When you’re looking to recruit top non-family executive talent to your family business, how can you compete with the offerings of public companies?
I’m David Shaw the publishing director for family business magazine and I’ll be discussing long-term incentive planning with Wendy Diamond who is us family Enterprises leader for Deloitte private.
Wendy how is long-term incentives, how are they being used within family businesses?
Prevalence of long-term incentive programs is increasing as companies continue to struggle with recruiting and retaining the caliber of talent needed to meet the organization’s objectives and strategic priorities.
As you’ve stated family Enterprises understand the benefits of adopting a long-term incentive plan.
Those may include it is easier to compete with public companies in the war for talent if there’s a long-term incentive plan that has been created.
It aids in retention.
It aligns the executive pay with the long-term performance of the organization.
And it really does Foster a sense of ownership by the management team.
So how do you balance long and short-term goals for individual compensation with the long-term business goals of the family business?
The short term and the long-term programs that are created should really work in tandem.
Family Enterprises do not want to create a short-term incentive program that incentivizes participants to engage in behaviors that might be detrimental to the long-term performance and goals of the business.
So adopting a long-term incentive plan in addition to a short-term plan really provides a mechanism to mitigate the risk that the management team is only focused on short-term results and not thinking about the long-term goals and growth strategy.
So how are family businesses remaining competitive when it comes to their incentive plans?
More family Enterprises are contemplating the adoption of incentive plans what we often see is it starts with a short-term incentive plan that is adopted first.
And then from there family Enterprises are looking at long-term incentive plans and those maybe take the form of a long-term cash plan or potentially a Phantom stock plan.
Traditionally real Equity.
It’s uncommon that real Equity issued to the management team.
It is more in the form of the Phantom stock plan that I mentioned or a long-term cash plan.
The long-term incentive programs that are being created are structured commonly to pay out over a period of time that may be three to five years to really maintain Market competitiveness in this fight for talent.
Wendy you mentioned Phantom stock programs.
What is that?
How does that work?
A phantom Stock Program is an employee benefit plan that gives the benefits of stock ownership without actually giving ownership in the company to the participants.
So in one of these Phantom stock programs, the plan is often structured such that the participants would earn a benefit based on the appreciation of the value of the business and that determination of value that can be calculated in a variety of ways and that would be prescribed in the plan documents.
So a family business could offer the feeling of equity and stock growth without actually having to share ownership That’s correctly.
Thank you very much Wendy.
This has been a really good look at long-term incentive planning.