Align Key Employee Incentives With Your Goals For Building Value & Exit

Emily has been in business for 10 years and has plateaued in both revenue and profitability. Her exit planning advisor Mary has learned that she wants to exit in 5 years and how much $$$$ she will need net of taxes in order to exit successfully. An estimate of business value has revealed that her business is worth about 50% of what it will need to be worth for Emily to head off to Hawaii in 5 years in the way she wants to.

There are two employees that Emily would consider key (play a strategic role; unique talents and skills; to the success of the business; would experience harm to the business if they leave) to the success of the business. Currently the two key employees realize the same employee benefits (health insurance, 401k with match, year-end cash bonus) that all other employees are eligible for, yet they have higher salaries commensurate with their roles and responsibilities. There is NOT an incentive plan in place that would be specific in further motivating them (in their strategic roles) to grow either revenue or profitability.

One of Mary’s recommendations for maximizing the sellable value of the business that she emphasizes, is that Emily installs an incentive plan that aligns with her goals of increasing the sale price over the next five years. Emily’s response initially was, “Wouldn’t that be taking more $$ out my own pocket…why would I do that???” Mary describes the following basic elements and structure that serves in alleviating Emily’s astute question:

• Mary explains that the plan would need the following elements to be impactful:

  • The plan is in writing and specific.

  • The plan is performance-based.

  • The bonus is substantial.

  • The bonus serves in “handcuffing” the employee to the business.

• Emily sets a threshold for either revenue or profitability. For example, $500K in profitability.

• Emily creates a bonus pool of 30% of all profitability that exceeds the $500K threshold:

  • She informs the two key employees in writing how they would be rewarded for increasing the profitability of the business. The pool would be split 50/50 between the two key employees.

  • In the following year, an additional $300K (over the $500K threshold) is realized and a pool of $90K is established ($300K X 30% = $90K). Each key employee receives $45K in incentive compensation split between immediate cash or stock payments and deferred compensation.

So, Emily was quick to see how this plan would actually put more $$$$ in her pocket and her exit goals could be attained successfully as the value of the business would increase as profitability increased. And, she understood how it didn’t “take $$ out of her pocket”.

With Emily’s enthusiasm about implementing an incentive plan, Mary made sure they now had an expert on the exit planning team with extensive experience and expertise in stock and cash bonus plans and how they need to be designed and maintained to also meet all IRS/ERISA regulations.

If you want to increase the sellable value of your business, aligning the performance metrics of your key employees with your goals and implementing a well-designed incentive plan can be most impactful. Contact us if you’d like to discuss further: email@ennislp.com | 301-859-0860.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Low Employee Engagement or High Turnover and Building Business Value

There may not be a greater management challenge in building the value of your business than engaging and retaining your employees. 

It is not unusual to hear business owners, with frustration, express as one of their greatest ongoing concerns the engagement and retention of their employees.  And it’s costly if you don’t do it right. A few years ago, The Society for Human Resource Management (SHRM) reported that on average it costs a company 6-9 months of an employee’s salary to replace the employee.  For example, for an employee earning $60,000 per year, the costs of recruiting, training, etc. would be in the range of $30,000 - $45,000.  These figures are probably higher today.

Business owners typically understand from experience that low employee engagement and high turnover are financially expensive, but sometimes they’re not aware of how costly these challenges can be to the business culture they have worked so hard to establish (which is also financially expensive).  We’ve all heard the Peter Drucker quote, “Culture eats strategy for breakfast”, implying that the culture of your company always determines success regardless of the impact of your business strategy.  So, culture is clearly very important for building and protecting business value, and a key driver of a strong culture is employee engagement and retention. 

Low employee engagement and high turnover are costly on all fronts.  What can a business owner do about it?

Our firm does not currently have a practice area or special expertise in employee engagement and retention, but we have observed some common practices among business owners who have a track record of success in it. 

• Clearly established vision, mission, and values that are continually communicated and modeled by leadership/management, which serves to facilitate a strong corporate culture.

• Clearly defined growth and succession plan that involves the retention of key employees.

• Clearly defined and communicated employee incentive (rewards, retention) plans that are aligned with corporate goals for growth.

•  Employee expectations are clearly defined and communicated.

•  Employees are held accountable and receive regular feedback on their performance.

• There is an employee selection and onboarding process in place that is well-defined, disciplined, and values-based.

For most small business owners, employees represent their greatest asset as well as their largest expense.  And hence, it is imperative that employee engagement and retention should be a high priority in managing toward a sellable business with maximum value.  It should be so valued by the business owner and management that it is seen as a significant aspect of the business culture by the employees. 

