To ensure the continued success of a business, owners need to ARM – attract, retain and motivate – key employees who can help grow and sustain their business. For many closely held companies, a well-designed compensation strategy that is directly connected to the growth plan of the business may be the answer.
Many businesses are sold to key employees. As a result, your ability to harvest the value of your business may be directly tied to the success of the people left to run the company. In fact, unless you have capable successors and employees, your closely held business may not survive your departure if your key employees leave instead of adapting to new owners and management.
Tying employee’s interests with yours
The purpose of a key employee compensation plan is to put “glue in the seats” for those members of your team who are critical to the success of your business. Equally important, it’s purpose is to provide a tool owners can use to identify current and future employees who thrive on peak performance and who have the ability to think and act like an owner.
A key employee compensation plan can help connect the dots between performance and results, providing a means to create and sustain long-term engagement.
There are numerous methods for rewarding a key employee’s commitment, loyalty and hard work. Whether they are cash-based, equity-based or in combination, effective plans typically share four common features: (1) the rewards are substantial; (2) specific and measurable; (3) tied directly to an increase in the company’s economic value and objectives; and (4) designed to vest over time.
There are few better motivators for retaining top performing employees than making them an owner. Stock ownership provides a “golden handcuff,” tying a key employee’s financial goals to the growth and long-term success of the company. Many owners of closely held businesses, however, don’t want to involve key employees in all the decision making for the business.
Rather than giving or selling shares outright to a key employee, many closely held companies reward select employees by allowing them to share in the success of the business through cash-based plans, which are offered when key employees meet measurable goals; non-qualified deferred compensation plans, which provide supplemental retirement benefits for a select group of key employees; or “phantom stock plans” that give rights to the appreciation in stock value rather than the stock itself.
Selecting the right plan for your business
Retaining key employees is crucial to growing the value of a business and to the owner’s goal of one day harvesting that value.
Each of these plans requires careful planning to maximize their effectiveness and to make certain that federal regulations are satisfied. That’s why it pays to speak with your attorney, accountant or financial advisor to learn about how a select employee compensation plan can help your business survive and prosper into the future.
Article prepared by Northwestern Mutual with the cooperation of AGC MA members Douglas DiCerbo and James Pettorelli. Douglas DiCerbo and James Pettorelli are Wealth Management Advisors with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Douglas and James are based in Boston, MA. To contact Doug or Jim, please call 617-531-9525, email email@example.com or firstname.lastname@example.org, or visit their websites www.dougdicerbo.com or www.jamespettorelli.com. This information is not intended as legal or tax advice. Not all products mentioned in this article are offered through Northwestern Mutual.