Effective Employee Retention Strategies to Add Value to Your Business

Author: Kris Karnes, Senior Director, Business Owner Advisory Services

Maintaining key employees is not only essential to keep your business running from day to day, but it’s essential when you think about transitioning your business in the future. Having staff remembers remain at the company in the event of a business transition can help ensure a smooth change of leadership and a consistent experience and level of service for customers. In this article, we’ll share some key employee retention strategies to keep your star players on the team.

Focusing on Value to Retain Key Employees

As business owners think ahead to selling their firm or handing the reigns over to a new generation, retaining employees becomes an important concern. Losing a critical individual, such as your right-hand associate, a high-performing salesperson or key design engineers, could have a negative impact on your ability to sell the business or the success of the venture once the new generation takes over.

Research indicated that the average wage growth for employees across all industries was 3.3% in the third quarter of 2021, however, those who switched jobs averaged a pay increase of 6.6%.

Statistics like these would seem to suggest that employee retention can be boiled down to a simple economic equation, one where a bigger pay increase equals greater satisfaction and willingness to stay with a current employer. However, salary isn’t the only consideration when it comes to retaining key employees, especially during a transition.

In this situation, encouraging retention requires a strategic approach, one that provides value to the employee while encouraging their continued engagement and support of company objectives and growth. In this way, employees will also continue to add value to the firm, increasing the attractiveness of the business for an eventual sale.

Incentives to Boost Employee Retention

When it comes to incentivizing the type of employee engagement that leads to long-term retention and value to the company, the two most common approaches are cash-based and equity-based. A cash-based offer uses cash incentives to encourage employee engagement and can be offered a few different ways.

The first is a cash payment. Often the bonus includes a simple, annual cash payment, stock appreciation rights, or phantom stock. Another common incentive is to offer key employees cash bonuses through a nonqualified deferred compensation (NQDC) plan. NQDC plans are arranged in a way that employees receive payment sometime in the future. Some employees may prefer this approach as tax payments are also delayed. High wage earners, for example, may wait until retirement to receive NQDC funds, when their income is lower, and they are taxed at a more favorable rate.

Equity bonuses are another way to incentivize employees, by offering a predetermined percentage of company ownership or an option to purchase such ownership. Since the employee is taking on the risks as well as the benefits of a company stakeholder, interest in achieving the company’s goals is naturally encouraged, creating greater value for the firm.

Either type of bonus, or a plan that blends elements of each, can be given for work already completed or once performance benchmarks– either company or individual based–are met. And it is important that any incentive plan be designed in a strategic manner that helps the owner meet his or her business and personal goals by incentivizing behavior that creates value for the business and, in turn, the owner.

As with all things, there are a few caveats that should be mentioned. First, it is important that any incentive be significant, clearly communicated, and easy to track. Any vesting, forfeiture or buy-back/buy-sell restrictions on sale provisions should also be clearly laid out. Also, if equity is given, it is important that every party understands that all shareholders will have voting rights and access to distributions, company financial reports, and the like. 

As a business owner, it’s also important to understand the tax implications to both the company as well as the employee, and to discuss any offerings you intend to offer with your accountant. Some plans also have technical legal requirements, and we encourage the companies to work with their attorneys to ensure compliance.

If you’re considering transitioning away from ownership in the near future, having these formal plans in place can improve the marketability of your business. When buyers see continuity of labor, they see a valuable business for years to come.

About the Author

In her role as Senior Director of Business Owner Advisory Services, Kris Karnes employs her extensive experience in legal counsel, combined with a dedication to client success, to offer advisory services to owners considering a business transition or sale. She assesses the current situation, discusses end goals and helps owners maneuver through the emotions and finances of selling or transitioning a business.