Articles Tagged ‘Key employees’

Characteristics of Bonus Incentive Plans

Friday, July 6th, 2012

Presented by T. Ray Phillips

Too often, owners only discover that the compensation plans they’ve put in place for key employees are sadly inadequate when those key employees leave their companies for greener pastures. The departure of one or more of these key employees not only complicates your daily business life, but it can slam shut the door on your exit plans. Without experienced management in place, you may find it very difficult (if not impossible) to leave your business in style.

Key employees are aptly named not only because they are key to the efficient and profitable operation of your business; they are also key to your departure. No one will want or be able to run your business without you, unless key management remains after your departure.

How then does an owner manage to keep key employees on board? Rather than tie them to the mast, many owners install Employee Incentive Plans that motivate them to stay. In doing so, owners also work to achieve the goal of ensuring their successful exits.

We have identified four characteristics common to successful bonus plans. They:

Are specific, not arbitrary, and are in writing;
Are tied to performance standards;
Make substantial bonuses; and
Handcuff the key employee to the business.
Let’s look at each briefly.

Clear Communication.

The most basic characteristic of a successful plan is that it is communicated clearly by the employer and understood thoroughly by the employee. Therefore, successful plans are in writing and are based on determinable standards. To be successful, employees know that the plan exists and how it works. Plans are explained to employees in face-to-face meetings, often with the owner’s advisors present to answer any questions.

Performance Standards.

The second characteristic is that the Incentive Plan’s bonus is tied to performance standards. Owners often work closely with their advisors to determine which performance standards should be used—perhaps net revenues or taxable income above a certain threshold—for which employees.

The standards of performance that the owner chooses must be ones that the employee’s activities can influence and that, when attained, increase the value of the company.

Let’s look at how one owner accomplished exactly that.

Duke Manning was struggling to keep his renowned, yet temperamental, chef in line. Henri always wanted more money even though the profits of the restaurant, specifically the kitchen, were uneven. Since Chef Henri controlled both the food costs and the labor costs, Duke and his advisors designed an incentive plan to encourage Henri to keep both items in line, but not too low.

Duke’s incentive plan worked as follows: If quarterly food costs were no greater than 26% and no lower than 22% (a range we once believed necessary to keep food quality high) Henri would receive incentive compensation equal to 1% of the restaurant revenues. Similarly, if quarterly labor costs stayed between 25% and 21%, Henri would receive another 1% or a possible total of 2% of the gross revenues. Duke determined that if the kitchen could not stay within these ranges, profitability or the reputation and quality of the restaurant would suffer. If the restaurant prospered, revenues could be in excess of $3 million and Henri could earn as much as $60,000.

The result? Henri was motivated to increase revenues, because his bonus would increase while keeping costs and quality in line.

Substantial.

Third, the size of the bonus must be substantial enough to motivate employees to reach their performance standards. As a rule of thumb, a plan should create a potential bonus of at least 30 percent of a key employee’s compensation. Anything less may not be sufficiently attractive to motivate employees to modify their behavior to make the company more valuable.

Handcuffs.

Finally, a successful plan handcuffs the key employees to the business. The goal here is to keep the employee with the company the day after, and even years after, the bonus is awarded. Owners typically use several techniques to create “golden handcuffs” for their employees.

Recall Henri’s incentive. Because Duke wanted to keep Henri for the long term, Duke paid half of Henri’s bonus to Henri as he earned it and deferred (and subjected it to a vesting schedule) the other half. Of course, if Henri left the restaurant before he was vested he would forfeit half of his bonuses.

