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Dear James,
Welcome to the November vfdnet newsletter Game Plans for
Growth, the regular newsletter for Owner Managers. This month we are
focussing 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.
Kind Regards
James
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 focussed 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.
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.
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