Value-Building Tip: Create a Management Incentive Plan

by Dave Driscoll

 Do you need to increase business value and create a succession plan through sale or management buyout? (Hint: The answer is nearly always yes!)

Create an incentive plan to cultivate and motivate your management team to help reach the goals.

Incentivize your team to the company’s bottom line by sharing the financial results produced by your management’s efforts and performance improvements.

So, how do you create your management incentive plan?

Simple. Share a percentage of the financial performance gain with your manager(s) based on total operating throughput (T) divided by total operating expenses (OE). Note: Throughput is the total value created after you subtract your outside costs (materials, freight, subcontractors, etc.).

Using the theory of constraints, the productivity measurement formula T/OE is simply the throughput divided by the operating expenses incurred to create that throughput. As the owner, ask yourself this question: What percentage of the increase over your business’s historical baseline (operating profits) would you share with your newly incentivized manager(s)? 10%? 20%? 50%?

This simple incentive plan tells the manager(s) that the company will reward them for their increased efforts and results above the company’s historical productivity level. Think of the power of the statement and the opportunity for the manager(s)! If the manager(s) can reduce expenses, drive revenue or both with the ultimate objective of increasing productivity, they can increase their own income(s)!

Example:

Let’s say your company’s historical productivity ratio (T/OE) is 1.07. If you decided to share 25% of the increase above baseline productivity performance with your manager(s) and with that incentive, the operating productivity increased to T/OE of 1.27, then the productivity of the business improved by 20% because of management involvement in expense reduction and/or revenue increases. The productivity increase results in additional operating profits. The manager(s) would earn 25% of that 20% operating profit increase. If you have one manager, this is easy; however, if you have a larger management team, you will need to strategize how to divvy up that 25%.

I believe strongly that every owner reading this article would gladly share 25% of the additional operating profits with the folks who made it happen. What an ROI for the owner! The company still benefits with 75% of the increased performance while encouraging managers to actively strive for improvement.

Furthermore, think of the positive vibe created within the management team. This practice clearly demonstrates that the managers truly are part of a team effort focused on the success of the business – very powerful motivation!

An additional benefit of empowered management is decreased dependence on the owner in the day-to-day operations of the business. Over time, leaders will emerge and additional responsibility/authority can be granted, creating additional market value for the business as well as allowing you to focus on business strategy rather than putting out fires.

Management incentive plans tied to real, measurable goals create short-term and long-term benefits for the manager(s), the business and you as the owner.
 
Dave Driscoll is president of Metro Business Advisors, a mergers and acquisitions business broker, business valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or (314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.