Attract, retain, incentivise!
Does your business rely heavily on one or more key employees who contribute to your business success? Are you worried about the effect on your business if they leave? Is your business owner proof?
Understanding how to retain key employees
This is a common problem many business owners face along their journey. As the business owner, you have built a successful business. You have spent time and money recruiting and training employees who are integral to the ongoing success of the business. However those same employees may be thinking about starting up their own venture or making a career move to a competitor. As a business owner you need to consider strategies to mitigate this human capital risk.
So how do you retain key employees?
Implementing a mix of financial and non-financial benefits builds a strong, performance based culture amongst employees and encourages key employees to remain in the business.
There are many reasons why a business owner may not be willing to let go of equity in their business. However, this does not mean that you cannot apply the “golden handcuffs” to these key employees!
Short Term Incentives (STI)
This is a short term employee incentive payment made to key employees, subject to the achievement of the performance targets of the business and/or the individual employee. Bonuses generally take the form of a cash payment and therefore do not involve the transfer or issue of any equity in the business.
Dividend Access Shares
A separate class of shares that may be granted to key employees. They entitle the shareholder to dividend payments at the discretion of directors and provide a form of tangible equity to employees. The shares normally carry no voting rights or rights to capital of the company and therefore the business owner is not required to transfer any of their equity. That is, no loss of control and no dilution of ownership of the business.
An arrangement whereby employees receive a bonus based on the business achieving an agreed outcome, such as an increase in value or achieving set profit targets. This is designed to align the interests of employer and employee, and allows key employees to feel that they are directly benefiting from their contribution to business success.
An arrangement whereby managers and key employees are given the option to acquire a partial ownership interest in the business by purchasing existing interests from the owners, or issuing new interests in the business. This can be an effective option for business owners looking to step away from day to day operations and realise some of the value they have built up, while rewarding long term employees with access to tangible equity and ownership of the business.
Long Term Incentives (LTI)
Arrangements designed to incentivise employees to remain and perform over an extended period of time. By rewarding participants for results over a longer measurement period, typically two to five years. Benefits normally take the form of cash or equity, and as part of a broader key employee remuneration plan. LTI’s hold employees accountable as their remuneration is directly linked to business performance.
These incentives can be even more powerful than financial incentives as motivators. They are aimed at team culture, work life balance, creative working, innovation, training and development.
- Employment agreements
- Employment engagement
- Performance management
- Setting and communicating career paths
- Learning and development opportunities
- Flexible working arrangements
Communication is key to underpinning your employee retention plan. This helps to keep employees in the loop and ensures that they feel they are a key part of the business and have an opportunity to share in the success of the business.
- Are your employees engaged?
- Do you know how to best engage them?
- Is your business owner proof?
- Do you have an owner plan?
Timing of plan
- The best time is now.
- Act before it is too late!
Timing of employee benefits
- Instant or progressive?
- What is the ideal mix?
- What is the outcome to the business owner?
- What about the employees?
- What are the risks associated with your key employee retention strategy?
Don’t know where to start?
Firstly, for most businesses, the key to success is its people. For this reason it is important that you take action now if you believe you have key employees at risk of leaving.
Next, when designing an effective key employee retention plan it is important to bring key team members along for the journey in order to gain key employee buy in.
Finally, as a business owner keep in mind that you will also benefit from owner proofing your business. A business with a strong management team is more valuable to a buyer than one where success is heavily dependent on the owner … not to mention the benefits of sharing the workload and stresses of the business with others!
Like to know how to achieve this?
At Fordham, we have the expertise and experience to help guide business owners through this entire journey.
We help you to minimise risk in your business by developing remuneration packages, backing this up through the facilitation of business plans, management workshops and key employee developments plans. These forums deliver significant positive outcomes for the owner, their business and the management team. We are only too happy to support you in what can often be a lonely lot in business life.
Like to know more?
This publication has been prepared by Fordham Business Advisors Pty Ltd (Fordham) ABN 77 140 981 853 and Perpetual Trustee Company Limited (PTCo) ABN 42 000 001 007, AFSL 236643. Perpetual Private advice and services are provided by PTCo. Fordham’s liability is limited by a scheme approved under Professional Standards Legislation. It is general information only and is not intended to provide you with advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. This information is believed to be accurate at the time of compilation and is provided in good faith.