Designing Your Key Employee Golden Handcuffs

Dyanne Ross-Hanson started Exit Planning Strategies in 2005 when she realized the business owners that she worked with didn’t give much thought to how they were actually going to get out of their businesses. She saw a need to educate these owners and develop intentional plans for ownership transition.

If you listen, you will learn:

• Why rewarding and retaining key employees is so important
• Four design variables of an incentive program for key personnel
• Difference between cash based and stock based incentive plans
• Different ways you can structure cash based incentive plans
• Ways to transition ownership financially to family members
• Tax implications for different incentive plans

Key Employee Retention

“The reality is that as an owner prepares for that inevitable transition, they recognize the importance of building as much value in the company as they can,” says Dyanne.

There are many value drivers to look at when exit planning. Nothing is more important than recruiting, establishing, and retaining your “key bench.” This should be top priority well before talking about the sale or transition of your business. If you don’t have an employee retention or incentive program in place, you need to look into it ASAP!

Key employees will help grow the company before the sale and make the actual deal more valuable because of their extensive knowledge and skill sets in the business. A solid employee retention program should be in place when these people are recruited and hired. You can assume that key performers will ask for it as a part of their compensation plans.

Employee Incentive Plans

If an employee retention or incentive plan is structured correctly, the plan will pay for itself. It should be a win-win for the business owner as well as the employee.

Dyanne explains, “These key employee incentive plans aren’t an additional line item on your balance sheet or on your income statement. If properly designed, they are being completely funded by increased profit.”

Not only should the program fund itself, when you go to sell your company, you should get a better multiple as well with the promise of these key people as continued employees.     

Cash or Stock Based Plans

You can structure your employee incentive plan to be cash based or stock based. Cash based plans are much more common and can include a cash payout, phantom stock option, deferred stock, stock appreciation, etc.

Phantom stock is the most popular cash based plan. It gives a sense of ownership mentality to the employee without making them an actual minority owner. They don’t have equity in the business but have the characteristics of it. There is an annual award amount put in place and this would be broken up into units that are put into an account and fluctuate based on the actual value of the company stock. The best part about this option for the business owner is that if the employee leaves, they get a payment and don’t have to deal with minority ownership issues with them.

Dyanne cautions if choosing a stock based incentive option that you should never give equity away in a compensation package before the employee has proven their value. You want to make sure this person will actually be an asset to your company as well as a key employee for any potential future owners.

Key Podcast Takeaways

The biggest mistake that some business owners make is they find an amazing key executive that they think may fit well or positively change their company culture and can take them to the promised land financially and decide to give them huge immediate cash bonuses or equity to lock in the relationship.

The vision of having this person to help possibly relieve some of their own workload blinds them from future consequences of their decision. Giving away equity to someone that has not proven themselves or not having a strategic plan that ties the incentives to company growth or performance is setting the situation up for failure. The key is to have a plan backed up with legal documentation that will have the key employee working hard now, growing the value of the business, and incentivize them to stick around even after the company is sold.

Find a way to align your business strategy, financial goals, and personal preferences and design an incentive plan to motivate your key employees in the short term, long term, and through any ownership transition.

Contact Information and Bio for Diane:

Email: drh@exitplanstrategies.com
LinkedIn: https://www.linkedin.com/in/dyannerosshanson/
Company Website: www.exitplanstrategies.com
Main Office Phone: 651-426-0848

Dyanne Ross-Hanson is President and Founder of Exit Planning Strategies, LLC. With 30+ years of experience, her firm specializes in helping business owners plan for what is likely the single most important financial event of their lives, ownership transition. Her mission is to act as an unbiased advocate on behalf of her clients and their families who require highly specialized, objective and comprehensive advisory services.

As a component of that planning process, key employees play a critical ingredient to any successful transition. Retaining, rewarding and recruiting key talent is often a top priority for any business and its owner(s). When properly designed and communicated, these plans prove to be a significant value driver via increase in profitability. And by doing so, become “self-funded” in many respects.

Dyanne shares her expertise and knowledge with numerous Professional Associations, Continuing Education Programs and published articles.  She is also a Vistage Speaker and has been featured on “The Exit Coach Radio Show” discussing the subject of Key Employee Incentive/Retention plans. Her most recent article on the subject matter can be found on the Construction Management Association online magazine, “Building Profits”.

Dyanne is a strong supporter of her industry and community having served as President of the Twin Cities Society of Financial Service Professionals, President of the Minneapolis Estate Planning Council, Secretary of the Twin Cities Exit Planning Institute, Co-Chair of the Minnesota Business Ethics Awards, Member of the Upper Midwest Family Business Advisory Group and Foundation Board of Directors of St. Andrew’s Church.