Introduction:
As a business owner, you understand the importance of incentivizing your key employees to drive growth and increase the value of your company. The right incentive plans not only attract and retain talented individuals but also align their efforts with the factors that contribute to the company's success. In this blog post, we will explore the significance of aligning your key people, discuss common compensation challenges, highlight the importance of focusing on key performance indicators (KPIs), and provide insights on building an effective incentive plan that leads to growth and a successful exit.
The Challenge of Subjective Compensation Planning:
Typically, compensation plans for key executives include base salaries and performance-based bonuses. However, the lack of well-developed bonus structures often leaves key employees uncertain about their income and can lead to misinterpretations and dissatisfaction. Moreover, subjective bonus plans may not adequately reward high performers and can be demotivating when non-performers are not held accountable. To address these challenges, it is essential to establish an objective framework that ties compensation directly to measurable business performance.
Aligning with Key Performance Indicators:
To align compensation with company performance, owners should identify and focus on key performance indicators (KPIs) that determine the success of the business. While revenue and cash flow are important metrics, it is equally crucial to consider operational performance and marketing efforts as they lay the foundation for future revenue. Each department and job function may require a customized approach, taking into account short-term and long-term goals and the desired behavioral changes. A comprehensive understanding of what drives value in a privately-held business is essential for creating incentives that encourage value-creating activities rather than just revenue and cash flow generation.
Starting Point: Begin with the End in Mind:
To initiate the alignment process, owners should envision the overall goals of the company and set a roadmap to reach the desired destination. Strategic planning and forward-thinking goals are crucial for developing a comprehensive incentive plan that outlines the path forward. Unfortunately, many owners tend to focus too much on day-to-day operations, neglecting the strategic planning necessary for long-term success. By dedicating time to work on the business rather than just in the business, owners can lay the foundation for a successful alignment strategy.
Involving Key People in the Process: When designing an incentive compensation plan, it is highly beneficial to involve key employees in the process. By engaging in open discussions and seeking their input, you can ensure that the plan is well-received and that employees feel a sense of ownership and inclusion. This collaborative approach not only leads to a stronger plan but also enhances buy-in and commitment from your key people.
Incentives that Drive Growth and Facilitate Exit:
A well-designed incentive plan serves as a challenge for both the company and its key employees. It empowers individuals to control their income while ensuring that increased compensation aligns with the company's benefit. By achieving this balance, the business becomes less dependent on the owner and more transferable. Aligning key people through effective incentives plays a crucial role in preparing for a successful exit. It necessitates building a strong management team and delegating responsibilities, allowing owners to focus on their highest and best use of talents.
Conclusion:
Aligning key people through well-designed incentive plans is vital for growing your business and planning a successful exit. By establishing objective compensation structures based on key performance indicators, involving key employees in the process, and encouraging behaviors that create long-term value, you can motivate your team to drive growth and increase the transferability of your company. As a CPA and CFO, I encourage you to invest time and effort in aligning your key people to build a prosperous future for your business.
Plan well and have a wonderful weekend,
Brad Whitfield
CPA, CVA, CM&AA