It's essential to identify one to three people with successor potential and create long-term incentive plans for them.
With cautious optimism as the operative words, recent indications point to a recovery of sorts in manufacturing, in particular on high tech factory floors. In fact, manufacturers added 25,000 new jobs in April, the seventh month of gains in a row. While these numbers are encouraging, they also create a potentially serious problem for "baby boomer" business owners eyeing exit plans for there might not be enough trained and experienced talent to adequately fill their shoes upon succession... and those who do have "all the right stuff" may have been lured away by rival companies.
Recently Bloomberg/Businessweek and the Wall Street Journal ran prominent articles about the reawakening in manufacturing and the enormous challenge companies are having recruiting and retaining skilled workers. But this issue extends beyond the workforce to management; as such there is a growing trend toward "poaching" key executives away from one company to take over at a rival's business.
It may be that they've heard good things from shared vendors, observed and admired demonstrated performances at tradeshows and other industry events or been within earshot when a business owner was singing the praises of his top shelf crew -- regardless of how these so-called poachers have come to realize the skill set of another company's key employees, be forewarned that competitors can and will attempt to lure them away.
The imperative is to prevent outside temptation and that starts with having "the conversation" with these key people regarding their future within the company, particularly if they have been identified as potential successors to the business. In the absence of this all-important one-on-one, the probable departure of valued employees increases...often to competitors promising substantial profit sharing plans and other incentives. But if they know where the company is headed and where they stand within those long-range plans, the chance of their staying is greatly increased.
It's essential to identify one to three people with successor potential and create long-term incentive plans for them; these complete compensation packages should include both financial incentives and personalized benefits, for while money certainly does talk, most executive level employees would likely agree that a hefty paycheck alone does not define job satisfaction.
Chosen potential successors have already demonstrated their engagement and commitment to the organization, but they will become even more invested within their roles if they have a clear understanding about how they, as key employees, will be rewarded based on how well the company performs.
As such, a properly designed incentive plan -- one that motivates the management team to increase the value of the company in a measurable way -- is essential.
Successful plans share four basic elements.
- First, the plan must be specific and leave nothing to interpretation. As such, key employees know, in advance and in writing, what precise standards need to be met to receive the incentive.
- Second, the incentive must be substantial; otherwise key employees may not be in it for the long haul. However, this substantial amount should be awarded only upon the attainment of the performance standards set by the business owner.
- Third, the plan should tie the key management team to the business; in this way regardless of who owns the company, these individuals have an incentive to remain. 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. Employing 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 increases the value of the business; this element is critical to a properly designed incentive plan.
It is essential that employers consult with a legal and tax advisor when establishing any incentive program.
While monetary incentive is unquestionably the largest component to a comprehensive long-term incentive plan, consideration must also be made to key employees' unique needs. Therefore, don't overlook other more creative add-ons to a complete compensation package. Could be a key employee wants to devote a few days each year to a volunteer effort; perhaps someone desires the flexibility to work from a home office one or two days a week. Others may consider continuing education benefits or reimbursement for costs associated with advanced professional certifications a big plus.
Also, acknowledge that needs change. What may have been an important benefit to someone when they first joined the company might now be replaced by a more urgent need.
By offering a complete compensation package that addresses the specific needs of those employees critical to the company's future, the odds are greater that they will say "thanks, but no thanks" to poachers.
Bob O'Hara, CPA/PFS/MST/CExP is the founder of O'Hara & Company, a financial firm that specializes in exit planning process, as well as the creator of a national educational website for business owners, www.exitplanning-edu.com.