The Lifetime Stay Bonus
By Maurie Cashman
The use of an incentive plan is an important technique for retaining your key employees. Weâ€™ve been talking for the last couple of weeks about how to build business value by building your management team. Now youâ€™ve decided to sell your company to an outside party. It is critical to keep your employees on board as you leave because:
- Key employeesâ€™ ability to maintain cash flow are critical to maximizing the eventual sale price of the business;
- Key employees may need to take on extra duties as your attention may wane or become diverted to your future retirement plans;
- You will be spending significant time in negotiations and due diligence to sell your company and will need your key employees to either help in this effort or focus on the business;
- Third-party buyers are unlikely to buy your company without the continued presence of your key employees.
â€œIdeas are not worth much if not supported by effective execution that creates customer value.”— Karl Stark and Bill Stewart, managing directors and co-founders of Avondale
How do you ensure that all of that knowledge, leadership and customer and supplier confidence you have so painstakingly built will remain in place with your key employees in their positions, even as you prepare to leave yours? One short-term incentive plan that can be set up to meet your Ownership Transition Plan objectives is the Lifetime Stay Bonus. The Lifetime Stay Bonus not only provides recognizable incentives for your key employees to stay and help your business through the transition period, but it also provides a level of stability for your company and its employees to succeed.
Selling owners typically have three objectives with respect to their key employees:
- To motivate key employees to increase the companyâ€™s cash flow in the period leading up to the sale.
- To keep key employees on board before, during and after the transition.
- To reward key employees when the business is sold, (provided that the award is not so great and so immediate that there is no incentive to continue working with the new owner).
The ideal time to begin key employee incentive planning is well before a business transfer occurs. However, even those owners already negotiating with a potential buyer would do well to begin the planning process. As the old saying goes, “The best time to plant a tree is seventy-five years ago. The second best time is today.” To better understand the importance and process involved with developing Lifetime Stay Bonuses, let’s look at the fictional case of James Johnson, owner of Johnson Manufacturing, Inc.
While James Johnson may not have launched the process of selling his company, he had mentally checked out months ago. Johnson Manufacturing was being maintained by the efforts of its three key employees, all of whom were well aware of, and increasingly nervous about, Jamesâ€™s desire to sell the business. In fact, it was Jamesâ€™s relationship with these employees that brought him into my office. In a sound effort to retain these employees during an eventual sale process, James had “sort of unofficially, informally promised” them a “piece of the pie” upon a successful sale. In addition, his “promise” reflected his desire that they benefit should he sell the business for his asking price.
Jamesâ€™s problem is not unusual. As he thinks about how to exit the business, he must give equal thought to discouraging his key employees from doing the same. If a selling owner or buyer provides no incentives, management has little motivation to remain employed by a company they did not choose. They may leave. This uncertainty dictates what you must do for your key employees if you are to leave your business on your terms.
Understanding the importance of providing key employees with a reason to continue with the new company when the sale or transfer of the company is imminent, part of James Johnsonâ€™s exit plan involved installing a Stay Bonus Plan that promised a cash bonus for his key employees. To determine the proper amount of the Stay Bonus, James looked at the following options:
- The unvested benefits of the existing key employee non-qualified deferred compensation program and promise to vest these fully in the event of a sale.
- The percentage of the anticipated purchase price that he wishes to give to his key employees in cash.
- A cash amount based on what he deems necessary in order to ensure the continued participation of the key employees.
Since James had already “informally” promised his three key managers a total of ten percent of the anticipated sale price, James and his advisor used this figure as a basis to begin designing the companyâ€™s Stay Bonus Plan. In the upcoming weeks we will look at the steps James had to take to create a successful Stay Bonus, as well as the proven tactics James used for communicating the plan to his key employees.