The top brass at a large company can be self-important even if their paychecks aren't justified. At a small business with less than 100 people, though, key employees have the right to be cocky.
"As small businesses mature and add employees ...
key people become so crucial to the business that the death or disability of that employee would cause a severe drop in efficiency and revenue," said Patrick Smith, vice president and director of estate and business planning with
The Hartford Financial Services Group
In many small businesses, especially those that rely on salespeople, a key person can be responsible for about 20% of a business' sales, says Smith. In general, anybody with a unique or well-pronounced skill set can add very meaningfully to the bottom line of a closely held small business and can be difficult and pricey to replace.
My business has no product other than our intelligence," says Louis Rowe, president and CEO of San Antonio-based
Goetting and Associates, a mechanical, electrical and plumbing consulting engineering firm. With 75 employees, Rowe knows that if one of his key people leaves and he is unprepared, his business could be severely damaged.
Engage Your Employees
Another job offer lurking around the corner is one of the biggest threats to employers.
Elliot Merberg, first vice-chairman at
Score's NYC branch says that while assessing fair compensation for key employees should be the first thing a successful business does, too many stop there. "Business owners hire someone, pay them and assume they are as involved in the business as
the owners are," says Merberg.
In reality, once people believe they are being fairly paid, "compensation moves way down on the line on the hierarchy of needs," says Merberg. The main drivers in job satisfaction become input into the position, involvement in the business and rewards for a job well done.
When Merberg ran a food-distribution business, he sat down every six months with his employees and asked them to list three or four things they wanted to accomplish, and provided their past list and prior bonuses. This way, employees could keep track of exactly how accomplishment affected their earnings ability. He rarely lost anyone.
401(k)s and phantom (nonvoting) stock also help to give employees equity in the business, says Merberg. While small-business owners tend to micromanage, they can establish a plan that sets boundaries within which the employee can make his or her own decisions. For example, listing five things that employees can do without your approval gives them more free range as far as the decision-making process while you retain a sense of control.
"One of the best ways to get employees to stay is to bring them into the business," says Rowe. His key employees participate in an ownership transaction plan where they slowly buy into the company and senior owners sell out.
Rowe says many small businesses hesitate longer than they should to bring key people into ownership because there's a tendency to hold the company too closely. "I learned by experience that
giving up some control was the better way to do things," says Rowe.
While there's no predicting death or disability of a pivotal employee, businesses can act preemptively.
Rowe provides life insurance to key employees to ensure a loss won't take the company down. After the loss of a key person, the resulting time lag while a replacement is found can create lost sales revenue, which makes investors leery. Insurance can help fund business continuation at this point and take care of difficult decisions, such as what a business pays to the deceased employee's spouse.
According to The Hartford Financial Services Group Business Owners Survey from October 2006, only one-quarter of businesses with fewer than 100 employees have key-person insurance. Even mature business tend to be profoundly underinsured, says Smith.
For example, if an employee passes away and the business had a $10 million life insurance contract on him or her, that income-tax-free $10 million can now be used by the business, the sole owner and beneficiary of that policy, to recruit a replacement, restructure the business or provide creditors with some assurance.
"Cash-value insurance is a golden handcuff," says Smith. Invested in sub accounts and mutual funds, insurance can also function as a form of nonqualified compensation for key people and act as an incentive to keep them at the company through partial bonuses or disability benefits.
CPAs are invaluable in identifying the value of an employee and assessing how much an employee would cost to replace, so make sure you have a trusted base of advisors.
"If you want to hold good people, you really have to think it through," says Merberg. "It's not something you do in a minute." So take the time to keep your competition close, but your vital workers even closer.