Loyd Rawls

A Case Study Look: Locking in Your Key Managers
October 18, 2007

 “All managers are NOT created Equal.” Managers vary from space fillers to rainmakers. If you have a rainmaker in your organization – you definitely do not want to let them go, which requires living by the golden rule:

Match compensation and incentive plans to the impact a key manager is having upon your business.

To illustrate, let’s look at the Smith’s situation that I have discussed in my previous posts:

As a recap, Mr. Smith was stressing over the possibility that key managers were going to quit because they were unhappy with their pay plans. And, Mr. Smith had not followed up on his perceived promise to make them partners. Knowing that his managers were the key to his success, Mr. Smith understood he was in a vulnerable position. The continued success of his business, as well as his family’s attractive lifestyle, was at risk.

I first confirmed that a significant component of all key managers’ compensation should be incentives that allow them to earn compensation commensurate with their impact on profitability.

Confirming that Ray was critical to succession, I recommended we address him first and, specifically, make him a shareholder as soon as practical. 

• Allocate 30% of the stock to provide Ray the immediate opportunity to be the Equity Succession Bridge.
• Have Ray purchase 20% based upon the lowest reasonable valuation, but require a relatively significant cash down payment to assure that he had “skin in the game.”
• Finance the balance over a period of time that the net distributable earnings of his share would support, assuming profitability at least remained the same.
• Require a shareholder’s agreement that guaranteed the return of stock in the event Ray terminated employment for any reason.

With respect to the Special Key Managers, I suggested presenting them with a lucrative Convertible Supplemental Executive Retirement Plan (SERP) that could include an opportunity for them to become shareholders, assuming:  

• They signed a non-compete and continue to fulfill expectations expressed by Ray, whom we would rely upon to develop them as leaders.
• After five years, based upon Ray’s recommendation, we would allow them to convert the funds in the SERP to purchase the remaining 10% of stock, based upon the same favorable terms. The SERP funding would provide at least the down payment for their purchase.
• If they quit prior to five years, they would forfeit all the funds allocated to their Convertible SERP. 

Consistent with the matching theory, I recommended we provide the two security conscious key managers a simple SERP that would be vested in ten years. We would contribute seven to fifteen percent of their compensation which, relatively speaking, would make a significant impact to these dedicated, role model employees.

The Smiths liked the suggestions. After securing Ray as a stockholder, the stress was significantly relieved. Subsequently, Ray influenced one of the Special Key Managers and we never felt the loss of the other. Ray and Sam used their influence to secure commitments from the two key managers. As circumstances allowed, they began replacing managers who were not having a significant impact upon our strategic goals. The business continues to rock on after Mr. and Mrs. Smith’s retirement.

Posted by Loyd Rawls on October 18, 2007 | Comments (0)