Most business owners would love to have employees who are as passionate about the company as they are. The most important reason: The future of a closely held or family business depends on how securely its select employees are tied to it.
To ensure the continued success of a business, then, owners need to “ARM”— attract, retain and motivate—key employees who can help grow and sustain their organizations. 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. If this occurs with your company, your ability, as its departing owner, to harvest its value may be directly tied to the success of the people left to run it. In fact, unless you have capable successors and employees, your closely held business may not survive your departure if key employees leave instead of adapting to the new owners and management.
TYING EMPLOYEES’ INTERESTS WITH YOURS
The purpose of a key employee compensation plan is to put “glue in the seats” for those team members who are critical to the success of your business. Equally important, such a plan’s purpose is to provide a tool owners can use to identify current and future employees who thrive on peak performance and 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 some combination, the most effective plans typically share four common features: 1) the rewards are substantial; 2) they’re specific and measurable; 3) they’re tied directly to an increase in the company’s economic value and objectives; and 4) they’re designed to vest over time.
A key employee compensation plan puts ‘glue in the seats’ for those who are critical to the success of your business.
There are few better motivators for retaining top-performing employees than making them an owner. Stock ownership provides “golden handcuffs,” which tie 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 key employees, many closely held companies will reward them by offering a share in the success of the business through cash-based plans. These are proffered once key employees meet measurable goals. Rewards can come in the form of a non-qualified deferred compensation plan, which provides supplemental retirement benefits to a select group of key employees. Another kind of reward might be “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.
All of these options require careful planning to maximize their effectiveness and ensure compliance with federal regulations. That’s why it’s wise 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 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, WI, and its subsidiaries. DiCerbo and Pettorelli are based in Boston, MA. To contact either, please call 617-531-9525, or email firstname.lastname@example.org or email@example.com 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.
This article was originally published in the February-April 2017 issue of Worth.