EDGEMONT CAPITAL BLOG
Creative Executive Compensation Strategies When Preparing for a Business Sale
A creative executive compensation strategy can nurture success more than just about anything else an owner does. Business owners seeking to build value and personal freedom should consider the way the right incentive structure can increase energy and velocity.
Additionally, the insertion of new compensation mechanisms can clean up employment contracts, enhancing future protections. Non-competes and other agreements not previously in place can become part of a new compensation package. Benefits with a long-term vesting schedule may also encourage employees to stay for the long haul.
A few of the most popular strategies include:
Upper Level Management and Chief Operating Staff
Incentive mechanisms for top players should include incentives that match yours. Compensation owners based on corporate profits offer a straightforward and healthy approach, but more creative alternatives can ensure that incentives match value enhancement targets, or ensure benefits stretch across longer time periods. Some options include:
- Profit sharing, with bonuses that vest over a time period of five years. The biggest rewards should come at the end of the period, for those who remain with the company for many years.
- A blended plan, of part cash and part longer term benefits. A recurring cash bonus and a longer term vesting bonus can work nicely together.
- Paying bonuses as the balance sheet grows—perhaps as a benefit that depends on a growth in the company’s net worth.
- A mock value tally of business worth that ties bonuses to growth in cash flow can work well.
- A bonus for key employees depending on their willingness to remain on board following a sale can keep your company operating like a well-oiled machine.
Key Sales Staff
A typical sales bonus is just straight commission. Alternative methods can increase profitability. These include paying more for new business, for highly profitable business, or for salespeople who remain with the team for an extended period. Individual incentives can create a territorial approach that undermines the business. Consider instead a layered approach that includes both individual incentives and incentives for corporate performance. Some incentives that work well include:
- Double commission for new customers for the first year of sales.
- Incentives based half on individual performance and half on group performance.
- Incentives that increase commissions when the business hits a certain gross profit benchmark.
- Paying half of the bonus up front, but with half deferred over several years, to be paid only if the employee remains with the company.
Key operations team members, including manufacturing management and service directors, need incentives that encourage quality and efficiency. Different circumstances demand different mechanisms. Think about which metrics point to more efficient approaches, and which best predict profits. Consider how your company measures customer happiness. There are many correct ways to incentivize your operations team, but the best incentives make a huge difference in company profitability and stability.
Discuss goals with your team, then design a unique plan for prosperity. Remember that great second-tier management may be the most important factor in creating value for the business. An outstanding incentive compensation plan is a major win for both owners and key staff.