Small Business Resource

The one indispensable component of a valuable business is its top employees. Think about it: your top employees are even more valuable than you are for the purpose of creating value for your ownership interest. The more valuable you are to the business, the less valuable the business will be when you leave it. What you need to do is leave behind key employees who add significant value to the business for several important reasons:

1. Properly motivated by a profit-based incentive plan, key employees do increase the value of your business.
2. Key employees often become potential owners when you decide to retire or move on to another venture.
3. If you decide to sell to a third party, the continued existence of a stable, motivated management team will increase the purchase price.

Key employees are not necessarily employees in key positions. Key employees think and act a lot like you, they are eager to be given responsibilities and challenges. Like you, they want to see the business grow and prosper, and they want to grow and prosper along with it. They take pride in being identified with, and contributing to, a successful business. In short, they act like owners. Their continued presence in the business is necessary if the business is to thrive.

There are several incentive packages you can implement to retain and motivate key employees. These incentive packages help your key employees reach their financial and psychological goals – if they stay with you. As your key employees attain their goals, the design of these incentive packages should also help you to achieve your ownership goal of building business value (and eventually converting that value into money). Take a hard look at your current employee benefit programs, especially those aimed at your key employees. Elements of your incentive program should include:

1. Financially attractive awards that create a potential bonus of at least 10 percent of the key employee’s annual compensation. Anything less than this will not be sufficiently attractive to motivate the key employee to modify his or her performance to make the company more valuable.
2. Specifics; that is, determinable performance standards, such as the company reaching a certain net income or revenue level.
3. Structure to increase the company’s value such that, as the key employee reaches measurable objective standards, the net income of the company increases.
4. Incentive reward vesting or “golden handcuffs” that link payment to tenure thus encouraging the employee to remain on the job in order to receive the reward.
5. Face-to-face meetings with your key employees to discuss the plan and make sure the incentive arrangements are thoroughly understood and all questions answered.