BlueRock Accounting Director Paul Evans is an expert in implementing effective staff incentive programs to help SMEs succeed and retain great people. In this article he covers short and long-term incentives to engage and motivate staff in alignment with business goals.
Being a small business owner can be a lonely existence. Sure, you may have 10s if not 100s of employees working for you but how many of them share your passion for success and the responsibility that comes with it? More often than not, business owners find themselves paddling the boat alone, on an adventure you hope your employees will appreciate and find fulfilling along the way.
But it doesn’t need to be that way. For the right employee, a review of their remuneration structure can assist in aligning the goals of your employees to that of the business, so that you’re paddling together as a high-performing team.
Know the Destination of Your Business Adventure Before Reviewing Remuneration Structure
Before embarking on creating an incentive scheme , you need to have a clear understanding of what you and your business are trying to achieve and therefore, what you need help with from your employees. Is it a growth strategy to increase market share, net profit, or a combination of both? Is it efficiency gains to maximise your current market share? Is it a cultural improvement process? Perhaps it’s a succession issue where you’re looking for that next leader to take over from you and potentially start buying the business in progressive steps.
Whatever your strategy is, make sure it can be clearly articulated to yourself and the employees you wish to engage. You should be able to demonstrate where the business is currently at, your goals, and how you’re going to achieve them. You also need to have a clear timeframe that doesn’t stretch too far into the future. No one will be engaged enough to see through your 20-year plan. Break it down so people can see what’s on the horizon. Think 1-year, 3-year or 5-year plans. If you need help with building your strategy, talk to our BlueRock’s Business Advisors about the process involved.
Incentivise the Right People to Paddle the Business Boat With You
Just as the type of strategy you’ve chosen for your business will help determine the way you incentivise employees, picking the right employees to help you achieve that strategy is also important. To get the best bang for buck, make sure you’re incentivising the people that have the biggest influence over business performance. It could be their relationships with your customers or their ability to attract new business, improve performance, create change and improve culture.
To help refine your options, review each employee’s attributes against ones your business values most. Once you’ve identified the superstars that you can’t do without, it’s time to figure out what motivates them.
“What’s In It For Me?” – Deciding on the Right Remuneration Package and Staff Incentives
Many employees seek autonomy, purpose and fulfilment and will align themselves to a common goal if it provides them with one or more of those outcomes. A review and tweak of your organisational structure, role descriptions and responsibilities can achieve quick wins by empowering people with the autonomy to deliver on your business strategy. Better still, involving them in the development of that business strategy creates ownership of it.
Others are incentivised by more traditional remuneration packages, i.e, money! It’s one of the greatest motivators of all and is the obvious option for business owners when trying to engage and motivate their staff. However, even if you’ve picked the right people to incentivise, simply throwing money at them won’t get the job done. Offering a higher total fixed remuneration to do the same thing usually leads to much of the same.
The momentary joy of receiving a pay rise can be fleeting and before you know it, the employee is back to their same old disengaged ways. To have a meaningful impact on behaviour, your employee needs to be on the journey with you. They need to understand what needs to be achieved, and celebrate the wins and share the rewards when you get there, and have the opportunity to do it all again next cycle. That’s where short-term incentives (STI) and long-term incentives (LTI) are utilised.
What are Short-Term Incentives?
Short-term incentives are a tool to align your employees’ goals with that of the short-term goals of the business. Most rewards come in the form of a cash bonus, linked to the financial performance of the business. Modelling out how this looks for the business, the owners and the employees is vitally important to ensure everyone’s a winner.
The key is to understand what success looks like for you and the business, benchmark it to ensure it’s achievable, quantify the potential upside by comparing it to prior years' results and then determine how to split the upside with your key employees.
Rewards can be split into categories that motivate employees to achieve the desired result and then even drive them to exceed it. Once you have your STI model in place, document it too. It may not be for everyone’s eyes but it's worth reviewing with employees aspiring to be eligible for the program or even as a talking point at interviews with prospective hires.
What are Long-Term Incentives?
Long-term incentives involve giving away (or selling) a share of your business to an employee. This act transforms the employee into a business partner. So as with any partnership, make sure you’ve picked the right partner.
Also, ensure the rules of engagement are clearly understood by all parties before entering into an arrangement. Rights, responsibilities, entitlements, and risks upon accepting, holding and selling an equity interest in a business should be known and documented before proceeding. This can be done by various means that BlueRock’s Commercial Lawyers are well equipped to assist with.
Consider the below to ensure your LTI program achieves the desired results:
- the amount of equity you wish to allocate to employees
- the impact that has on your returns as a shareholder
- your ability to sell or raise capital in the future
- majority control matters
- the value of the equity you are giving away and the valuation methodology
- the discount provided
- the returns to you as a shareholder
- the best mechanism to allocate equity to an employee
- the tax implications of employee share schemes for all parties.
Talk to BlueRock About Creating Short and Long-Term Incentive Plans For Your Business
There’s a lot to consider and a lot that can go wrong when it comes to remuneration structures. Modelling the outcomes is vital to ensuring any incentives achieve a material and desired result for everyone. But with the right incentive scheme in place, you’ll be heading for success on your business adventure with a group of people who are engaged, incentivised, and rewarded for achieving common goals. If you’d like to talk further on how to design an incentive scheme for your business, get in touch with one of our business advisors today .
