Unless they have capable successors and employees, many closely held businesses do not survive the departure of the owner. The chance of survival is further diminished if key employees leave instead of adapting to the new owners and management. Therefore, a business succession plan should contain strategies to identify and retain key employees. Even if the owner has a successor who is ready and able to successfully take control of the business when the owner retires, key employees will usually be necessary to ensure the business continues to grow and prosper. Key employees are not always limited to those in high-level control or management positions. They often include employees in important finance, marketing, or operational positions.
DEVELOPING A RETENTION STRATEGY
Retaining key employees during times of transition is vital to a business’s success. Therefore, it is important to develop a strategy to retain those employees when formulating a business succession plan.
1. Identify Key Employees and Their Goals
When formulating a business succession plan, it is important to identify all employees who are critical to the continued success of the business. There is no standard definition of a key employee, although the term generally connotes upper-level management. However, lower-level managers or even rank-and-file employees may have valuable expertise and experience.
Once key employees are identified, a strategy for their retention can be formulated. The key to any retention strategy is designing incentives that will motivate that particular employee. For example, some key employees may desire equity ownership in the company. Others may be motivated by more current income or more income upon retirement. Although the business may not be willing to provide everything the employee wants, acceptable compromises often can be reached. The key is to identify incentives that motivate the employee and package the ones the business is willing to offer.
Although money is usually the biggest motivating factor, non-monetary factors should not be overlooked as an incentive for key employees to remain with the business and contribute to its success. Flex time or part time employment may motivate employees who want to spend more time with family or pursue personal goals. Other incentives include job advancement and job enrichment. If there is a higher position for which the key employee is qualified, the company can provide an incentive for the employee to stay by offering the promotion, which should also offer higher pay. Job enrichment includes expanding the employee’s responsibilities, assigning leadership on a new project, or enhancing the employee’s decision-making role in the company. Top management’s commitment to enrich an employee’s job as a part of the ownership transition program can provide the key employee with an incentive to stay and make a positive contribution to that transition. Ultimately, the appropriate retention strategy usually contains a combination of monetary and non-monetary factors.
2. Alleviate Fears through Communication
Employees may become apprehensive about their future when a business goes through an ownership change. Often, they are concerned that the business will not be as successful as before or fear the new owners will change the way the company operates. They may also feel a loss of goodwill and appreciation they had built up with the previous owner and resent having to re-establish their importance to the business. An employee retention strategy should anticipate and address these concerns.
Open communication is a good way to alleviate the key employee’s fears about the company’s future. To the extent possible, make the key employee aware of the owner’s plans for succession. Knowing when the succession will take place, the owner’s involvement during the transition period, and why the owner chose a particular successor can help alleviate the employee’s concerns. Often, a meeting between the successor and key employee to discuss the successor’s plans for the business will make the employee feel more comfortable. The meeting may help the key employee realize the owner has left the business in capable hands and may give the employee the opportunity to establish a rapport with the new owner.
3. Point out the Positives
Pointing out the benefits of continuing to work for the family business may help to retain key employees. Generally family businesses do not have excess employees to easily replace a key employee. Thus, key employees often benefit by job stability in a family business. Also, the owner may be more loyal to key employees. Often the owner and key employees have worked together to build the business. This shared history and mutual pride in past achievements often results in a much closer relationship between owner and employee than in a larger company.
4. Share the Responsibility for Success
The degree to which employees are allowed to participate in management decisions can impact a business’s retention rate during an ownership transition. Many owners make all the business decisions. Delegating responsibility for some of these decisions allows key employees to contribute to the success of the business and enhances their perception of their value to the business. Involving key employees in the development and implementation of future business plans gives them a vision of the future that they are helping to create; therefore, they are more likely to be excited about staying and convinced that their visions can become reality.
5. Use Monetary Incentives Effectively
Money is a motivating factor for most employees. Ensuring that employees are paid at or above industry standards is important to maintaining high employee retention rates. An executive placement agency or consulting firm is a good source for competitive salary information. One of the biggest mistakes a business can make is increasing key employees’ responsibilities during a transition in ownership without adequately adjusting their pay. In addition to providing competitive base compensation, there are other monetary incentives that can be offered as part of a total compensation package, e.g., bonuses for meeting short-term performance goals, and stock options, deferred compensation, etc. for reaching longer-term objectives and providing for the employee’s retirement.
6. Choose Appropriate Nontaxable Fringe Benefits
In addition to providing key employees with the necessary monetary incentives, companies may be able to use nontaxable fringe benefits as additional retention and motivation tools. Broad-based fringe benefit programs, such as medical reimbursement plans or group-term life insurance policies, can be provided tax-free to employees.
7. Consider the Need for Employment Contracts
Although written employment contracts are rare in family-owned businesses, they can be useful in certain situations to help hire or retain a key employee. From the employee’s perspective, such a contract can provide a measure of security (in the form of a salary guarantee, etc.) when the ownership and control of a company is transferred. If the company is being sold the existence of employment contracts with key employees should increase its value, since the purchaser has some assurance that key employees will remain with the company. In addition, an employment contract will normally provide the details of the employee’s basic compensation and the terms of any bonus arrangement, deferred compensation, stock-based compensation, or severance benefits to which the employee is entitled.
Besides being a means to document the employee’s compensation arrangement, for an employer the benefits of an employment contract include the ability to provide for such provisions as the following:
- A Noncompete Clause
- A Nondisclosure and/or Trade Secret Clause(s)
- An Arbitration (or Alternative Dispute Resolution) Clause
- Patent, Invention, or Copyright Clause
- Anti-moonlighting Clause
Even though employment contracts can be an advantage to both the employee and employer, they have some drawbacks. Because it is a complex legal agreement covering an important relationship with a valued employee, an employment contract should only be used when the company is willing to pay the cost necessary to have it drafted by a qualified employment law attorney who is familiar both with applicable state law and the business’s unique circumstances and intentions. Failing to go to this expense can create unintended results that frequently come to light only after there is a disagreement.
An employment contract will also likely be viewed as undesirable if it binds an employee to a company or the company to an employee, even after the two discover they simply are not compatible. However, this potential problem can usually be overcome by providing in the contract that the employer and employee both reserve their rights to end the employment relationship simply by providing a certain number of days of notice. The amount of any termination payments, the length of any noncompete clauses, and other provisions applicable to the departing employee may be affected by which party initiated the contract termination.