Long-term Incentives for Attracting and Retaining Senior Talent
For agency owners, it has never been more important than now to attract and retain senior talent. Here’s how.
Having a strong senior team is vital to driving your agency (and your eventual exit) forward. In this piece, we’ll share our thinking on what it takes to attract and then retain these highly valuable people.
Agency owners should have high expectations for their senior leaders… and then deliver what’s needed to keep them.
If designed correctly, long-term incentive plans can be a powerful tool for locking in the motivation and loyalty of the senior leaders who are critical to the agency’s success (and market value) both now and in the future. These leaders are the select few who have consistently demonstrated their ability to:
Generate meaningful leads and new business wins to the agency with minimal ownership involvement.
Manage large, complex client relationships with minimal ownership oversight.
Organically grow client/agency relationships to include the expertise and resources of the entire agency.
Provide clients with high-end strategy and sophisticated content.
Identify and seize opportunities to differentiate the agency from competitors.
Additionally, these are the people who enable the firm to:
Provide a consistently high level of program execution to clients.
Develop meaningful intellectual property that differentiates your agency in the market.
Build the next generation of senior leaders around them.
Create team and agency-wide alignment on:
Mission, vision and values.
Roles, authority level and accountability.
Metrics and incentives for rewarding performance.
Even before offering long-term incentives, there are four basics for attracting and then keeping this level of talent.
First, their compensation must be market-competitive including:
Salary.
Insurance benefits.
Retirement plan.
Meaningful performance bonus (20-30% of salary in good years).
Written bonus plan which clearly states the metrics that trigger the bonus.
Second, you need an agency culture that’s a magnet for talent. Such a culture is based on a deeply entrenched mindset devoted to inclusive input into agency decisions, ongoing learning, the development of talent (including a leadership pipeline) and recognizing excellence.
A healthy culture often includes:
Values that ownership and senior leaders reflect through their behaviors.
Consistent decision making based on mission, vision and values.
Regular and transparent communication to staff.
An Executive Committee that provides meaningful input on major decisions.
Ongoing professional development which trains staff for the next level.
Clear roadmaps for advancement based on defined metrics.
A review process which provides valuable feedback.
Challenging work (and intentionality around how you assign it).
These cultures provide clear and compelling values that everyone in the agency lives by… and indicate how you expect clients to treat agency personnel.
Third, in today’s world, offering adequate workplace flexibility is becoming a must. For many senior leaders who need to balance work with family, this may mean a hybrid approach which combines in-office work with work-at-home time. Actual work hours may vary from official office hours provided that deadlines are met.
Fourth (and, for some people, the most important factor of all), senior leaders want to have significant input into how the agency’s major decisions are made. For independent firms, this can be one of your biggest assets in recruitment. We believe that owners owe their senior team a voice. In return, the team owes the owner alignment once a decision has been reached.
How to lock in your senior leaders for at least three years.
The grand bargain with long-term incentives is to motivate senior team stability over time as opposed to rewarding a single year of good performance. This stability also helps agency owners sleep better by not having to navigate painful leadership changes with clients and staff.
When offering senior talent the potential for far greater compensation than simply their salaries and annual performance bonus opportunities, owners should require a long-term commitment to the firm in return. Incentives can be mixed to create a set of tools for the owner to retain and motivate these senior leaders.
As you offer additional incentives to senior talent, a great tool to match compensation to their commitment to the future is to vest both the historical annual bonus payments and incremental long-term incentive plan payments over a three-year period.
For agency owners, there are at least three benefits to this approach:
Better alignment of incentive dollars spent with ownership’s goal of stability.
Demonstration of senior leaders’ commitment to the agency.
Provides a reward for the senior leader’s commitment and a penalty for breaking it. The recipients could forfeit unvested amounts for their performance, profit participation, tenure and sale-of-agency bonuses which have accrued but have not been paid.
There are many different incentive plans for ownership to consider.
Annual performance bonus – We generally suggest a goal of 20-30% of salary for superior senior leaders. The leader only receives this bonus level if both the agency and the leader meet specific performance metrics.
