Second, the incentive is substantial. The key employees must perceive it as a substantial incentive worth achieving. This substantial amount is only awarded upon the attainment of the performance standards set by the business owner.
Third, the plan should tie the key management team to the business so that, regardless of who owns the company, these individuals have an incentive to remain with the business. Payments of these incentive plan awards to the key employees are not immediate. There should always be some type of vesting schedule associated with any incentive plan award. Normally, a continual or “rolling” vesting schedule is used – this approach requires each year’s award to vest on a separate schedule. Using this type of schedule will tie the key employees to the business longer as they are never fully vested in the most recent awards.
Fourth, the key employees should receive the incentive award based on performance standards that, when attained, increase the value of the business. This element is critical to a properly designed incentive plan.
Also, it cannot be overstated that employers should consult with a CPA to strengthen legal and tax advice when establishing any incentive program.
By working on their clients exit plans as part of an advisor team, the CPA can participate in the transfer planning work, earn additional fees and have the opportunity to build a relationship with the future owners of their clients’ businesses.
And, if it is time for the CPA Owner to move forward with his own succession plan, remember to create a work environment that encourages longevity and recognize that most employees are motivated by an atmosphere that acknowledges skill, allows for active participation in decision-making, provides opportunities for professional growth, and supports financial comfort now and in retirement.
Remember, each key employee is unique.
Bob O’Hara, CPA/PFS MST, CExP™ is the founder of O’Hara & Company, a leading financial firm that specializes in guiding businesses through their exit planning process while building sustainable business value, as well as the creator of a national educational website for business owners, www.exitplanning-edu.com