Next-level management teams are the drivers behind building business value. But how can you and your advisors attract and keep next-level management teams? The answer lies within incentive plans.
When incentive plans are properly designed and implemented, your business has the potential to grow well after you sell. Well-executed incentive plans can motivate each member of your management team to measurably increase the value of your company.
It is recommended that incentive plans only reward key employees if the business value and/or cash flow increases by a predetermined amount each year. Each incentive plan should be customized to each key employees’ role and responsibilities and incorporate these four basic elements:
1. Set performance standards that are tied to increasing the value/cash flow of the business necessary to meet your goals.
2. Create specific, attainable standards.
3. Implement substantial incentives and rewards if targets are met.
4. “Handcuff” your key employees, so to speak, to make the incentives so appealing that they are encouraged to stay with the company until goals are achieved.
Many owners create incentive plans or bonuses for their key employees so that key employees cannot obtain the bonus unless they stick around for a certain amount of time. This way, you can increase the chances that once the business is sold your key employees stay and continue to grow your business. This strategy “handcuffs” employees to the business by giving them greater access to compensation benefits the longer they stay. Having these types of plans in place may also increase the likelihood of a sale because potential buyers love to see trusted employees motivated to stay on and continue to grow the business.
Understand what motivates your employees. It might not only be a bonus of some kind. Think about promotions or other rewards. Are they interested in equity or cash? If your employees are not motivated to achieve their rewards, the incentive plan may become ineffective. The plan also becomes obsolete if the standards don’t increase the value of the business.
Consider these various forms of incentive plan alternatives:
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