Focus on Employee Incentives

For owners of closely held, service-based businesses contemplating the total or fractional sales of their companies, attracting and retaining key employees is critical to creating and sustaining value for the long term. A service-based business faces the unique challenge of proving its continuing viability to a potential buyer, since its assets are people. A business that can keep its best employees both during and following a transaction will be much more likely to keep its customers.

The current competition for talent is fierce. This is especially true with professional service industries. It is the employees’ collective expertise (skills, relationships and knowledge) that helps create value for your business. There is a direct correlation between the strength of a general contractor’s workforce and the company’s overall value. So, how do you attract employees and keep them with your company to ensure the viability of your business? Establish a plan to actively build and demonstrate the value of your company through key employee attraction and retention strategies.

First, you have to attract and hire the right people. Then you must give them incentive to stay. The promises of competitive compensation and retirement plans are not always enough to retain the most talented employees long term.

Equity incentives can enable you to provide your most valued employees with equity positions similar to what they might receive if they worked for a publicly traded company. A variety of alternative forms of real or synthetic equity can be used, including stock options and restricted stock or phantom stock and stock appreciation rights. Are you concerned with giving up part of the ownership of your business? Does the idea of having multiple shareholders make you uneasy? If so, synthetic equity may be the right answer for you.

Synthetic equity can be structured to convey most of the economics of real ownership, without giving up the legal rights of ownership. As a result, select members of your leadership team can participate in the value growth of the business without muddying up the ownership waters. You own 100 percent of the company, yet still allow key employees to benefit financially from the growth in value over time.

Synthetic equity plans can be designed to provide intermediate term cash payouts that allow certain key employees to realize the benefits along the ride as opposed to only at retirement.

A plan that only allows for payouts at retirement may not serve the employee well, and a plan that only allows for short-term payouts may not serve the company well either. Finding balance is key. It is important to thoroughly understand the dynamics of each business and then customize a plan that serves each business’s needs. Creating flexibility is critical to achieving overall objectives.

Developing incentive plans that are based on shifting employee behavior and providing incentives that are meaningful from the employee’s perspective will create a line of sight for the employee. Employees need to understand the link between their actions, how those actions drive company value and the impact they have on their incentives. Business owners should remember to stay consistent with strategies and rewards that are currently in place.

In a nutshell, the ultimate goal would be to align the employees’ interests directly with the owner’s interests in a way that allows everyone to benefit from an increase in company value over time. Consider seeking expert counsel to ensure your reward system best fits your long-term goals.

Operational changes are also key to sustaining value for your company. As a business owner, gradually phase yourself out of your company’s day-to-day operations in order to position it as a successful, independently functioning enterprise.

Give your best employees more responsibility and hold them accountable for their business decisions. You will find that making management accountable will help create a sense of ownership for the company’s success and an increased sense of loyalty from these stakeholders. The right combination of corporate responsibility and benefits can be the key to attracting and retaining highly valuable employees.

Often overlooked factors that greatly contribute to employee attraction and retention sometimes include company reputation, the nature of the work, individual job titles, working conditions, location and the company’s culture. Any particular one of these factors will not keep an employee from leaving the company. However, the apparent lack of any one of them will absolutely keep an employee from staying. It is imperative to have clear lines of communication that provide employees, managers, leaders and owners with the information necessary to make important decisions.

Business owners are inundated with the day-to-day activity of running a company, which can make it difficult to objectively evaluate all of the necessary factors to ensure employee attraction and retention. That is why it is important to work with an experienced and trusted advisor to develop a realistic and personalized plan to attract and retain employees.

If your contracting business is rich with these intangible assets, take the proper steps now to strengthen your company, ensure its long-term viability and ultimately increase its marketplace value.