When business owners begin planning for their eventual departure, they may overlook an important aspect — how key employees contribute to the overall health of their company.
As part of a company’s human capital, key staff members serve an important role in contributing to the success of a business. Their worth to business owners cannot be overstated.
There are several detrimental aspects to losing a key employee:
- Loss of expertise that can be difficult to replace. Key employees often have specialized skills and knowledge that are essential to the company's operations. Over the years, staff have developed a deep understanding of the company's products, services and processes.
- Instability and disruption of the company's operations. Key employees often have long tenures with the company and a deep commitment to its success. They are familiar with the corporate culture, missions and values and can help ensure continuity during times of change.
- Loss of leadership and mentorship. Key employees are often in leadership positions and have a significant impact on the company's values, culture and direction. They can serve as mentors to other employees and help develop the next generation of leaders.
- Loss of customer relationships. Key employees often have close relationships with the company's customers and clients. They understand their needs and preferences and can provide valuable insights into how the company can better serve them.
Business transitions such as mergers, acquisitions or restructuring can create uncertainty and anxiety among key employees. Unless there are incentives to stay with the business, these employees may seek more money or recognition elsewhere, taking their talents with them.
To incentivize your key employees to stay on with the business and remain committed during the transition to new owners, here are five options business owners should consider:
1. Improve communication and transparency.
Keeping key employees informed and involved in the transition process can help to reduce uncertainty and build trust. This can be achieved through regular communication, such as town hall meetings, email updates or one-on-one meetings with management.
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2. Offer career advancement and development.
During a business transition, there may be opportunities for key employees to take on new roles or responsibilities. Offering promotions or career advancement opportunities can be a way to incentivize them to stay and contribute to the organization's success.
Providing training and development opportunities for key employees can be a way to show them that they are valued and to invest in their career growth. This can also help them acquire new skills that are beneficial for the transition and beyond.
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3. Provide flexible working arrangements.
During a transition, employees may have increased workloads or additional responsibilities. Offering flexible working arrangements, such as remote work or flexible hours, can help to reduce stress and improve work-life balance.
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4. Give out retention bonuses.
A retention bonus is a one-time payment made to employees who stay with the company during the transition period. This bonus can be tied to specific milestones, such as completing the transition or achieving certain performance goals.
Here are a few reasons why companies offer bonuses to retain their top talent:
- Retain institutional knowledge. Key employees often possess valuable knowledge and expertise that is critical to the success of the business. By offering them bonuses, companies can incentivize them to remain with the organization and retain their institutional knowledge, which can be costly and time-consuming to replace.
- Maintain business continuity. Losing key employees can disrupt the workflow and continuity of the business. By incentivizing them to stay, companies can ensure that they maintain a stable and consistent workforce, which can minimize disruptions and prevent the loss of valuable momentum.
- Avoid talent poaching. Competitors may try to poach key employees from a business by offering them more lucrative compensation packages. By offering bonuses, companies can make it more difficult for competitors to lure away their top talent, ensuring that they retain their competitive advantage.
- Boost morale and motivation. Offering bonuses to key employees can also serve as a form of recognition and appreciation for their hard work and contributions to the company. This can boost employee morale and motivation, leading to increased productivity and job satisfaction.
Overall, offering bonuses to key employees is an effective way for a business to help drive success by retaining top talent and ensuring they maintain a stable and consistent workforce.
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5. Award equity or stock options.
Offering equity or stock options can be an attractive way to incentivize key employees to stay with the company. This gives them a stake in the company's success and aligns their interests with that of the organization. Keep in mind that these incentives should be tailored to the specific needs and goals of your organization and employees.
There are several reasons why business owners offer stock options or equity in the business:
- Conserve cash. Offering equity or stock options can help conserve cash for a company, particularly in the early stages of a business when cash flow may be tight. By offering equity or stock options instead of cash bonuses or other forms of compensation, a company can reduce its immediate cash outlays while still providing a valuable benefit to employees.
- Align goals. When employees have ownership in the company, their incentives become more closely aligned with those of the company. They are more likely to work toward the long-term success of the business because their own financial well-being is tied to it. This can help improve employee motivation and commitment.
- Become an employer of choice. Offering equity or stock options can be a powerful tool for attracting and retaining talented employees, particularly in competitive job markets where talented individuals have many options. By offering equity or stock options, a company can differentiate itself from other employers and offer a potentially lucrative benefit.
It's important to communicate these incentives clearly and proactively to your key employees to ensure they understand their value and how they will be rewarded for their contributions during the transition.
Retaining key employees during a transition to new ownership is important because they bring essential knowledge, expertise, stability and continuity to the business. Their presence helps minimize disruptions, maintain customer relationships, boost employee morale and ensure a successful transition that sets the foundation for future growth and success.
As with any change to a business owner’s exit and succession strategy, we suggest you seek the advice of a trusted adviser.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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