By Maurie Cashman
Stay Bonus Plans not only serve as excellent vehicles to help meet your Ownership Transition Planning Objectives, but they also provide short-term incentives to satisfy your key employees during the transition. Last week, we looked at the steps that you need to take to create a successful Stay Bonus Plan. We used the case study of fictional owner James Johnson to illustrate the merits of a Stay Bonus program and the methods needed to create a win-win situation for both John and his key employees.
â€œThose who really desire to attain an independence, have only [to] set their minds upon it, and adopt the proper means, as they do in regard to any other object which they wish to accomplish, and the thing is easily done.”
–P.T. Barnum, American showman and businessman
As with many owners, one of Jamesâ€™s main concerns during the sale of his business was confidentiality. Using the Stay Bonus concept allowed James to get over the hurdle of talking to his key employees about the sale. At some point, Jamesâ€™s key people needed to know about the sale because the buyer eventually wanted to talk to these key employees. The Stay Bonus not only allowed Jamesâ€™s key employees to be brought into the “sales loop,” but it also helped to keep his key employees on board, which is especially important in the case of a deferred pay-out situation to the owner/seller.
Once James worked with his Ownership Transition Planning Advisors to develop a plan that benefited him, his employees and his company, he was able to congratulate himself; his job was half-finished. The other half of the process is to convince the key employees to view the plan as favorably as he does. When James was ready to communicate the plan, his Ownership Transition Planning Advisors recommended the following approach.
Initial Meeting. Once an owner recognizes the value of the Stay Bonus or other incentive plan, he or she meets with the Advisory Team (transaction advisor, attorney, CPA and financial advisor) to discuss the specific objectives he hopes to achieve with the plan. The team should work together to develop the outline of a plan. Typical Stay Bonus amounts begin at one yearâ€™s salary for each covered executive.
Drafting Meeting. During a second meeting, the owner and advisors review the specifics of the Stay Bonus Plan. This short agreement accomplishes the following:
Identifies eligible employees.
Includes the amount of the stay bonus for each eligible employee. This amount is typically at least one yearâ€™s compensation.
Describes the vesting schedule of the plan â€” typically, one-third of the bonus is paid at closing, one-third is paid on the first anniversary of the closing date and the remainder is paid on the second anniversary of the closing date.
Ensures that key employees are still entitled to the Stay Bonus if they are terminated without cause by the new owner.
Establishes that the obligation to pay the Stay Bonus is with the selling owner, not the new owner, which serves to ensure that the key employees will be paid their Stay Bonuses.
Modification Meeting. After the business owner reviews the Stay Bonus, the team discusses and modifies the plan as needed.
Employee Presentation. The Stay Bonus plan is presented to the key employees. Since business owners are often emotionally involved in the process, we recommend that one of your advisors presents the plan to the key employees. This enables the business owner to be removed from a potentially emotional situation and it allows the advisor to answer any technical questions the key employees may have.
Sometimes the Stay Bonus is negotiated with the Seller responsible for the cost of the bonus through closing and the Buyer responsible after closing. This can be an important signal to the employees that they are valued by the new owner, particularly when the buyer is known and a transaction is in the process of due diligence and closing. Just be careful that the payout pre-closing is not so high that the employee leaves upon collecting pre-closing or closing payments.
Typically, it takes 30 days to move through these steps and complete the Stay Bonus creation process.
As discussed in this series of articles, it is crucial for you to do whatever you can to prevent your employees from leaving after you transfer or sell your company. Stay Bonus Plans not only serve as excellent vehicles to help meet your Ownership Transition Planning Objectives, but they also provide short-term incentives to satisfy your key employees during the transition. If you have any questions about how this strategy applies to your company, please contact us to discuss your specific situation.