Disclosure:
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Securities, investment advisory and financial planning services offered through MML Investors Services, LLC 317-469-9999 Member SIPC Supervisory offices: 900 E. 96th St, Ste 300, Indianapolis, IN 46240. The Family Business Legacy Company, LLC is not an affiliate or subsidiary of MML Investors Services, LLC.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

T. Ray Phillips, CFBS, AEP, ChFC
trphillips@financialguide.com

The Family Business Legacy Co, LLC
900 E 96th Street
Suite 300
Indianapolis, IN 46240
http://www.familybusinesslegacies.com
317-208-6312

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Why Smart Employees Underperform

Wednesday, January 4th, 2012

We’ve all been there. After an extensive and thorough search for a key manager, one candidate stands out. This candidate has the right experience, solid qualifications, and a relevant work history, and has given an impressive performance during the interview process. She said the right things, put forward some great ideas and generally presented very well. You commit and make the hire. Three months later, you begin to question your decision. Your new hire’s team appears disgruntled, morale is low, and output and productivity are well behind the figures from the previous quarter. After investigating further and speaking with a few key team members, you realize there is a disconnect—a mismatch. While the hire looked impressive on paper and presented well during one-on-one interviews, your new hire’s style, approach, and behavior on the job are simply inconsistent with the values and expectations of your organization. Your new hire is not a good fit and you need to make a change. We are going to look at seven reasons this could be.

1. Inadequate Capability

Don’t judge a book by its cover, and don’t believe what you read on a resume!

Capability refers to the skills, tools and experience that a person needs in order to successfully perform her job. When any of these factors are missing, there is an increased chance that the employee will underperform.

Diagnostics that help you identify if an underperforming employee has adequate capability:

Skills—Do you know what skills are needed to perform the job and whether the employee possesses those skills? If she doesn’t possess the necessary skills, how will you help her acquire them, and how long do you expect that process to take? Skills training takes time and money, and results are never guaranteed unless there is adequate commitment from both the manager and the employee.

Tools—Even if an individual has the skills and experience to do the job, does he have the tools to deliver peak performance? The tools don’t have to be the most up-to-date, they just need to work well.

Experience—Just because an employee has the skills to do a job doesn’t mean that he has the experience to apply those skills in his specific position. This is especially true for recent graduates, outside hires from different industries and internal hires from different departments.

2. Poor Job Fit

“Fit” reflects the behaviors and interests needed to succeed in a job

Many people fall into the trap of choosing a profession or job that is a bad fit. We are who we are. Our “mental DNA” is influenced both by our genetics and our early life experiences, and it is almost completely formed by the time we are 20 years old. Rather than trying to understand ourselves so that we can choose a calling that builds on our strengths and aligns with our interests, we choose jobs because of peer pressure and societal influences.

Skills can be taught, but behaviors are much more difficult to change

Skills can improve through training and mentoring, but it takes tremendous effort and motivation to change natural behavior. If an individual isn’t motivated to change, then he probably won’t.

It is important to understand a person’s innate behaviors and interests when trying to match him with the right job. Know the job, know what type of person is successful in that job, and then hire others who have the behavioral traits that fit that job. This is easier said than done because it is difficult to gauge behaviors in a job interview, but behavioral assessments can be extremely helpful.

3. Fuzzy Goals and Accountabilities

Clear goals help focus and motivate employees to achieve the desired results

Employees need to be very clear about their responsibilities and about the results you expect them to achieve. Daily work and priorities are easily affected by the crisis of the day, new requests or changes in direction. Setting and tracking SMART goals helps your employees focus on what is most important to your business, and clear accountabilities help ensure that the work gets done with minimal conflict.

Use SMART goals to create clarity and improve the employee’s performance

Specific–Your employee has a much better chance of accomplishing a specific goal than a general goal.

Measurable–Establish concrete criteria for measuring progress toward the attainment of each goal you set.

Aligned–The individual’s goals need to support the organization’s priorities.

Realistic–To be realistic, a goal must represent an objective toward which you are both willing and able to work.

Timed–A goal should be grounded within a time frame; otherwise there is no sense of urgency.
read full article »

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Want to Stay Employed? Stop Living in the Past

Friday, December 30th, 2011

Being successful is hard work and not everyone likes hard work. It might be safe to say that many people are lazy, they do just enough to get by. I remember when I finished high school I knew I had to go to college so I could get a good job. When I went to work I found out I needed a master’s degree so I could keep my job so I went back to college. I began to notice that education never stopped except after college I would have to be responsible for my education. To stay competitive in the job market I would have to continue to learn and grow. Sometimes I had to learn things that weren’t interesting but were important to my career survival. Not only hasn’t this changed but it’s changing every day or maybe every minute. In my travels I often hear business owners saying, “I’m glad I’ll be out of this business soon so I won’t have to do that social media thing.” Chances are once they get out of business social media will still be chasing them, especially if they want to communicate with the rest of the world.

