - Craig Rutledge

Links and Resources:

VL Advisors Website

Phantom Stock Online Website

Mastering Your Cash Flow Digital Course

ARKONA Boot Camp

Reach out to me if you have questions about the boot camp!

You can also reach out to me via email at rtansom@arkona.io, on my LinkedIn.