Employee And Executive Compensation - Keeping The Talent To Fuel Success.
People will ultimately facilitate the success of any start-up or emerging entity. This means the owner (or champion), management, and employees, if you have them. A strategy to keep good, strong talent is necessary because established firms are prone to actively pursue what you already have, if for no other reason to add them to their own talent pool. It’s not unheard of for goliaths like Google and Cisco to purchase start-ups exclusively for their talent pool.
So keeping the best that you have, and preventing them from running off to Silicon Valley for large dollars, requires a smart plan. Here are the components you need to consider and possibly include:
- Revenue incentives
For the monetized operation, revenue incentives need to be balances with income incentives, or else your people may possibly do anything to generate a sale (include incur costs greater than the money received on the sale).
Baseline structures here involve calculating a breakeven point (including principal loan payback amounts), and then specifying a percentage pool out of which will be extracted incentive payments. Using a percentage pool allows the bonus to increase relatively with performance. Pools can be generated for each employee, employee or management group, or for the staff pool in total. 2 separate pools for employees and management is normal.
- Income incentives
Income incentives should trump revenue incentives, because you don’t want to be exposed to the loss situation described above. In other words, revenue incentives are triggered only when income incentives are reached. This ensures that the company generates appropriate recovery on it’s sales.
For example, based on your market norms (or studies or similar markets if you’re in a new area), net income levels must increase year-over-years by a benchmark percentage. If this is reached, then incentives are awarded for reaching the income goals. The revenue incentives also kick it to complete a compensation package.
Overriding the consideration of these components is a calculation of what the “aggregate” compensation package should be, and ascertain if the package is sufficient to keep and attract good talent. If monetary compensation is a little thin in comparison with the competition (ie: monetary resources are a little limited(, then incentives can be provided elsewhere to provide comfort, such as benefit plans, incentive trips, etc… The overriding intent here is to make sure of the maximum compensation exposure and ensure that, if goals are reached, you can afford to pay out. You should be able to, because it can be funded from the increased sales – just make sure you collect on those sales!
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- Option pools
Option pools are a necessary component in the compensation package for early employees and management. Management personnel usually receive in the area of 1 ½ to 3% share in the company in an option round; the specifics of which usually end up being finalized in the final moments of a capital fundraise. Giving top management options not only gives them incentive to stay with the company to help bring to fruition your business goals, but is also seen as the right thing to do to solidify your strongest personnel and protect against poachers.
In the end, people, yourself included, will build the company to success. Although you need a breakthrough and disruptive product, even the best idea won’t go anywhere without the right people to steer it correctly. You might as well keep them with you by finding out what motivates them and give it to them
Nicholas Kilpatrick is a partner at the accounting firm of Burgess Kilpatrick. Please visit our website at www.burgesskilpatrick.com or on Facebook at www.facebok.com/BurgessKilpatrick for more information on our firm.
