Through the course of my interactions with more than 100 business owners over the last six months, I have heard some common messages. Businesses have weathered the storm of several years ago. They have emerged as better run companies with greater cash reserves. Now they are wondering what to do with that extra cash. Options include pursuing an acquisition, developing a new product line, upgrading executive talent, or distributing it as bonus compensation to key employees.
Let’s focus on that last option.
Compensating Your Top Performers
From a cash perspective, we highly recommend performance-based bonuses as a key way to compensate your top performers. Today’s executives are being measured more by the value they create for the company’s owners than by simply getting the job done. We encourage owners and CEOs to create measurable, achievable benchmarks for key executives that can be monitored in a relatively easy and efficient manner.
We are seeing a growing trend toward the creation of bonus and/or cash pools to properly incent top performers as the company grows. Companies are also increasingly using alternatives like phantom stock plans and stock appreciation bonuses that put a percentage of increased revenues over a specified time period into an executive’s retirement plan. With these plans, the executive does not own equity in the company, but shares part of the increase in value. These vehicles reward executives for growth and profits with a focus on specific goals and objectives that need to be accomplished.
Transparency is vital with these arrangements. Owners need to be more willing to communicate the company’s cash position to key executives on a regular basis. That way, you can avoid surprises and everyone will understand why bonuses are down when the company has not had a great year. The philosophy should be that if everyone is rowing in the same direction, everyone will win.
Attracting “A” Players in a Talent War
Mid-market companies realize there is a talent war and know they need to pay for top talent. I recently attended a seminar featuring a highly respected economist. He mentioned two trends that we have been talking to our clients about for the past two years. First, when looking for new executive talent, please know that “A” players have many more employment options than in previous years. “A” players control some of the hiring leverage and will be interviewing you as much as you are interviewing them.
Second, these “A” players are being heavily recruited because there is currently a smaller supply of qualified candidates. To successfully attract top talent to your organization, you must be willing to offer above average salaries.
However, many executives do not yet realize that they will increasingly be asked to share in a company’s risk. One way to ensure your new hire will have some “skin in the game” is by offering a package with a very competitive salary along with a strong performance-based bonus and upside compensation. As the executive positively impacts the company and its bottom line, you can easily measure his or her contribution and distribute profits accordingly.
Contact us to learn more about this topic.
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