Posts Tagged ‘bonus’

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:

  1. It provides a clear connection between financial reward and the success of the company.
  2. It encourages cooperation among individuals and groups, because everyone will benefit financially if the company prospers.
  3. The vesting schedule encourages and directly rewards longevity.
  4. The company repurchases non-vested shares for zero dollars.
  5. 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.

Good luck!


PhotoPopell 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

We all know the demands of starting up and running a business. With so many things to focus on, delegation and prioritization become important from an early stage. But many entrepreneurs mistakenly give low priority to talent management practices, relegate them to an HR administrator or even ignore them altogether, thinking they’re unimportant administrative activities.

Before we look at why that’s a mistake, let’s start by defining what we mean by talent management. Talent management encompasses the set of management practices and processes that support employee performance, development and recognition, throughout the employment lifecycle, from hire to retire. Talent management includes things like: job descriptions, goal setting/alignment, performance appraisals, competency assessment, employee development, compensation management, succession planning, etc.

Here’s why talent management is so important.

Good Talent Management = Better Business Results

More and more research is showing that mature, integrated talent management practices have a direct impact on corporate performance.

  • The Hackett Group recently reported that companies with more mature talent management capabilities have on average18% higher earnings, 54% greater net profit margins, and greater return on equity and assets than those without mature capabilities.
  • The Aberdeen Group’s latest research finds that companies who integrate their talent management processes see significantly greater performance gains, and can measure a correlation between their talent management efforts and business operational results.
  • IBM, HCI, IDC and others have shared similar findings.

When you think of it, these findings are not all that surprising. At their core, talent management practices are designed to help you get the most out of your only sustainable competitive advantage, your workforce.

Keep Your Employees Engaged and Productive

Study after study has shown that to be engaged and productive, employees need to have:

  • Clear goals and know what is expected of them in their work;
  • Regular feedback about their performance, what they are doing well and areas for improvement;
  • Opportunities to develop, prepare for career progression and address skill gaps.

We’re also hearing almost daily that employee engagement is at an all time low.

Good talent management formalizes the practices that ensure employees have what they need to be engaged and productive. It includes the setting of SMART (specific, measurable, achievable, relevant, time-bound) goals, the identification, assessment and development of competencies important to the role as well as to the organization, and the assignment of development plans to expand knowledge, skills and experience. It also provides employees with regular, formal and informal feedback on their performance and encourages an ongoing dialogue on performance between the employee and their manager. All of these management best practices are known to foster higher employee performance, productivity and engagement.

Align Your Workforce

Simply making sure your employees have SMART goals isn’t enough. Effective talent management helps you align your workforce by tangibly linking each employee’s goals to the organization’s higher-level goals, mission and values. This gives every employee much needed context for their goals and helps them how their work directly contributes to organizational success. For the organization, it ensures that everyone’s efforts are focused on achieving the organization’s mission, vision and values, not just completing tasks and collecting a pay check.

Develop Competencies as a Competitive Differentiator

As business cycles shrink, and products and services become increasingly commoditized, your people become your only sustainable competitive advantage. Given this reality, it becomes all the more critical to identify the key competencies that differentiate your business, and cultivate these in your employees. Integrated talent management practices use competencies as the foundation for job descriptions, performance appraisals, development activities, and succession plans, and foster their continued development. In this way, they help your organization ensure its competitive advantage.

Identify and Retain High-Potential, High-Performing Employees

Identifying and investing in developing and retaining your high performing, high potential employees is key to your organization’s continued success. Even in tough economic times, retaining these employees can be a challenge. Talent management practices help you to more objectively and accurately identify your high-potential and high-performing employees, and then challenge, reward and develop them, so they remain happy, engaged and loyal to your company.

Identify and Address Performance Gaps

If you don’t know what your company’s weaknesses are, how can you address them? Mature, integrated talent management processes allow you to effectively identify and measure performance gaps by evaluating employees’ performance of goals and demonstration of key competencies. Armed with this data, you can take action to address performance gaps at the individual, departmental or organizational level, and then monitor the effectiveness of your actions in terms of improved performance. Identifying and addressing performance gaps in this way helps you to foster a culture of continuous improvement and development. It also helps prevents performance challenges in any part of the business from going unnoticed or unaddressed.

Drive Focus, Accountability and Efficiency

Having mature, integrated talent management processes help keep individual, group and organizational performance at top levels. Everyone is accountable for their personal goals, competencies and development plans, as well as those of the organization. It encourages everyone to regularly discuss progress, opportunities and challenges and improves focus, accountability and efficiency.

Conclusion

As entrepreneurs, we’re all focused on the success of our business. By ensuring our companies adopt talent management best-practices right from the start, we set our employees and our business up for success.