Make sure your most talented key executives don’t leave when you need them most.
Illustration by Janet Atkinson
Introduction:
Joe Smith had built a successful business over a 40-year working career and was now ready to cash out and enjoy his Golden Years. He envisioned himself playing golf, fishing and watching the grass grow in Florida. One of the elements that made his company so attractive was that Joe had been very effective at finding, training and developing key executives. Sam and Mike, his two key executives, would work closely with the new owner, not only to maintain the smooth running of the business during the transition phase, but to stay and help grow the business. He hired a business broker to help him find a suitable buyer. After several months of meetings and negotiations, he had a firm offer and a letter of intent to sell his business. The deal would close and Joe would be on his way to his dream retirement as soon as the buyer finalized his finances.
Problem:
Sam and Mike had no ownership position in the business or guarantee of their future financial security, so when they became aware of Joe’s plans to sell the business, they felt compelled to explore other opportunities. They soon realized that they had been instrumental in building and operating Joe’s company and had strong relationships with many of the firm’s major clients. They had no loyalty to the soon to be new owner, so they decided to leave Joe’s firm, move down the street, start a new company and take several of Joe’s major accounts with them. When the new owner learned that Sam and Mike were leaving and taking a significant amount of the business with them, it dampened his enthusiasm for buying the company and he withdrew his offer.
Rather than retiring to Florida, Joe now found himself back at the reigns of a company that was, unfortunately, considerably less valuable and attractive to potential buyers. Not only did he find it difficult to maintain and run his business without his two key lieutenants, he now had to fend off strong competition from them. Instead of cashing out, he now had many more years of hard work to get the company back to a profitable, “sellable ready” position. All of this could have been avoided with a little advance planning and the use of a program to recruit, retain and reward key executives.
The Golden Handcuffs Program
Agreement
The heart of a “Golden Handcuffs” program is a written agreement between the company and the executive stipulating that a certain dollar amount will be contributed to a long-term savings plan. A well-designed plan spells out all the details of the plan, including the obligations of the executive and the company, the contribution, the vesting schedule, the benefit payout and the funding vehicle.
Company and Executive Obligations
The company is obligated to protect the executive from being fired without cause. The executive is obligated to a non-compete clause in the event the executive leaves.
Contribution
Most plans call for a contribution of 10 to 30 percent of the executive’s salary each year, for as long as the plan is in effect.
Vesting Schedule
Almost every plan uses a vesting schedule. The schedule specifies how long the executive has to stay with the company before receiving the benefits. In most cases, this schedule can be for 10, 15, or 20 years, or until retirement. It can be customized differently for each executive, as appropriate.
Benefit Payout
The secret to a successful Golden Handcuffs Program is to offer a hefty benefit, so that executives think long and hard before accepting an offer from a competitor or deciding to leave to start their own business. A large annual contribution, coupled with a long career, can often result in a sizeable retirement benefit, possibly as much as one to two million dollars, depending on the time frame.
Funding Vehicle
The plan becomes credible to employees when they see that the company is actually putting money away for them. In order to comply with the relevant laws, it is critical that the funding be “informal”. This means that the company can use bonds, stocks, mutual funds, annuities or life insurance in order to build up a fund that will ultimately be used to pay the executives their benefits. These funds remain an asset of the company, if the executive leaves before the full vesting period.
Make sure your most talented key executives don’t leave when you need them most.
Learn about the Wealth Preservation Solutions Succession Planning Process.