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By Wayne Rivers The old saying goes, “If you see a turtle on a fence post, you can be sure he didn’t get there all by himself.” Successful family business owners most readily agree. While they may have provided the vision, the capital, the blood, tears, and 50 to 60 hour weeks in building their businesses, most of them can point to one or more non-related key employees who have been instrumental in the success of their businesses. Recognize and Retain Just as key non-related employees helped achieve the prosperity of the company, they can help keep it thriving and profitable. When the founder is ready to implement a succession plan, key employees are an essential element to these plans. Family business owners know that if they can keep certain key employees in place, the next leader will have a considerably easier time in making the transition. They can become valuable coaches and mentors to the younger generation. Many CEOs worry about what would happen to the family or the business should they get involved in an accident or have a heart attack. They want some security that the company could continue, and often a non-related key employee can help form the nucleus of a leadership team to see the company through such a traumatic event. Having a contingency plan in place can bring great comfort to owners of family companies. Bankers, bonding companies and vendors also feel better knowing such a plan exists. Sometimes one of the key non-related employees is chosen to be an interim leader between generations of family members. This is often the case when there is more than a twenty year gap between the current leader and the next generation or when a child’s experience level isn’t sufficient to warrant him or her becoming the next chief executive. Beware the Downsides Key employees can also become problems. After so many years of working alongside the family business owner, many key employees react strongly when the owner’s children or other relatives come into the business. Emotions range from feeling threatened, unloved or jealous to downright hostility. If not shown the respect and attention they feel they deserve, they can become saboteurs for both the next generation and the business. “They don’t treat me like they treat members of the family,” is the common complaint of non-related employees. This is a fact of life which must be addressed in small businesses. Often the key employee has been told how valuable he or she is to the business and starts believing that means they are one of the family. While the owner might even think of this person that way, it isn’t the same as being related by blood. Sometimes a third party advisor must meet with the key employee and explain the reality of life; while they are important and greatly valued, they must understand that there will always be a difference in the way they are treated versus the way family members are treated. The question they must ask themselves is: are you being compensated and treated fairly? If the answer is yes, then the employee must get over feelings of resentment. If not, they must address the issue with the owner. The downside has another aspect. Consider the children who come to work in the business and constantly have their performance compared to a key employee’s. Or they determine they can never gain a position as a confidant because the key employee has filled this slot for many years, and Dad doesn’t want things to change. If children don’t have a clear understanding of their position in the company, they can become jealous of the key employee and try to find ways to undermine him. Non-related employees understand all too well the “blood is thicker than water” admonition and know that if children or family members are intent on having them removed, sooner or later it will be done. Astute family business owners must ensure that both key employees and family members are secure in their roles within the company so that they will not spend time playing referee to either faction. Showing Appreciation Family business owners are usually eager to recognize and reward loyalty. They want to show their gratitude to those who helped them get where they are. The ultimate compliment is to consider giving loyal employees stock in the family business. But is it a wise decision? Most advisors will tell you it isn’t. Valuation of a closely held company is difficult at best. If you give a key employee stock, what is it worth? What does the employee really have? Most family businesses plow their profits back into the business, so dividends or distributions are generally small to non-existent. The small percentage of stock held by an unrelated employee cannot control management, policy, operations or dividends. The key employee has no real power - unless a dispute arises between shareholders. Then this block of stock could be used as a pawn in a power struggle; regardless of who might win, the game is dangerous. Suppose this key employee develops a drinking or drug problem. How about if this person gets caught up in a nasty divorce or bankruptcy? Do you want your stock involved? Suppose the employee becomes disenchanted? How about when he or she dies? All of the scenarios above have ugly downsides to owners of family firms. Golden Handcuffs While often given a negative connotation by the media, the concept of golden handcuffs is very appropriate in rewarding and retaining non-related key employees. While there are many ways this could be accomplished, there are four primary methods to making sure key employees remain valuable to the company. 1. Phantom stock. Instead of giving actual stock, the company issues a warrant or makes a gift of phantom stock to the employee. The employee understands how the imaginary stock is valued at the time of the purchase or gift and how it will be valued when redeemed. For example, the units of interest can be valued at book value, or a certain multiple of cash flow or gross revenues. If the stock increases in value, so does the value of the phantom stock. 2. Salary continuation plans. This is a written agreement in which the employee is promised full or partial salary for a period of time if he or she remains with the company for a certain time period. For example, a key employee might be given one-half salary per month for every month of continued employment during the next five years. This rewards continued allegiance and longevity. 3. Enhanced compensation plans. Perhaps the company doesn’t want to be obligated down the road, yet would like to hang on to valued employees. Current benefits could include longer vacations, company paid trips to conventions, a company car, increased retirement benefits, or bonuses. A word of caution: check with your CPA or attorney to ensure you don’t violate ERISA or other rules. 4. Graduated retirement. When key employees begin to talk about retiring, yet their services are still needed to train their replacements (family member or not), one way to accomplish both goals is to allow the key employee to begin cutting back. For example, the agreement might stipulate that the employee will begin working four day weeks on a certain date, three day weeks at a later date, etc. Compensation can be adjusted according to the value of the employee. Any of the above will help the key non-related employee understand his value to the company and help ensure it continues. Aided with this knowledge, both the family and the key employee can concentrate their efforts on achieving the goals of the company. ■ Wayne Rivers is the president of The Family Business Institute, Inc. FBI’s mission is to deliver interpersonal, operational and financial solutions to help family and closely-held businesses achieve breakthrough success.
Vol. 3, Issue 3
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