Lifetime Stay Bonus Plan Considerations
By Maurie Cashman
An incentive plan to retain employees during an ownership transition provides for important employees to be compensated for their time and for their commitment to continue working after a company has been sold to a third party or transferred to an insider. These employee incentive plans, Lifetime Stay Bonuses, are integral in maintaining the continuity of your company as you prepare to leave it.
We also introduced you to fictional owner James Johnson, who realized the importance of providing key employees with cash incentives to continue with the new company after James sold or transferred his company. James also understood that the efforts of key employees to maintain cash flow is critical to maximizing the sale price of his business. Similar to most selling owners, James had the following three objectives with respect to his key employees.
- To motivate them to increase the companyâ€™s cash flow in the period leading up to the sale;
- To keep them with the company before, during, and after the transition;
- To reward them 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).
“I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” -Jimmy Dean
Using a sound and thoughtful incentive-based plan for key employees, you can help achieve these key employee objectives, as well as your overall Ownership Transition Planning objectives. Prior to beginning the process of creating a Stay Bonus Plan, it is important to address the following four Lifetime Stay Bonus considerations.
- Keeping key employees is not only desirable â€” it is necessary if the business is to be sold and sold at the highest possible price;
- Plans designed for short timeframes must provide a substantial benefit in a short period of time, contingent upon the business being sold;
- These key employees may need to shoulder extra duties as the ownerâ€™s attention wanes or is diverted by the sale process;
- Given that few sales to third parties are all-cash sales, owners are usually exposed to post-sale financial risk.
After addressing the four considerations highlighted above, the next step is to begin formulating the Stay Bonus Plan. Next week, we will look at the steps and the approach James Johnson took to develop a Stay Bonus program that helps accomplish Jamesâ€™s critical Ownership Transition objectives, as well as the objectives of his management team.