Key Employee Compensation Planning: 5 Mistakes Made by Most Private Companies

Blog

Key Employee Compensation Planning: 5 Mistakes Made by Most Private Companies

By , April 3, 2024
06_key-employee-1080×675

Top-performing key employees can drive a profitable business and sustainable growth. The question is – how do you motivate them and drive their best performance? The answer lies in compensation and at-risk pay.Top-performing key employees can drive a profitable business and sustainable growth. The question is – how do you motivate them and drive their best performance? The answer lies in compensation and at-risk pay.

Consider your objectives as a business owner. You want to:

  • recruit premier talent (especially challenging in today’s job market)
  • retain top performers
  • increase focus on execution of the business plan
  • improve accountability for results
  • align executive rewards with shareholder objectives

But private business owners often miss the mark on these objectives – while public companies are more likely to achieve them. Why is that?

Public vs private companies: dangling a big carrot or not much at all

In larger publicly held companies, about 70% of senior executive pay is at risk, meaning only 30% of their pay is salary while the majority is pay for performance. Whether short-term or long-term, it is incentive-based.

On the other hand, most small private companies place less than 15% of their senior executive pay at risk. And on average, more than 80% of any variable pay is only short-term.

Why is there such a difference in approach? Simply put, it’s because larger public companies hire advisors and compensation consultants who understand the key role played by compensation planning for key employees. Their advice pays off, with larger companies often driving better performance and more sustainable growth and profits.

5 mistakes made by private companies

When we work with a smaller private business, these are the five pitfalls we most often see when it comes to compensating key employees:

  1. Variable (at-risk pay) is too low
  2. Balance of variable pay is too short-term
  3. Incentive plans are ineffective
  4. Assured retirement is too low
  5. Benefit gaps are too large – such as life insurance or disability insurance

To motivate key employees to achieve their best performance, you need to know what they want.

Your key employees want an assured income, rewards for their top performance, long-term wealth, family protection and a secure retirement. As a private business owner, you can do what public companies do. You can develop a compensation plan that provides what employees want, which then inspires better performance. And high-performing key employees are proven to increase the value of your enterprise.

Follow the rules of smart compensation management

At Succession Plus US, we’ve helped hundreds of small and large private companies increase the value of their business and generate sustainable growth. Much of this success is due to key employee compensation planning.

Our guidance is based on these three rules:

  • Design, operate and communicate compensation more effectively to get better performance.
  • Re-examine your use of at-risk pay. If you under-utilize it, your employees will under-perform.
  • Under-utilize long-term pay and you misalign with shareholder stated objectives.

If you neglect or ignore at-risk pay, you build a culture of under-performance. You are essentially disincentivizing the people who could raise your business to the next level.

Give your key employees an outlet for earning more by performing better, and you will see the difference – not only in your bottom line but in better attitudes and a culture of high performance.

Contact us to discuss how you can design a more effective Key Employee Compensation Plan to align employee performance with your objectives as a business owner.

MarkDorman

Mark Dorman

President & Managing Director of Succession Plus US

CFBS, CEPA, AIF, ChFC

Mark Dorman is recognized as an industry leader for his work with small and mid-sized businesses. A Certified Exit Planner and Certified Family Business Specialist, he has counseled more than 100 privately held businesses.

In a career spanning 35+ years, Mark has purchased, founded, and exited businesses of his own. He published numerous e-books on exit planning and hosts the popular Finish Big podcast.

Mark was president of Legacy Business Advisors before establishing Succession Plus US.

Ready to maximize your business' value before you sell?
Download our free guide on 15 powerful exit strategies you can action now.