The following information is a preview of our “Business Transition Planning: Maximizing Your Legacy” booklet. Click here to request your copy.
Bonuses are flexible. Bonuses are simple. Everybody understands bonuses.
Bonuses can be short-term, long-term, or both. Bonuses can be tied to goals: goals for the individual and goals for the company. Some companies provide a flat percentage of salary across the board regardless of individual performance. While it is important to reward everyone when the company does well, the superstars deserve and expect more. Conversely, a superstar should not be penalized when he does well, but the company overall is lagging. It’s not fair to an operations manager who can produce more than the sales area can sell.
Stock options are key tools to incentivize employees. The employee ends up owning equity. This can be positive, but it may lead to issues. Owners can have a vote. They may become contentious and exercise minority shareholder (and like) lawsuits. As owners, they will now be subject to the terms of your shareholders’ agreement. If the shareholder/employee departs, you may need to buy out these shares.
Synthetic Equity Plans
Synthetic equity plans include phantom stock and stock appreciation rights. Both reward the holders of these with the increase in the value of the company. Neither transfers ownership interest.
These plans can work in conjunction with annual and longer-term bonuses. Synthetic equity plans reward key employees based on the performance of the company as a whole. They reward teamwork. Only if the team works together will the company grow. Your operations VP will work with the sales VP to design units that are more saleable. She won’t just produce units that are less costly or are quick to make.
The plans can be very flexible. They can be based on the “value” of a segment of the company, not just the company as a whole.
This concept of synthetic equity is important. Our objective is to keep control of the company in your hands, not to dilute it. Using real equity can create issues.
For more information on synthetic equity plans, visit the National Center for Employee Ownership, a membership group: nceo.org
An employment agreement is a simple way to tell your employee you want him/her to stay on. It will carry all the standard clauses including expected duties, compensation, bonus arrangements, stock options, synthetic equity, benefits, term, causes for termination, confidentiality, etc. This is a legal document, so an attorney is required to help set it up. But it gives peace of mind to key employees, especially in a family business.