So, if you are in need of assistance in this area, it is well worth the investment of time and finances to get professional help as soon as possible.  The right advice can save you both money and time.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Key Employees and Building and Protecting Business Value

You may have people working in key roles who are instrumental in growing and building the value of your business. These key people can be identified as having the following characteristics:

• makes a substantial business contribution

• possesses critical information or knowledge or

• maintains and nourishes key contacts and relationships

In helping clients plan to build a business that’s sellable, and then eventually exit on their own terms and conditions, we emphasize that “key people are a key value driver “ in realizing success in both of those strategic goals. And, we find it helpful for owners to have two categories in mind when considering key employees:

1. Building business value

2. Protecting business value

Key people help owners build value and exit successfully as their roles serve in removing the owner(s) from the day-to-day management of the business, and by accomplishing objectives and key results for growing the business, that are aligned with the exit goals of the owner(s). An important planning focus for the owner(s) in building value, as it pertains to key employees, would include alignment of the employee’s performance goals with the exit goals of the owner(s), and a well-defined key employee incentive plan that provides impactful awards for goal attainment and retention.

Owners need to be aware, that there is also inherent risk related to key employees. Risks involving departure and competition, solicitation of customers and/or employees, and disclosure of confidential information. There is also the risk of losing a key employee due to unexpected death or disability. It can be costly to recruit, train, and compensate for a replacement in such a situation, as well as makeup for any loss in corporate earnings. Important planning areas in protecting business value, as it pertains to key employees, would include: Well-written and regularly reviewed employee documents (i.e., Employment Agreement; (listen to ExitReadiness® PODCAST Episode 43 w/attorney Marc Engel) and adequate life insurance coverage on the key employee (listen to ExitReadiness® PODCAST 54 w/Bill Betz of Betz Financial Advisory).

Check out our virtual exit planning resources and solutions at exitreadiness.com

Customers Want to Be Treated as Individuals

I recently participated in an ExitReadiness® Podcast episode hosted by Pat Ennis and Walter Deyhle and our topic was “When You Start Making a Big Decision, First Talk with The People Involved.”  The high-level summary of the conversation is when you must make a major decision regarding your products and services, talk first with the people who will be impacted by your decision.  Otherwise, if the decision goes against what the stakeholders consider to be in their best interest, the outcome will fail to achieve your objective.

 Climate Control

Consider this example.  If I have power over climate control, you can count on the thermostat set at 70 or 71 degrees.  In our home, this results in many discussions, as my wife prefers the temperature at 73 degrees and my daughter at 68 degrees year-round.  Fortunately, we’re able to move ahead with a shared willingness to communicate and make appropriate compromises. 

But what if this were my office environment? If I’m the one person permitted to adjust room temperature, I may lose some key or important employees if they don’t feel their needs are being seriously considered and accommodated as room temperatures are consistently not to their liking.  The same could happen if my business depends on customers entering my place of business and spending a fair amount of time inside, they might just give up on visiting the store. 

In that there is much competition in attracting both key employees and customers, both may end up leaving my business for greener pastures without even sharing with you the reason why. 

Proactive Problem Prevention

Be proactive in preventing this problem with “The Platinum Rule” investing the time to find out how your customers, employees, and all stakeholders want to be treated.  And then create a plan and execute it.  Being considerate about how you treat customers and employees will go a long way in making your business more valuable.

About Sam Klaidman

Sam has consulted with Fortune 500 companies like GE, Pfizer, Corning, and Honeywell as well as many small and midsize businesses in a broad range of industries. Many of his SMB clients are privately held and still controlled by members of the founding family.  Sam and his firm Middlesex Consulting specialize in helping service businesses grow.

Aligning Employee Incentive Plans with Owner Goals

Sarah wanted to exit in 5 years and had learned through planning and analysis led by her exit planner what “her number” was, as well as an objective estimate of the value for her business. She was pleasantly surprised to find that the financial gap for making her post-business dreams happen is not insurmountable. At the same time, she is aware that growing the value of the business (Sarah’s largest asset) will be necessary to close the existing gap.

With her newly designed comprehensive exit plan, and a decision to exit with a future sale to an unidentified strategic buyer, Sarah now has a crystal clear picture of what is needed to maximize and preserve the value of the business and attain her post-exit goals. Following are a few of the key value-driver action items identified during the analysis of Sarah’s situation:

• Strengthen Management Team

• Improve Financial Performance

• Establish and document a Growth Plan

• Increase Recurring Revenue

Now that Sarah knows how much she needs to grow the value of the business within her planned time frame for an exit, and what needs to happen to facilitate the required growth, she needs to take action in aligning employee incentive compensation with her strategic goals. For example, there is a need to increase EBITDA so she will implement an added incentive for the Chief Operating Officer that is tied to profitability. Currently, all that’s in place is a year-end bonus simply based on Sarah’s generous nature and whether or not they “had a good year.” She will do likewise for other employees who help drive the performance needed to accomplish her goals.

