b'THE OFFICIAL NFBA MAGAZINEcontinued from page: 9Ideally, your key performers compensation package is made up of short term (ST) incentive-based pay, along with long term (LT) incentive-based pay. Both tied to the attainment of predetermined financial benchmarks. Benchmarks that again, reflect metrics an owner wants to focus on. Those benchmarks may even be identical, with a portion of the annual award payed in cash (ST) reward is earned. And the more they help create, theand the balance (a majority in this authors opinion) more they share in what they produce. They becomeat some point in the future, determined by the owner. growth-partners. They develop a sense of stewardshipTime for a reality check. If given the choice, most key about protecting shareholder interests and applyperformers would prefer cash to a future promise of BUSINESS MANAGEMENTan ownership mindset towards decision making. Acompensation. Here is where an owner must share mindset shift that creates a unified financial vision fora compelling vision for the companys future. As a growing the company. Thereby negating the familiarretention tool, long term incentive plans (4+ years) entitlement mentality that often accompanies il- are critical. A design element often overlooked.designed incentive plans.4. Communication2. Simplicity is a Must As important as previous design elements are, this one The incentive plan must be easy to understand firstis likely even more so. How an owner communicates and foremost. For long term plans, paid for annualboth the purpose of their incentive plan as well as performance, reward should be tied primarily to profit.the mechanics, cannot be underestimated. If plan This is the measurement that not only aligns everyonesbenchmarks and performance expectations are not efforts toward the only variable that fuels growth, butunderstood or believable, the plan will fall flat. All the also has a direct link to enterprise value. modeling in the world will not make any difference There are nine different incentive plan types thatif key performers do not believe the results can be owners can employ to reward long-term value creation.achieved. And with it, their financial participation in Three of them are ways to share equity, three arethat journey.different types of phantom stock plans and three areFinal Thoughtsreward approaches that are tied to other financial measures (which impact business value). ManyAs owners (and their Advisory Teams) contemplate organizations need help determining which type ofthe challenges and opportunity brought about during plan is suitable for their companies. This is the role ofthis Covid economy, they are likely reevaluating an independent consultant hired to direct the processbusiness strategy and their own value proposition. and see it through implementation. And to keep planThey are also cognitive of the need for prudence via construction simple. cost-containment measures without strangling their ability to move forward with confidence. All this plays 3. Meaningful & Deferred Payout into both the kind of talent that is needed and when a Incentive award must be meaningful, if not compelling.business can afford to hire those people.When it comes to value-sharing opportunities, ownersLong Term Incentive Plans, rooted in value-creation, need to adjust their thinking if they expect to attract/ offer a self- financed solution. They benefit retain great talent and treat them like partners. Todaysshareholders by creating a unified financial vision, marketplace indicates that incentive award potentialreinforce roles, outcomes, strategic priorities, and must reach at least 25% of key performers salary.ultimately value creation. They benefit key performers With 50%+ being commonplace, after a fair returnby putting them in control of their earnings while on shareholders capital. Less than these thresholds aresimultaneously sharing in the value that they help more consistent with discretionary or periodic cashcreate.bonuses. Which elude the growth partner mentality necessary to influence behavior and/or recruit keyDuring a time when competition for top talent is performers. Mentality where owner and key performersat a zenith, creative pay structure must not only be are working in sync toward a shared financial vision.compelling, it must be irresistible. As a result, making And as partners, apply an ownership mindset towardthe shift from incentives to value-sharing not only all their decision- making. makes sense, it is strategically urgent.10 / FRAME BUILDER - NOV2023'