Finding ways to reward non-family executives in a family-owned business can be one of the biggest challenges faced by owners of a small- to mid-sized firm. However, it’s imperative for the health of your business that you retain top performers, especially as your growth demands you hire talent outside the family.
What can you do to keep your best employees motivated and acting like owners even if you can’t share ownership?
Make compensation competitive
Find out what companies of comparable size, both in your industry and others, pay in salary, bonuses and benefits. You need to judge how competitive your salary and benefit structure is before you proceed. This research will give you a firm foundation on which to base any improvements in an employee’s total compensation package.
Keep an open mind while analyzing the competitiveness of your compensation package. If you can’t offer ownership, remember that a market-based salary and benefits must compensate for that.
Also make sure that non-family and family members in the same positions with similar education are paid the same. A squishy salary structure that rewards lazy family members over other loyal, hard-working employees spells disaster.
Know what matters to them
Get to know your key non-family employees well enough to understand what might be important to them. For instance, a manager with a young family may value more robust health insurance and a smaller co-pay. An older manager with grown children may want additional time off.
That said, it can be difficult to change or improve insurance benefits for just one or two employees. Other short-term incentives might include:
- Extra paid vacation
- Paid vacation package for the family
- Performance bonus
- Holiday or fiscal year-end bonus
The advantage of such short-term benefits is that you haven’t committed to distributing these extras every year. You can dial back short-term incentives should your business face an unexpected downturn.
Longer-term rewards
While you may not be able to offer actual ownership in your company, there are long-term incentives available.
Phantom stock or stock appreciation rights can be other options to reward key non-family employees. Such methods allow non-family members to share in your company’s growth without permanent ownership.
Phantom stock or phantom equity is a method that allows you to give your employees shares of non-voting stock, which they can redeem later, usually when the company is sold or when the employee retires (assuming the employee is fully vested). Unlike traditional shares that need to be repurchased when an employee leaves or is terminated, phantom shares essentially disappear upon certain triggering events.
What is really important about phantom stock is that it’s “non-voting.” This means you don’t need to get their approval before major decisions are made, especially as it relates to selling the company. Keep in mind that you will need 100% approval of the sale of the company from every voting shareholder prior to the transaction closing. If you have handed out hundreds of shares of voting stock to employees, you could have a real problem on your hands later when you want to sell.
Another option: Speed up an employee’s vesting schedule to create an extra incentive to stay with the company.
Finally, the biggest reward of all can be your respect and trust. If you’ve hired a talented executive to lead your company, let them do their job without interference. Listen to their ideas and publicly thank them for their work. Let them participate, or at least consult them, when big decisions must be made.
From the buyer’s perspective
When you sell your company, it’s a sign of a well-run business to have key employees who receive competitive, fair compensation. Potential buyers don’t want to see exorbitant salaries paid to family members or deal with the morale problems of unfair compensation practices.
What’s more, properly paid employees are more likely to stay long-term to help a new owner transition the company and continue its growth and success. This cannot be stressed too heavily: Buyers see risk if excessive family members are involved in the operation of the company and too few non-family members are on staff. The assumption is that if the current owners sell and leave the company, what impact will that have on family members who now have to take orders from a non-family member executive? Avoid this if possible.
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