Sarah also now knows that it will be essential for these key employees to stick around during, and after, a sale transaction if the transaction is to be successful. Key employees who are not incentivized to remain through the owner's exit can seriously impact the owner proceeds at the sale and even destroy the deal.  

So, what does Sarah do? Stock Option Plan?  Phantom Stock Plan? Restricted Stock? Cash-Based plan? Stay Bonus? What plan or plans will be the most effective, easiest to implement, and cost-efficient?  Incentive planning can be complicated requiring deep expertise in statutory and technical requirements, tax planning, and other areas.   The Certified Exit Planner has made sure that the right experts have been involved and coordinated in designing and implementing Sarah’s new incentive plan, and so she is quite confident in the final plan.

In summary, be intentional in aligning your employee incentive compensation plans with your strategic owner-based goals for growth and exit, and get the needed expertise on your advisor team to help design and implement the plan. Effective incentive planning can play a key role in helping you attain exit goals within your desired exit time frame.

Contact us today for an exploratory conversation if you want to exit within the next 10 years. Don’t wait until you feel pressure to leave your business to begin planning. Plan now.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

LEADERSHIP DURING A CRISIS: Leadership, Engagement and Culture

How do we lead employees in times such as these? Even without a global pandemic, leading employees can be a challenge that requires much time and energy. But now, in addition to trying to lead well, you are trying to keep your business afloat in a way that you have never had to do in the past. No doubt these are difficult times to be a business owner. The following are a few tips to strengthen your Leadership, Employee Engagement, and Culture in the midst of this crisis.  

Golf Bag Leadership

The first area of focus is Leadership. Invest a few minutes right now and assess your current leadership “style.” You may at times be democratic or a delegator, a pace-setter, or any other number of styles, but more than likely you have a “go-to” style. The recommendation is to move away from a singular style or “golf club” during this time of crisis and instead think of your leadership as a “golf bag” carrying different leadership styles for various situations.

In the great game of golf, you want to select the right club once you have assessed the lay of the ball, the distance, and various other factors. The same should be true for our leadership styles. For most of us, the lay of the ball has shifted — our environment has changed dramatically in the midst of this crisis. You need to now feel empowered to “select a different club” or style than you normally would because everything happening is unprecedented. That might mean you are a lot more directive and commanding in your leadership style for the sake of saving the company. Communicate this shift in your leadership style to your people. It certainly will not be like this forever, but this is how we will survive today. As a leader, you have the freedom to change that style in order to combat the present circumstances.

Your Employees’ Connection With You Drives Their Engagement

The second focus area is Employee Engagement. In the best of times, when employees are engaged, research shows that it leads to higher profitability, productivity, customer satisfaction, and lower turnover. An engaged employee gives their discretionary effort and goes well above and beyond what is required of them. That’s important during normal times—now, it is essential. As a leader, you have been pouring into employees, paying their salaries, and showing up for them. Now is not the time to abandon those duties. Your employees are on the same boat that you are on. You must step out onto the deck and continue to engage with them as you’re all fighting for the same thing; you all want your ship to stay afloat. This is crucial because we know that 47% of an employee’s connectedness to their work is directly correlated to the connectedness they feel to their leader. Therefore, in whatever bandwidth you have, you must make an effort to continue to connect and engage with your employees.

Culture Is Forged In Times Like These

The last area of focus is Culture. Organizations with strong cultures consistently outperform organizations with weaker cultures.  Culture is simply the values, beliefs, and experiences that a group of people demonstrate and enjoy collectively. In these unprecedented times, our values and beliefs are being tested, and new experiences are being created. Most importantly, your people’s beliefs about you as a leader and your company are being solidified.  As leaders, it is crucial that we step up right now and demonstrate intentionality in shaping those experiences. This will be a defining moment in the history of our country and your company. Your people are judging you and your response to it.  It is essential to respond well.

Summary

·       Feel free to lead differently. These are different times.

·       Engage with your employees. They need you and you need them.

·       Be intentional about your company culture. We will get past this and when we do, your employees will remember how you responded.

I wish you all the best. If there is some way I can help you avoid damaging your human capital as we get through this very difficult season of business, please call me and I’ll be happy to share openly with you.

Alan Kemper, DBA

678.346.1186

Alan@LEADWorkforce.com