You’ve decided to sell your business and you found a buyer. You’re in the later stages of negotiations with this buyer and you’ve settled on a price that you’re happy with… 5 million dollars. Your two key employees just walked into your office today and they demand a half a million dollars each or else they’re out. What do you do???
In today’s video, I’m talking about an important but often overlooked topic when it comes to successfully exiting your business. And that is how to keep your key employees from leaving your company, especially when you need them most.
- Why it’s crucial to keep your key employees during the business exit process.
- 4 critical elements of a successful employee incentive program.
- Employee Incentive program options that will “handcuff” your key employees to the business.
Click here to watch the full video or read the full video transcript, below.
4 Critical Elements To A Successful Key Employee Incentive Program
As much attention as ping pong tables and nap pods are getting these days as employee perks, what really motivates your best people is an incentive plan that will also increase the value of your company in a measurable way. When your key employees are rewarded, when the company does well and business value increases, it’s a win-win!
No matter what type of incentive program you implement, they each need to have 4 critical elements to be successful.
- Specific: The plan must be specific so that your employees know, in advance and in writing, what standards need to be met to receive the incentive. If you are going to implement a cash bonus or a stock bonus plan, the last thing you want is your employees to work all year and have absolutely no clue how their contribution to growth will be rewarded.
Make your plan specific and communicate what employees need to do to earn a reward within a given year. It could be a company-wide target, a department target, an individual target, or a combination of all 3.
- Substantial: The incentive must be substantial. If you think a $25 gift card during the holidays will suffice, think again. This substantial amount is only earned and paid when the employee meets the specific performance standard that you set.
Depending on the type of plan you adopt, and what incentives you’re trying to reward, it could be as much as a full year’s compensation or more. 10-25% of annual compensation for an annual reward would be considered substantial.
- Performance Standard: The incentive should be based on a performance standard, that when attained, increases the value of your business. It’s often the hardest part in designing a plan and a way to measure how each of your key employees will contribute to the value of the business. But it’s key that you align your key employees interests with yours, and the best way to do that is to align the incentive with growing the value of the business.
- Handcuff Key Employees: Critical for your exit plan, is that your key employee incentive plan must handcuff your key employees to the business. Employees must be motivated to stay with the company today and after you transition out of the business.
Employee Incentive Program Options
Now that we know the four criteria for a successful employee incentive program, let’s talk about some different options. The great news here is that there is so much flexibility in plan options for key employees, that you can custom tailor the right plan or plans for your business and what you’re trying to accomplish.
- Cash Balance Plan- The obvious place to start is the cash bonus plan. Most businesses start here, and they also end here. They think that the cash bonus plan will take care of retaining their employees. While cash bonuses are great, they do nothing to handcuff your key employees to the business.
Long Term Retention Programs:
- Non-qualified deferred compensation plans– are an amazing incentive plan option. They are very flexible and fit all 4 of the criteria for a strong incentive plan. If you don’t want to share ownership with your key employees, it’s a non-ownership alternative that’s very effective as a long-term retention tool
- Bonus of stock- this is a great option if you want to eventually transfer the business to one or more of your key employees. It allows you to reward one or more of your key employees with stock
- Sale bonus or a stay bonus plan- these you can implement to allow your employees to receive a substantial bonus, but only if they stay on for a certain length of time after your exit or after a sale.
This is not an exhaustive list, but all these plans can be designed to create an incentive plan that is specific, provides a substantial reward based on a performance standard, and handcuffs your employees to retain them for the long-term.