Dec 12, 2012
The key to a successful future
Bob O’Hara, CPA/PFS, MST, CExP™
Founder, O’Hara & Company
While the U.S. economy makes strides to recover, industries today (within both the public and private sectors) may feel the urgency for an in-house succession plan to be certain their business is headed in the right direction—to build business value, create strong process and management, and secure a future for themselves as well as their key employees.
With a recovery in many industries, encouraging as it is, it also creates a question for the “Baby Boomer” owner/manager eyeing exit plans and preparing to leave—is there enough trained and experienced talent to adequately fill their shoes upon succession?—with the added concern that those who have “all the right stuff” may decide to leave, or those new to the industry may be lured by a competitor or another industry type.
The statistics are clear: 78 million Baby Boomers are planning their retirement. The challenge is, who will be superseding these business owners/employees today and in the coming years?
There is a shortfall in recruitment, as the next generation of business owners/managers—the Gen-Xers—are at a staggering low of 49 million, clearly not being able to replace the Baby Boomer workforce. Competition for the Xers’ talent is staging up to be very intense due to the significantly lower numbers of available key employees in this generation.
Now is the time for the Baby Boomers to take a look at this next generation, as the Gen-Xers are waiting in the wings, ready and able to begin work, assume leadership positions and operate businesses. It is imperative today to ensure the time to recruit new employees and identify your key employees—those with all the right stuff—and start a conversation about what their future within the company holds.
Without this conversation, your valued key employee may depart to secure a successful future. Communication can make the difference between staying for the long haul or leaving for another opportunity.
It is critical to create a Key Employee Incentive Plan
Key Employee Incentive Planning is not just about financial techniques, but more importantly the process the business owner goes through to create and then manage the plan. Therefore, it’s in a business owner’s/manager’s best interest to identify one to three people who have successor potential and create long-term incentive plans as part of a complete compensation package that includes not only financial incentives, but also individualized benefits to secure solid business value.
While the general imperative is to establish an environment in which these key staff members can substantially share in the company’s value and profits, particularly over the long term, be aware that compensation means different things to different people. Certainly, regular salary increases is one way to motivate and retain staff, but most high-level employees would likely agree that work satisfaction is defined by more than a hefty paycheck.
Chosen potential successors have already demonstrated their engagement and commitment to the organization—otherwise they wouldn’t be on the short list to eventually take over. But they will become even more invested within their roles if the business owners/managers clearly communicate how they, as key employees, will be rewarded by sharing in the value they help create.
One of the many factors in creating, motivating, and keeping good employees is a properly designed incentive plan. To be successful, an incentive plan must motivate the key team to increase the value of the company in a measurable way.
Long-term incentive plans should consist of a number of components so that employees have a diversified package; the more attractive this package is, the more difficult it will be for key employees to entertain an offer to leave the company.
Successful plans share four basic elements. First, the plan is specific. The key employees know, in advance and in writing, what standards need to be met to receive the incentive.
Second, the incentive is substantial. The key employees must perceive it as a substantial incentive worth achieving. This substantial amount is only awarded upon the attainment of the performance standards set by the business owner.
Third, the plan should tie the key team to the business so that, regardless of who owns the company, these individuals have an incentive to remain with the business. Payments of these incentive plan awards to the key employees are not immediate. There should always be some type of vesting schedule associated with any incentive plan award. Normally, a continual or “rolling” vesting schedule is used; this approach requires each year’s award to vest on a separate schedule. Using this type of schedule will tie the key employees to the business longer as they are never fully vested in the most recent awards.
Fourth, the key employees should receive the incentive award based on performance standards that, when attained, increase the value of the business. This element is critical to a properly designed incentive plan.
Also, it cannot be overstated that employers should consult with a legal and financial advisor when establishing any incentive program.
Remember to create a work environment that encourages longevity and recognize that most employees are motivated by an atmosphere that acknowledges skill, allows for active participation in decision-making, provides opportunities for professional growth, and supports financial comfort now and in retirement.
Bob O’Hara is the founder of O’Hara & Company, a leading financial firm that specializes in guiding businesses through their exit planning process while building sustainable business value, as well as the creator of a national educational website for business owners, www.exitplanning-edu.com.