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SHOULD I TREAT MY LEADERSHIP TEAM DIFFERENTLY FROM A COMPENSATION PERSPECTIVE?

December 13, 2017
 
The short answer is yes.

Your leadership team is just that – a team of leaders. As such, you should have their compensation structured in a way that is tied to specific individual and business goals. Set milestone goals for the business tied to key performance indicators, such as hitting a revenue mark or bringing on a defined number of new clients.

BUT. The reality here is two-fold (yes and no). You want to pay people enough that compensation is not a reason for them to leave, but if you can’t do that you need to have a lower base salary and incentives tied to behavior to make up the difference. The key here is to establish the right incentives for your leadership team.

Consider this: a company that looks at operational efficiency among machinists will have an incentive around the production per hour/minute/day for those team members. Versus, your leadership team incentives surrounding cash flow increase and profitability. It’s quite simple: different incentives for different audiences.

You probably can’t put a profit incentive in place for a rank-and-file employee because they do not feel that they have any control over the profitability of the business. While their role may control the businesses workflow and client service metrics (CSM), bonus pay to bring in new business does not make sense for them. Fairly assign incentives to roles and results in which they have control.
 

DOES THAT MEAN GIVING MY LEADERSHIP TEAM EQUITY?
Outright equity should almost never be on the table for your team. Giving equity creates minority partners, and minority partners can create unnecessary problems. Instead, if you are going to give your leadership team a stake in the business, consider giving phantom equity in lieu of equity.

Rather than giving away a portion of your business ownership like you would do with equity, you would instead tie that employee’s dollars to a goal.

Ex. You can declare that if your organization hits $10 million in sales in five years you will pay you out 5% of that increase value in phantom stock to that team member.
By the way, the reality is (even when they think they do) most employees don’t really want equity! When gifted equity, recipients then have to manage everything that goes with it – coordinating financials, accepting liability – when they really just want to see the dollars. Make explaining that difference part of the conversation to help avoid unnecessary push back.

Share your leadership team incentives by contacting us! It helps to hear from the experiences of other business owners. How have your metrics helped to make a more profitable decision for your business?
 
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the advisors of Gerber, LLC. and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
 


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