Developing a creative executive compensation plan can actually do more to really nurture operating success than almost anything else an owner can do. When a business owner seeks to build value in his company ownership and to build personal freedom in his own life, as the manager of the business, the ideal incentive structure can increase energy and velocity in ways that nothing else can.
Also, the insertion of a new and vibrant compensation mechanism can allow owners to “clean-up” their employment contracts to allow for greater future protection. Non- competes, previously not in place, can be added as standard features to an executive compensation package. Benefits with a longer term “vesting” schedule can provide incentive for people to stay long term.
There are varied mechanisms which commonly serve as great incentive builders for top management within a company. A few of the popular ideas we’ve seen, are highlighted below.
Chief Operating Staff/Upper Level Executive Management
When establishing incentive mechanisms for top people, you want their incentives to match yours. Many owners do very straight forward compensation bonuses for corporate profits. That is fine and can be healthy, but consider creative other alternatives to make incentive match value enhancement targets, or to make those benefits stretch to longer time periods. A few of the things we’ve seen work well are recapped below:
a) Consider a profit-sharing plan, with payment bonuses that vest over 5 years. Vesting for the plan proceeds might occur at 1/5 per year going forward, so that the biggest rewards come for those who stay with the company for a number of years.
b) Consider a blended plan, with part cash and part longer-term benefits. Perhaps half of the benefit paid is a recurring cash bonus, and the other half has a longer term vesting schedule.
c) Consider paying such bonuses also as your balance sheet grows. Perhaps a portion of the benefit depends upon growth in company net worth.
d) Consider a mock “value” tally of the business’s worth, like tying a portion of the bonus to growth in cash flow (pretax profits plus depreciation expense).
e) Consider a bonus for key employees, dependent upon their agreement to stay at least one or two years after sale. These employees might get a benefit of maybe 5-10% of total sales proceeds to someday reward them for being willing to cooperate with and facilitate someday sale of the company.
The more you plan incentives to nurture performance toward those areas that really enhance value, the more likely you are to achieve success.
Key Sales People
The natural sales bonus for outstanding sales staff is just straight commission. That works, and can do well, but there are a range of alternative mechanisms that pay more for “new” business, or pay more for strongly profitable business. Or, for the real long term sales leaders, owners might want to consider adding more to a long term incentive program. Also, purely individual incentives can tend to create a territorial ownership of accounts, which can be hazardous to overall company results. Consider a layered bonus with some bonus for individual performance, and some for corporate performance trends.
A handful of selling incentives we have seen to work well include:
a) Sales incentives that double commissions on new customers for the first year of sales.
b) Sales incentives that increase commissions for business above a certain gross profit threshold.
c) Sales incentives that are half on individual performance, and half on overall group performance.
d) Sales incentives where half of the commission bonus is paid up front, but half is deferred over a several year period, and is paid only if customer continues at same or greater volume level.
Like other operating performance bogies, owners need to think about direction they would hope commissions or bonuses might nurture, and to build in incentives to reward progress toward the right longer term directions.
Key operational people including the manufacturing management or service directors for specific segments of a service company, need incentives that reward efficiency and quality. I had one computer consulting client who paid bonuses entirely based on client rating done by the customers themselves. This actually worked out extremely well, but the “service questionnaire” to be sent to customers always brought some enthusiastic discussion from project managers. (This made for a couple of tough meetings, but produced excellent results.) Different operating circumstances require creative compensation mechanisms. Think about what operating metrics indicate efficient and profitable results. Think about how your company keeps happy customers. Think about what performance creates strongest profitability. There are as many “right” answers to questions of operating incentives as there are jobs to be done. And, although no program works perfectly, continuous progress toward better-targeted incentives, will pay dividends.
The best employee incentives can make a tremendous difference in a company’s stability and profitability. Discuss it with your people, and design a unique plan that can really help you to prosper.
Great second-tier management is one of the single most important factors when creating value for your company, and an outstanding incentive compensation plan can be a tremendous win-win for both owners and staff.
Written by Debbie Douglas, Managing Director of Douglas Group