An owner’s worst nightmare:
Your top performer comes in your office and shuts the door. He gives notice that he is leaving in a couple of weeks. Do you walk him to the door to protect your key files or do you try to counter-offer to keep him in place? In our experience, by the time the employee is giving notice, it’s too late to sweeten the offer.
Another version of this is that your top performer decides to set up shop down the street to compete with you. Because she was the one with the relationships, she took your top 5 clients with her. Their last year volume represented over 40% of your gross revenue. What to do?
As a business owner, I am sure you have experienced some version of people leaving at an inopportune time. Employees leave for a variety of reasons: money, opportunity, growth, spouse transfer, not feeling valued, burn out or even to follow a passion.
Your company’s success depends on the quality of your organization—the people who make decisions daily. When it is clear that these decisions contribute directly to the success of the company, employees behave differently. Take it a step further, select the key contributors to your profit, and tie their incentive compensation to the profit results of the company and they get a new level of satisfaction. This creates a “we’re in this together” attitude.
How do you go about rewarding the behavior you want? How do you build a retention plan that doesn’t require you to give away your ownership? Often, we hear from owners that including key executives as owners will keep them on board. There’s some merit to that but it can make running the company more complicated. You might be creating an ownership position for someone who really doesn’t think like an owner but might be a stellar salesperson. How will they add value to running the company and making key operational or capital investment decisions? Not to mention the complexity of creating new legal documents and valuation of the units you decide to hand out to the new owners.
If you want to continue to be active in the running of the company, you want to be careful about diluting your equity (ownership) position too early. If it’s still mostly your money and your risk and your intellectual capital, do you want to start giving away pieces of the pie?
Control is a big issue for founders and starting to give that up can be tricky. Even when you know you will be retiring or transitioning out in a few years, it can be hard to let the younger executives chart a new path.
There are a few reasons to keep them engaged and on board. If you want to move toward an exit whether that’s a sale or retirement, you want to know you have key decision makers on your team who can keep things moving as you begin to spend less time on the business. Knowing that it’s running smoothly and you have experts in place who can make sound decisions without you can really afford you a lot of peace of mind.
On the other hand, having these key performers in place when you pursue a buyer for your firm is also important. When you leave, you’ll be taking a lot of institutional history with you. Many of the customer relationships were probably built by you over the years. Your prospective buyer is likely to place a higher value on the firm if you have set up a strong management bench for the new buyer to rely on. They can help maintain relationships and the company culture for the new owner. If you have agreed to a deal that is contingent on the company’s ongoing performance for the next three to five years, your management team will make a significant difference for you as well.
So, how do you build a retention plan that appeals to your key performers, doesn’t give away your equity prematurely, and helps you continue to grow the company?
An executive retention plan that is funded by the very profits that the executives help generate can be an effective way to increase both annual profits as well as potentially increasing the value of your company. You want to build a plan that is above and beyond what they currently make. If you have to take away something that they have grown to expect, you won’t get a congenial reception when you present it.
You will want them to consider:
- They can directly impact their compensation as it is tied to their success in your company profits.
- Your company has invested in them by allowing them to participate in an exclusive plan that creates collaboration between owners and key performers.
- They have some rewards of ownership without the risk of their capital.
- You can build a strategy for acquiring the company over time if you choose this as part of your plan design.
Our experience has been that executives who are incentivized in this way begin to think like owners. They find solutions and bring them to you rather than the other way around. They feel like they are a part of something bigger and not just someone who gets a paycheck from you.
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