Business planning often revolves around the idea of “What’s in it for me?” Business owners usually want the kinds of planning that let them run, grow, and eventually leave their business on their terms. Rare is the business that can run, grow, and allow its owner to leave on their terms without support from key employees. To gather that long-term support, business owners likely need to incentivize those employees.
Consider the example of Donald Fowler, a fictional but representative owner, and how incentive plan choices changed the arc of his business planning.
If It Looks Like a Duck and Quacks Like a Duck . . .
Donald Fowler always said, “If it looks like a duck and quacks like a duck, it’s a Fowler!” Donald had found great success manufacturing duck-centric treats and training tools for dogs—professional show dogs, hunters, and mutts one and all. He employed sixty full-timers, including his two key employees, Ben and Courtney.
Ben was an outspoken and ambitious sales manager constantly looking for the next big win. A natural-born leader, Ben often asked Donald for more challenges to grow the company. His sales staff adored him, and Donald knew that Ben had a huge role in his company’s success.
Courtney was quieter and much more cerebral, but no less important. She implemented several business processes that lowered production costs, increased fulfillment speeds, and helped Donald attract the best talent, including Ben. Courtney was also Donald’s adopted daughter, and Donald had always longed to pass the business on to her when he retired.
During an annual performance review, Ben told Donald, “Another company approached me. They’re offering me stock in their company. I’d rather stay here, and I’m not sure how I feel about owning part of a company, but the money is so good. I need you to offer me something similar.”
Donald was stunned. Ben had never mentioned an interest in ownership. And Donald didn’t want to provide Ben with stock, since he intended to pass the business to Courtney. Donald assured Ben he’d figure something out for him. But he had no idea what to do.
Creative Business Planning
Donald set up a meeting with his team of advisors. One of the newer members of the Advisor Team told him that he was right to hesitate about giving Ben ownership if he wanted Courtney to run the business. Employees and family members often clashed on this issue. Donald felt stuck.
“Donald, you always say, ‘If it looks like a duck and quacks like a duck,’ right?” his newer advisor asked him.
“Yes . . .” Donald said.
“Well, what if it looks like a duck and quacks like a duck, but isn’t really a duck?”
“What are you getting at?” Donald asked.
“What we’re saying,” another advisor said, “is that you can give Ben something that looks like stock, acts like stock, and has value like stock, but isn’t really stock.”
Phantom Stock as an Incentive Plan
Donald’s advisors recommended that he consider a Phantom Stock Plan to incentivize Ben to stay. Ben had said he wasn’t sure about ownership but that he liked the idea of more money. But Donald needed to keep Ben motivated in the long term to achieve his financial independence goals. When he approached Ben with the idea of a Phantom Stock Plan, Ben was intrigued.
With help from his Advisor Team, Donald proposed a plan to Ben. Every time Ben exceeded a specific and written annual sales goal, he’d receive Phantom Stock shares. As company value grew on the back of Ben’s work, so would the value of Ben’s phantom shares. However, the plan also included vesting and forfeiture terms to entice Ben to stay to receive full value, effectively handcuffing him to the business.
In the end, Ben loved the idea. He’d receive more money based on his performance, which was a perfect motivator for someone as ambitious as him. But it also relieved him of the pressures of actual ownership, about which Ben wasn’t too comfortable in the first place.
The incentive plan helped align Donald’s goals with what motivated Ben most. Ben continued to outperform expectations, making more money for himself as the business grew in value.
Growing business value gave Donald more opportunities to achieve his financial independence goal, which he did over the next five years. He then transitioned ownership of the company to Courtney, who continued to incentivize Ben with a similar plan with similar results.
We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.
Keven P. Prather is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. Call 216-592-7314, send an email to email@example.com or visit transitionextadvisors.com.