Long-Term Incentive Bonus Plans Attract, Retain and Motivate Talent to Deliver Sustained Agency Performance.
Why attracting and keeping talent is so important to your agency.
Building lasting value for the agency’s ownership requires stability in the agency team, especially in the senior ranks. Staff stability increases overall agency knowledge (so it cannot just walk out the door) and efficiency of client service delivery. It also supports cultural alignment and the pursuit of new business via a team that’s deeply experienced in the agency’s methodologies.
On the other hand, turnover is costly. The firm suffers from the loss of client and agency institutional knowledge, destabilization of client relationships and lower morale. It then incurs recruiting costs to replace talent and endures a long learning curve before the new staff member is as knowledgeable as the former one.
Attracting and then retaining top talent have always been critically important to the long-term success of marketing communications agencies. This has also been easier said than done as the best people are so frequently being pursued by competitors. Doesn’t it seem more often than not that it’s your top performers who are approached by other firms rather than those who are under-performing?
Today, attracting and retaining talent is rapidly becoming even tougher due to a surging economic rebound and the resulting demand for the best people.
We’re finally coming out of the COVID-19 crisis. Growth in GDP was a robust 6.1% during the first quarter of 2021 (even with some of the more populous states not completely open yet) and it is expected to remain strong into 2022.
Rising GDP drives overall growth for the agency industry. That growth creates a greater demand for talent. That demand translates into higher average industry salaries. At the same time, many talented people who preferred to remain in secure jobs for the past sixteen months are now seeking (or are vulnerable to) better opportunities elsewhere.
So, once you’ve expended the time and money to find and hire first-rate people, how do you promote senior team stability in the face of a rising market for talent?
In a previous mailing, we described the need to ensure that your agency’s culture is collaborative and transparent and that your compensation philosophy is market competitive. We provided guidance for reviewing compensation practices and client pricing in light of the current economic surge so you can hold on to your key team members.
But there’s more you can do to best position your agency for senior team stability.
Incentive Bonus Plans – What they are… and what they offer to agency owners.
Incentive plans are tools which can be very helpful in retaining senior talent. There are two broad categories of these plans.
The first includes plans that reward a strong performance or delivery on an important assignment in the present or recent past. Examples include performing exceptionally over a single fiscal year or introducing the agency to a highly desirable prospective client.
The second category includes plans that are designed to reward sustained performance and increased agency value over time. These plans offer four important benefits to agency ownership:
Ensuring the continuity and stability of your most important people or teams.
Providing even more motivation to drive sustained commitment and performance.
Encouraging your key people to think and act like agency owners and not just employees.
Aligning the goals, mindset and behaviors of your key people with your own.
The net effect: Generating increased agency value.
Most agencies focus their precious incentive compensation resources on short-term performance that does not drive long-term value for the owner. Agency owners are better served by developing an incentive compensation mix of short-term and long-term rewards as golden handcuffs. The right long-term incentive plan can make it painful for a key leader to depart your agency.
It’s important to note that all incentive plans (whether long-term incentives or annual performance bonuses) should be based on INCREMENTAL success so that the owner’s compensation or share of agency valuation are not diluted.
The five characteristics of successful incentive plans.
The most successful incentive plans have five things in common.
First, they’re very specific in writing on how the incentives will be earned. They clearly define the behaviors and outcomes which will be rewarded (and which should reflect ownership’s goals). These plans include long-term rewards designed to incentivize actions that should lead to greater growth and motivate participants to act like owners.
Second, they’re equally specific in writing about how the incentives will be calculated. Will the incentive be based on metrics for the agency as a whole, a team, the individual or hybrid? Whatever the metrics may be, they need to be something that the staff member(s) involved clearly understand and can in fact influence.
Third, bonuses for senior staff should be substantial (and, again, based on INCREMENTAL success). The incentives must be significant and compelling. Don’t short-change this opportunity to further spur their commitment and motivation. To achieve ambitious goals, change behavior or both, we recommend 30% of base salary as the target for senior team members.
Fourth, bonus payments should vest over time. While the incentive itself can be earned in one year, the payments can vest over three or four years. This can be applied to both annual bonus plans and long-term incentive plans. Top performers are thereby incentivized to achieve ownership’s goals while also being locked in for a longer period. Should they choose to leave, they will leave behind a substantial amount of their incentive compensation.
Fifth, successful plans protect the owner from dilution. Every incentive should be based on incremental success over the past year or base year. Some level of revenue growth is needed to keep up with rising annual costs. By making agency performance the trigger for funding the incentive plan, the owner’s annual income is protected. Once the plan in funded, it’s divided among participants based on their individual success metrics.
