Your next-level managers and key employees are likely the most important element in determining your business’s value. Given their importance, retaining these people is possibly the most critical thing you can do to build your company’s value. In this newsletter, we’ll look at two common and effective strategies for retaining important employees and explain why retention plans can support your long-term goals in terms of building business value and selling your business to achieve financial security.
1. Stay Bonus Plans
As the name implies, stay bonus plans are plans that give certain employees bonuses for staying with the company for a set time frame after a certain date. For this discussion, the “certain date” is the day you leave your business.
For example, say that you have an employee who invented a method for streamlining operations in your business, allowing you to reinvest the money from new efficiencies back into the business. This is clearly an employee that you would like to keep for the long term.
However, an employee this talented may also begin to look for greener pastures, especially if they learn that you’re looking to exit the business. And losing an employee like this as you plan for your eventual business exit could force you to scuttle your plans altogether.
In this case, a stay bonus plan could be a strong strategy to keep that employee at your company. It would offer the employee a monetary bonus for staying with the company for a certain period after you leave the business. For example, you might offer this employee a $100,000 bonus for staying with the company for 4 years after you leave it, which would facilitate a smoother transition between owners while giving the employee incentive to stay with the company.
When buyers have more assurance that the company’s key employees will remain after the transition, it can make the company more valuable to them. After all, the fewer important employees they have to replace, the less time and money they need to expend finding their replacements.
Your Advisor Team can help you identify key employees and create plans that speak to their motivations to entice them to stay with the company after you leave it.
2. Salary Continuation Plans
Sometimes known as “golden handcuffs,” a salary continuation plan is another strategy you might use to encourage key employees to stay with your company after you leave it. The benefit to key employees is assurance that they will have a steady stream of income even after they leave the business.
For instance, say that you have an executive vice president of sales who drives the bulk of your new business. To ensure that she not only stays with the company but also continues to perform well after you leave it, you might craft a plan that offers to match a percentage of her commissions as deferred compensation, as long as she achieves performance metrics and stays with the new ownership for a certain period of time.
In this scenario, your key employee gets the peace of mind of knowing she has a steady income stream after she leaves your business. She is also motivated to continue to build the business’s value because the better the business does, the more money she stands to make.
Additionally, there could be tax advantages to implementing a salary continuation plan for both your company and your employee. Tax implications vary by state, but a tax advisor may be able to share insights on any tax benefits a salary continuation plan may offer your business.
How These Plans Help Build Value
Stay bonus plans and salary continuation plans can help build business value by ensuring that the most important people at the company remain at the company after you leave it. When a new owner can count on the company’s best people being committed to the company, it could make the company more turnkey and thus more valuable to them.
A key component of both plans is that they typically include vesting schedules. They also often include certain performance standards that employees must meet to receive the full value of their stay bonus or salary continuation plan. In these ways, these plans motivate key employees to continue performing well and stay with the company long term because doing so will have direct financial benefits for them.
When executed correctly, stay bonuses and salary continuation plans could create a virtuous cycle: Key employees perform well, increase business value, and get rewarded. When they’re rewarded, they’re motivated to continue performing well, which continues to increase business value. Business performance entices buyers, and you position yourself to sell for top dollar. After you leave, if the key employees continue to perform well under new ownership, they continue to get rewarded.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.