Posts Tagged ‘executives’

Increase the value of your company

by Steve Popell on August 9, 2010

This post is about the Role of Stock Appreciation Rights in retaining key employees; which goes a long way in increasing the value of your company. One of the least understood, but most valuable, strategic assets of any privately held company planning to sell is the quality of management, including its breadth and depth.

Put yourself in the position of the buyer.  Would you pay a lot for a company the executive corps of which consists of the founder/CEO and a cast of minor characters?  Of course you wouldn’t, and for one very sound reason.  If something were to happen to that individual (illness, injury, death or, simply, loss of motivation) your return on investment would be in serious jeopardy.  So, you would reduce your risk by reducing the price.

Therefore, it is critically important that ownership find effective ways to retain key employees.

Fewer Practical Options (Pun Intended)

Financial incentives have always played a key role.  However, because IPOs are much harder to come by in today’s market, one of the traditional favorites (stock options) has lost much of its appeal.  Not to worry.  Riding to the rescue is a great alternative: Stock Appreciation Rights or SARs.  This vehicle conveys no equity ownership.  Instead, the employee shares in the financial success of the company through what amounts to cumulative deferred income, with a vesting schedule that can take nine years or longer to play out.

Advantages and Disadvantages

There are several distinct advantages of SARs over traditional stock options, including:

  1. The value of the SAR shares is directly related to critical measures of company success, such as Pretax or After-Tax Profit, or Net Worth.
  2. The bases for the (hopefully increasing) value of the SAR shares are strictly a matter of management discretion.
  3. There are none of the nettlesome issues associated with employee equity ownership, such as membership on the Board of Directors.
  4. All SAR shareholders have a common goal, which encourages cooperation among sometimes competitive individuals and/or departments.
  5. The vesting schedule provides a powerful incentive to stay with the company – the whole point.
  6. When the company repurchases vested shares, these payments are fully deductible.

The principal disadvantage is common to stock options; namely, inadequate short-term incentives.  This problem can be very effectively addressed with cash bonuses.

The next post will discuss the logistics of setting up and managing an effective SAR program, as well as how to structure a cash bonus program that it actually benefits the company, and not just the employees.

Make it a great month!

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

Providing ROI

by Himanshu Jhamb on June 10, 2009

roiI just got back from a 3 day conference where I met some of the most accomplished individuals in the business world. Many of them were successful entrepreneurs who had started companies, failed time and again… and then succeeded. Many were leaders in executive roles in their organizations. The conference had a few break out sessions which were led by some of them. I couldn’t help but notice how they moved around and conducted themselves. Here are some of their actions and what they meant to me:

  • They made every effort to be On time – Indicates to me a deep respect for my opportunity cost of meeting with them, (i.e. they cared about the opportunities participants had to forego to attend their session).
  • They came Prepared for the sessions they led – This gave them an opportunity to produce high Returns (increased productivity, learning) On Investment (Time, Money, Energy) for the participants.
  • They opened with a question ‘Why are you here?’ – This gave them an opportunity to generate relevance for the participants.
  • They kept the session interactive – This kept the participants engaged & interested.
  • They closed with an actionable request – This gave the participants an opportunity of putting into practice (in real life) what they learnt.
  • Imagine the increase in productivity in whatever you do, if all the meetings and sessions were run with these fundamental tenets in mind, regardless of if you were a participant or the leader.

    Imagine the ROI!

    …I’ll leave you with that thought to reflect upon!