Using Short-Term Incentive Plans to Retain Key Employees during the Transfer of a Business

Communicating The Lifetime Stay Bonus Plan

In the last issue we looked at the steps that you need to take to create a successful Stay Bonus Plan. We used the case study of fictional owner John Ewing to illustrate the merits of a Stay Bonus program and the methods needed to create a win-win situation for both John and his key employees.

As with many owners, one of John’s main concerns during the sale of his business was confidentiality. Using the Stay Bonus concept allowed John to get over the hurdle of talking to his key employees about the sale. At some point, John’s key people (VP of Sales, COO, CFO) needed to know about the sale because the buyer eventually wanted to talk to these key employees. The Stay Bonus not only allowed John’s key employees to be brought into the “sales loop,” but it also helped to keep his key employees on board, which is especially important in the case of a deferred pay-out situation to the owner/seller.

Once John worked with his Exit Planning Advisors to develop what he believed to be a plan that benefited him, his employees and his company, he was able to congratulate himself; his job was half-finished. The other half of the process is to convince the key employees to view the benefit plan as favorably as he does. When John was ready for the step of communicating the plan, his Exit Planning Advisors recommended the following approach.

Step 1: Initial Meeting. Once an owner recognizes the value of the Stay Bonus or other incentive plan, he or she meets with the Advisory Team (attorney, CPA and financial advisor) to discuss the specific objectives he hopes to achieve. At the end of this meeting, the outline of a plan should be established. Typical Stay Bonus amounts begin at one year’s salary for each covered executive.

Step 2: Drafting Meeting. During a second meeting, the owner and advisors review the specifics of the Stay Bonus Plan. This short agreement accomplishes the following:

• Identifies eligible employees.
• Includes the amount of the stay bonus for each eligible employee. This amount is typically at least one year’s compensation.
• Describes the vesting schedule of the plan –typically, one-third of the bonus is paid at closing, one-third is paid on the first anniversary of the closing date and the remainder is paid on the second anniversary of the closing date.
• Ensures that key employees are still entitled to the Stay Bonus, if they are involuntarily terminated by the new owner.
• Establishes that the obligation to pay the Stay Bonus is with the selling owner, not the new owner, which serves to ensure that the key employees will be paid their Stay Bonuses.

Step 3: Modification Meeting. After the business owner reviews the Stay Bonus, the team discusses and modifies the plan as necessary. This step is often completed by telephone, with copies of changes provided to all advisors and the owner.

Step 4: Employee Presentation. The amended Stay Bonus is presented to the key employees. Since business owners are often emotionally involved in the process, we recommend that one of your advisors present the plan to the key employees. This enables the business owner is be removed from a potentially emotional situation and it allows the advisor to answer any technical questions the key employees may have.

Typically, it takes 30 days to move through these steps and complete the Stay Bonus creation process.

As discussed in this Exit Planning Navigator® series of articles, it is crucial for you to do whatever you can to prevent your employees from leaving after you transfer or sell your company. Stay Bonus Plans not only serve as excellent vehicles to meet your Exit Planning Objectives, but they also provide short-term incentives to satisfy your key employees during the transition. If you have any questions about how this strategy applies to your company, please contact us to discuss your specific situation.

Subsequent issues of The Exit Planning Navigator® discuss all aspects of Exit Planning. If you have questions, please contact Kevin Short, Managing Partner & CEO (kshort@claytoncapitalpartners.com).