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Financial Consulting

Four Elements to Retention Plans for Key Employees

Key employees remaining with the company can be the key to getting the best deal when selling your business. Without such management your ownership transition may be more difficult.

One constant of successful companies is a stable, motivated management team. This quality not only contributes to corporate success, it is also key to the business owner’s successful ownership transition.

Potential third-party buyers place significant value on the strength of your management team-if that management team can be expected to remain after you have left the business. Similarly, if you contemplate selling the business to family or to employees, the likelihood of being paid for the business after you’ve left can be entirely dependent on the strength of your remaining management team.

One of the many factors involved in creating, motivating and keeping good management is the creation of a properly designed incentive plan for key employees. To be successful, an incentive plan must motivate the management team to increase the value of the company in a measurable way. Only by increasing company value do employees receive the incentive whether it be ownership or cash.

Four Basic Elements:

  1. The plan is Employees know, in advance and in writing, what standards need to be met to receive the incentive.
  1. The incentive is A bonus of at least 25 percent of annual compensation in stock or cash is the minimum necessary to motivate a key employee, and sometimes more. This substantial amount is only earned and paid upon the attainment of a performance standard that you set. It should pay for itself!
  1. The plan handcuffs management to the business. Employees are motivated to stay with the company in the short term as well as after the ownership transition has taken place.
  1. The key employee earns the incentive bonus based on a performance standard, that, when attained, increases the value of your business.

Management incentive plans are based upon the assumption that the plan provides incentive. What is often less clear is exactly what the incentive motivates the employee to do. Effective incentive plans motivate employees to act in ways that increase business value.

Remember, your ultimate goal is to build enterprise value that you will someday convert to cash.