Here are 8 things you can do right away:

1. Always be curious and interested in the world around you. It may be more exciting than you think. Dive into your life, get excited. Excitement is catching. People who are exciting are fun to be around and very motivating. Look out around you, what do you see, what’s out there waiting for you? Think about an event you’re going to attend in the future and get excited. What is going on in your life at this moment that can make you excited?

2. Read articles that keep you current with changes in your industry. What you remember from the 90′s might not help you. Read articles from industry experts, join LinkedIn or check out Facebook. If you’re in the flooring industry join us on Fabulous Floors Magazine facebook page and join the discussions. If you want to give “red hot customer service” you have to know your products.

3. If training is offered to you, particularly for free, take it. Taking classes will help motivate you and improve your outlook on life. Look for training classes in your community, are there free classes you can take or some for very little money?

4. Take a college class and brush up on your writing skills or take any class that helps you to think. You know the old saying, learn it, teach it, do it. Or is the new expression, Teach It, Tech It, Learn It, Lead It, by the way, this is a great blog. Whatever you learn, share it with everyone; if you can teach it you probably understand it.

5. Be responsible for your own education and learning. This may mean investing your own money so you can stay in the game and remain employable. It’s a competitive world out there and the winners will be those who keep up on technology.

6. Question what you know and what’s new. What could you learn that would make you “more employable?” What are younger people studying in college, what skills do you need to master if you’re going to remain employable?

7. Whenever possible take a sales class even if you don’t sell professionally. We are all salespeople and always selling something including ourselves.

8. Listen and learn from others. Check out blogs that interest you and watch TV shows that do more than amuse. Check out YouTube for something you want to learn. I love YouTube you can learn everything from horseback riding to knitting.

I love this quote:

The difference between school and life? In school, you’re taught a lesson and then given a test. In life, you’re given a test that teaches you a lesson.
Tom Bodett

Lisbeth Calandrino
Fabulous Floors
Associate Publisher &
Director of Consumer Research
lcalandrino@nycap.rr.com

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Exit Planning: First Things First, Prioritize Your Objectives

Wednesday, May 18th, 2011

Presented by T. Ray Phillips

“You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” — Yogi Berra

It is not always easy to interpret Yogi. In this case, perhaps he is advising you to figure out just where you are headed in your business. As you near the time when you will leave behind the daily worries and stresses of business ownership, have you defined your successful exit? Do you know where “there” is, much less how to get there? Unless you set and prioritize your exit goals or objectives, you may have too many, or they might conflict, but in either case you may not make much headway.

The clearest example of a failure to set objectives may be Bill Wilson (not his real name), a business owner who recently told us that he wanted:

To leave his business within three years, but he was ready to leave today;
Financial security, defined as a seamless continuation of his current lifestyle; and
To transfer the business to his key employees.

A quick review of Bill’s personal financial statement, however, revealed that most of the income required to maintain his lifestyle would have to come from the business. Unfortunately, his business wasn’t large enough to attract a cash buyer. And, since Bill had done no Exit Planning, his employees had no funds with which to purchase his ownership interest. A long term installment note seemed to be the only answer — a risk Bill was unwilling to take.

Contrast this unpalatable solution with Bill’s objectives — objectives which could have been achieved had he taken the time (well before he wanted to leave the business) to establish and to prioritize his Exit Objectives.

If, for example, an owner’s need for financial security prevails, selling a business to a third party for cash may be the best and quickest exit path.

If, however, attracting a qualified third party is unlikely, an owner may need more time to devise and to implement a transfer to an insider (child or employee) that provides the owner adequate cash.

On the other hand, if an owner’s desire to transfer the business to a specific person or group trumps his or her need for financial security, and his/her deadline for departure draws near, financial security in the form of “up-front” cash must take a backseat.

As you can see, owners must consider—simultaneously—the three primary exit goals (listed below). Ask yourself which is your most important exit objective and rank your answers from 1 (most important) to 3 (least important).
read full article »

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