how to encourage retention and share profit with a key employee

February 17, 2022

by a searcher from The University of Chicago - Booth School of Business in Denver, CO, USA

Hi all. Long time listener, first time caller.

I bought a corporate catering business in September 2019 and then was crushed by COVID and more specifically WFH patterns that kept people from meeting.

After a disastrous 2020 and mostly horrible 2021, along with some bumpy starts/stops, we are finally seeing people heading back to the office and I think we are going to make it. I have one (or to a lesser degree 3) key employees who have been with the company 15 years or more, and I want to create an incentive structure for them. Goals would be:

1) encourage them to stay, 2) reward them for their leadership/loyalty and 3) share in the profits of the company. I would rather not simply add them to the cap table, as I don't want partners, especially ones that have left the company after they have vested. If you have models that have been successful in the past, and particularly if you have examples of the agreements you put in place in a similar situation, I would love to hear from you.

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

Depends on your entity structure and what your goals are. There are equity incentive plan options and "equity-like" options. If you're an LLC the structure is very different than if you are a corporation. Typically an LLC equity plan is set up as a profit interest plan, but if you structure it correctly you can retain some tax benefits for employees so that it is more like equity, but has to be done the right way with the right advisors. Or you can stick to cash bonuses tied to performance of the employee or the company overall. In any case you typically want to set aside an overall pool that you are willing to set aside, and the divide up that pool amongst eligible employees based on value.

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

Don’t make it easy for key employees to leave.

One of the best ways to retain the most valuable employees is for the company to enter into employment agreements with them. Make it worthwhile for them to stay with the company, and to perform on mutually agreeable terms. Paying a reasonable retention bonus or increasing pay or benefits may be less expensive than what it could cost to replace a key employee and train the replacement. And once you are in control, do not rush to upset the apple cart. Be sure and slow to change employee job descriptions or the routine ways the employees behave and interact with each other and with the company’s customers and suppliers.

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