The most recent post discussed the structure of a Stock Appreciation Rights Program as part of your ongoing effort to retain and motivate key employees, and as alternative to issuing equity. The principal advantages of the SAR program are:
- It provides a clear connection between financial reward and the success of the company.
- It encourages cooperation among individuals and groups, because everyone will benefit financially if the company prospers.
- The vesting schedule encourages and directly rewards longevity.
- The company repurchases non-vested shares for zero dollars.
- When the company repurchases vested shares, 100% of the repurchase price is tax deductible.
As we indicated in the last post, an SAR program provides little in the way of immediate reward. For some individuals, such as “hunter” salespeople, the lack of short-term feedback can be a demotivator. This shortcoming can be remedied by an effective cash bonus program.
There is one cardinal rule for designing any cash compensation program; namely, reward the employee for success in areas in which s/he has a significant amount of control or, at least, considerable influence. Financial accountability is critical, and that means the capacity to carve out in numbers the results of your employee’s efforts.
Let’s say, for example, that your company manufactures a number of products which carry a wide range of Gross Margin as a percent of sales. Among those product lines that generate comparable unit volume, your sales force should emphasize sales of the high Gross Margin products, and you should reward those who are successful in this effort. Specifically, the bonus plan must reward both Gross Margin dollars and Gross Margin percentages.
We have designed a number of sales compensation programs over the past 40 years, with particular emphasis on this very principle. The beauty of this idea is that, if the salesperson increases the proportion of high Gross Margin business, while maintaining constant sales volume, s/he will benefit twice. First, Gross Margin dollars will increase because the Gross Margin percentage is higher on constant sales. Second, s/he will get a bigger slice of those Gross Margin dollars. So, the salesperson will get a bigger slice of a bigger pie. Now, that’s motivation!
Stock Appreciation Rights programs and cash bonus programs are not mutually exclusive. Quite the contrary, they can be companions that address the need to motivate the employee in the short run and encourage both strategic thinking and longevity.
This article has been contributed by Steven D. Popell. Steve has been a general management consultant since 1970. Steve is a Certified Management Consultant, business valuation expert, and inventor of ExiTrak®- a process designed to assist the privately-held company owner/manager to build an attractive strategic acquisition candidate