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Don't Let Employee Poaching Hijack Your Exit Plan

Thu, 09/08/2011 - 11:39am
Bob O’Hara, CPA/PFS/MST/CExP founder of O’Hara & Company

While the U.S. economy remains in a fragile state, statistics point to a resurgence of sorts in manufacturing, especially on high tech factory floors. In fact, manufacturers added 25,000 new jobs in April, the seventh month of gains in a row. While this is certainly encouraging news it also creates a serious problem – “baby boomer” business owners who are preparing to leave their businesses behind may find there isn’t enough trained and experienced talent to adequately fill their shoes upon succession… with the added concern that those who have “all the right stuff” may be lured away by rival companies.

In fact, recently two major business publications – Bloomberg/Business Week and The Wall Street Journal – ran prominent articles about the reawakening in manufacturing and the huge challenge companies are having finding and keeping skilled workers. But beyond the workforce, this issue extends to business owners and management, resulting in an increasing trend toward owners poaching executives from one company to take over at theirs. 

And while present employers may also be keenly aware of the value those top performers bring to their organization – and in fact may be grooming them to eventually take over the business – quite often they have never had “the conversation” with these key people on what their future within the company holds. In the absence of such a discussion, the potential departure of valued employees is increased – often to competitors promising impressive profit sharing plans and incentives.

Let’s face it: People, by nature, want to be kept “in the loop” and perhaps nowhere is that more true than in the workplace. Knowing where one’s present and future lies within a company’s infrastructure can make the difference between staying for the long haul or leaving for another opportunity. 

Therefore, it’s in a business owners’ best interest to identify one to three people who have successor potential and create long-term incentive plans for them – complete compensation packages that include not only financial incentives, but also individualized benefits.

Ultimately, most key employees have a desire to be apprised of where the company is headed, the strategies to get there, where they fit into the mix… and what’s in it for them.

While the general imperative is to establish an environment in which these key staff members can substantially share in the company’s profits, particularly over the long term, be aware that compensation means different things to different people. Certainly, regular salary increases is one way to motivate and retain staff, but most high level employees would likely agree that work satisfaction is defined by more than a hefty paycheck.

Chosen potential successors have already demonstrated their engagement and commitment to the organization – otherwise they wouldn’t be on the short list to eventually take over. But they will become even more invested within their roles if the business owner(s) clearly communicate how they, as key employees, will be rewarded based on how well the company performs.

Creating, Motivating, & Keeping Management
One of the many factors in creating, motivating, and keeping good management is a properly designed incentive plan. To be successful, an incentive plan must motivate the management team to increase the value of the company in a measurable way.

Long-term incentive plans should consist of a number of components so that executives have a diversified package – the more attractive this package is, the more difficult it will be for key employees to leave a post.

Successful plans share four basic elements. First, the plan is specific. The key employees know, in advance and in writing, what standards need to be met to receive the incentive.

Second, the incentive is substantial. The key employees must perceive it as a substantial incentive worth achieving. This substantial amount is only awarded upon the attainment of the performance standards set by the business owner.

Third, the plan should tie the key management team to the business so that, regardless of who owns the company, these individuals have an incentive to remain with the business. Payments of these incentive plan awards to the key employees are not immediate. There should always be some type of vesting schedule associated with any incentive plan award. Normally, a continual or “rolling” vesting schedule is used – this approach requires each year’s award to vest on a separate schedule. Using this type of schedule will tie the key employees to the business longer as they are never fully vested in the most recent awards.

Fourth, the key employees should receive the incentive award based on performance standards that, when attained, increase the value of the business. This element is critical to a properly designed incentive plan.

Also, it cannot be overstated that employers should consult with a legal and tax advisor when establishing any incentive program.

Encouraging Longevity
Creating a work environment that encourages longevity doesn’t stop and start with the dollar sign. Business owners should recognize that while most employees are motivated by an atmosphere that acknowledges skill, allows for active participation in decision-making, provides opportunities for professional growth, and supports financial comfort now and in retirement, each key employee is unique.

It all comes down to providing the best tools necessary to effect sincere company devotion. By offering a complete compensation package that addresses the specific needs of those employees critical to the company’s future, the likelihood of their being lured away by poachers will be greatly diminished.

Bob O’Hara, CPA/PFS/MST/CExP is the founder of O’Hara & Company (www.oharaco.com), a leading financial firm that specializes in guiding businesses through their exit planning process, as well as the creator of a national educational website for business owners, www.exitplanning-edu.com.

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