For your senior people, expect a lot and be willing to reward them for it.
For senior team long-term incentive plans, be clear on the criteria that drive an invitation to participate. We strongly recommend using performance as the basis for pretty much everything. Such as:
Year-over-year improvement in net revenue and profit. This is a must. Increased profit drives agency valuation.
Consistently driving meaningful leads and new business wins with minimal ownership involvement.
Ability to manage large, complex client relationships with minimal ownership oversight.
Providing clients with high-end strategic thinking and content which generate desired results.
Differentiating the agency vs. competition through new service offerings, new methodologies and other significant IP.
Building the firm’s reputation.
Staff development.
Rewards should be based on determinable and objective standards of performance. As noted above, these are often measurable. However, they can include important qualitative metrics as well.
Agency owners can create customized plans based on their goals and what’s most important for their specific firms.
Incentive plans don’t need to be all or nothing propositions.
These plans can be tiered so that performance which exceeds the metrics can be rewarded even more. Conversely, performance which doesn’t fully achieve the desired metrics can still be reasonably rewarded (or not).
For example, for exceeding agency, team or individual metrics, the reward could increase by 50%. A senior performance bonus could go from 30% to 45% of base salary.
For incremental success that falls short of the target, the reward can decrease. For achieving 75% of the target, the bonus might decrease by 50%. For a senior leader, the performance bonus could drop from 30% to 15% of base salary.
You can lock in talent longer by vesting their bonus payments.
Since the true value to ownership of incentive plans is to encourage senior staff stability and performance over time, it makes sense to structure all plans with these goals in mind.
Vest annual payments or even performance bonuses over three or four years. To make this more palatable, add a tenure component in addition to performance with a large lump sum payment if the leader stays for five years.
This approach will align incentive resources with the fundamental value to the owner of stability and sustained performance. Senior leaders will be encouraged to think twice before taking another job. They would be walking away from a full-year bonus amount after three years with the agency. They’d also be forfeiting any money from separate long-term incentive plans.
There are different types of long-term incentive plans to meet ownership’s goals and needs.
Here is a brief review of the four most common long-term incentive plans, what they are and how they differ from one other.
Stay/Tenure – This is a promise to pay a bonus to a staff member after a defined period of time. This bonus is over and above normal annual compensation. It’s generally expressed within an employment agreement to provide greater protection for the agency’s clients, staff and IP.
The Stay/Tenure approach allows the firm to target a bonus to a specific individual as opposed to all employees. In addition to generally being a less expensive plan to administer, this type of bonus can also be combined with any other long-term incentive plan.
Sale of Agency – In this case, the promise is to pay a fixed amount or percentage of the proceeds from an agency sale (which is only owed if the agency is actually sold). The owner can target an employee, group of employees or the entire staff. Participants must be in good standing at the time that proceeds from the sale are received by ownership.
Phantom Stock – This option is usually used to reward a senior team or group of key executives. It provides them with some of the benefits of ownership without the risks. The incentive can be based on a percentage of sales price or annual cash profit. The criteria for how phantom points or equity are earned can vary based on ownership’s goals.
Agency owners should be aware that a Phantom Stock plan requires administrative effort to manage.
Profit Interest – With this plan, key leaders receive a percentage of profit growth from the base year specified in the plan. The historical profit continues to flow to the original ownership. It’s a percentage of the increase in profit which the owner shares with each participant.
Some important things to understand about long-term incentive plans.
These plans are in addition to (and not substitutes for) normal annual performance bonus programs. It’s important that staff sees long-term plans as potential reward for their contributions over an extended period of time and not as a way of deferring the payment of an annual bonus.
Long-term incentive plans are not governed by the IRS. However, they are contractual promises made by ownership to employees.
Finally, for plans which target a group of employees or the entire staff, there is a great deal of flexibility which can be built into the plan to protect ownership. However, there is much less flexibility for plans which target individuals.
To summarize.
In addition to offering competitive salaries, long-term incentive plans are just as important to attracting and keeping talent, ensuring the stability of senior staff and motivating sustained performance.
As you’ve seen in this article, there are many different ways to do this. At Prosper Group, we have the hands-on knowledge and experience to help you develop the plan (or combination of plans) designed to meet your specific goals.
We’d be happy to discuss this with you at any time.
We’re here to help you prosper.
Prosper Group exists to help the owners of independent marketing communications agencies achieve their ambitions and maximize the value of their life’s work.
We are former agency leaders and owners who focus our deep experience on implementing proven proprietary methodologies across our three practices of agency performance, owner exit planning and M&A transactions in order to drive owner and agency success.
