Welcome to the November vfdnet newsletter Game Plans for Growth, the regular newsletter for Owner Managers. This month we are focusing on ways of retaining key managers.
We hope that you find this useful. Do please forward this newsletter onto other Owner Managers who might be interested.
The loss of a key manager is always a big event in SME businesses. At the very least it will lead to short term pressure, considerable senior management time spent recruiting, and potentially advertising and recruitment costs. At the worst it could seriously damage your growth plans and potentially scupper a future sale of the business.
So how can you help ensure that your key managers are motivated and retained within your business? Of course every business is different, but Owner Managers may benefit from taking a look at techniques that have been used in other successful businesses.
It is incentive plans that are the central to motivating key managers. Incentive plans need to address the short term (usually through a cash based scheme) and also the long term (normally through a share based scheme)
Short term incentives, such as annual bonuses, are often linked into achievement of the businesses profit objectives. Carefully devised schemes will have considered the basis of the profit target, ie. whether this is budgeted profit or an actual profit number. How will the scheme cope if a major change in the business occurs, such as a major contract win or an acquisition? In addition where the business has separate divisions or profit centres, how much of the incentive payment should be down to individual profit centre achievement and how much to the business overall?
A good short term Management Incentive Plan will not replace the need for sound people management, but it will contribute to keeping key employees focused on the targets set.
Longer term schemes need to link key manager rewards to the long term success of the business, and this is often done through a type of share based scheme. The types of scheme available include share option schemes, share schemes and even schemes which mimic share ownership.
Before a scheme is implemented there are several factors you should consider:
- Objective – what is the scheme aiming to achieve? Is it a share in the proceeds of an eventual sale or a long term bonus plan? How will the participant turn the shares / options into cash?
- Confidentiality – How much information do you wish to share with the participants? This needs careful thought and presentation before ‘awkward’ questions from participants.
- Scope – Who will be invited into the scheme? What about future senior managers? Can the participants really make a difference to the business?
- Equity – Are you happy to give away part of the equity of your business? Do you want the shares to pay Dividends or to be non Dividend shares?
- Tax – This should never be a driver in itself, but if a tax effective scheme fits your requirements, then participants may well be very grateful if they can achieve taxable gains at 10% tax through say an Enterprise Management Incentive (EMI) share option plan.
- Ownership – If you are considering giving or selling your businesses shares then drawing up a shareholders agreement is essential in order to safeguard your interests in situations such as being able to accept an offer for the sale of the business.
- Leavers – The scheme needs to cater for ‘Good Leavers’ and ‘Bad Leavers’ so that a participant leaving to join a competitor would be required to forfeit all rights / sell the shares back, whereas a ‘Good Leaver’, such as a key manager retiring on ill health grounds, could be allowed to maintain his or her interest.
The End Result
If long term plans are not successfully implemented the impact can be very substantial as was discovered by this case study.
A medium sized business ran a management incentive plan which was very successful in motivating and rewarding key managers for their performance. Managers received a bonus according to their ability to influence their profit centre and also for the overall business performance.
However the business lacked a medium term incentive scheme or share plan. When the owner announced his intention to retire and sell the business, key managers no longer felt a medium term loyalty so left. The business went through turbulent times and a potential sale at a healthy valuation never happened, with an adverse impact on the owners, managers and staff.
If you had to replace a key manager what would it cost you? How much are you prepared to invest in ensuring your key managers stay with you and remain motivated? Well thought out incentive schemes can be very motivating, however poorly thought through schemes can be demotivating, divisive and an administrative burden, so hence it is well worth getting proper advice from someone experienced in implementing these schemes. If you would like to talk about your incentive plans (on a no obligation and confidential basis) please call me on 01865 78 40 60 or contact us.