Profit interest plan – Select senior leaders receive a percentage of the firm’s incremental profit above a base-year level. The historical profit continues to flow to the original ownership. Therefore, ownership is only sharing with each participant a percentage of the increased profit over the base year. The base-year concept is used to ensure that ownership’s compensation will not be diluted.
The power in this type of plan is that profit should grow substantially beyond the base-year level over time. This means that the dollars flowing to the senior leader get larger as time goes by and so does the owner’s compensation as there is only a sharing of incremental profit.
Stay/Tenure bonus – This is a large, one-time bonus for staying with the agency for a specified amount of time. The bonus is paid only if that date is reached. In general, an employment agreement will also be developed to provide greater protection of the agency’s clients, staff and IP. This type of bonus can also be combined with other long-term incentive plans.
Sale-of-the-agency bonus – This is a promise to pay a fixed amount or percentage of the proceeds from a sale of the agency either in total or the incremental amount over a base valuation. These payments are only made if the firm is actually sold. Ownership can target a specific employee, group of employees or the entire staff. Participants must be employees in good standing at the time that proceeds are received by ownership.
Again, the concept of a base-year valuation is designed to reward incremental growth of the agency.
Phantom equity – This is generally used to reward a senior team or group of key executives. It provides some of the benefits of ownership without the risks. These benefits can include a percentage of the sales price or annual cash profit as described above. The criteria for how phantom points or equity are earned can vary based on ownership’s goals. (Please note that phantom equity also requires additional administrative effort to manage.)
Real equity – One of the challenges to offering real equity to senior leaders is that many of them might not be able to afford to buy it. Gifting equity has tax consequences for the senior leader. However, if ownership chooses to do so, equity can be sold at a significant discount. Or, earned and vested amounts from bonus plans can be used to buy equity from the owner. That said, owners must carefully consider the effect that diluting their equity can have on their compensation, control of the agency (including its financial information) and the marketability of the firm.
These ownership tools (with the exception of real equity) allow for flexibility in:
The manner in which the plans are structured.
Mix of incentives you wish to offer.
Ability to change metrics and plan structure later.
While these are generally contractual obligations (with the proviso that you can make changes), none are governed by the IRS.
Finally, agency owners should recognize that long-term incentive plans are in addition to and not a substitute for the four important “Basics” outlined above. Money alone will not keep talent in an unhappy or uncomfortable situation.
What owners must keep in mind when developing these plans.
Ensure that all plans are designed to avoid diluting the owner’s compensation and wealth.
Bonuses and long-term incentives should be designed to share incremental agency success with senior leaders. These should simultaneously protect ownership while driving meaningful wealth to senior talent.
The metrics should be specific and clearly understood for these plans to be successful. The agency’s performance triggers the bonus pools. Individual performance triggers a bonus payment.
Lastly, these plans require a senior-level financial person to design and administer them.
Recommended timing for senior leaders’ compensation progression.
Establishing the timing for offering long-term incentives to senior leaders as a pathway to real equity ownership is almost as important as the incentives themselves. Both ownership and the senior people involved should clearly know what to expect.
Before real equity is offered to senior executives, they should have proven their value over a material amount of time. It’s far easier to get into an equity relationship than it is to get out of one. Therefore, we recommend that the timing move forward in three phases:
Phase I – The leader excels at the position for a minimum of two years. This allows the owner to determine the cultural fit and assess the leader’s ability to motivate and lead staff.
Phase II – The qualifying leader starts sharing in a Profit Interest Plan/Phantom Equity Plan with a tenure bonus also now in place based on two or more additional years.
Phase III – Real equity is offered to a select few:
This replaces the Profit Interest/Phantom Equity plans and tenure bonus previously in effect.
Provides the leader with a percentage of cash distribution in addition to a performance bonus.
Also provides the leader with a percentage of any sale-of-agency proceeds.
If you’re interested, we can take you through detailed year-by-year examples of how a senior leader’s total compensation breaks down based on the firm’s performance and the application of these plans. Please feel free to contact our Managing Partner Alex Halbur at any time. (His cell is 310-936-3774 and e-mail is alex@prospergroup.net.)
Finding the best senior talent for your agency.
To help agency owners find their successors, practice leaders or both, Prosper Group offers not only our highly experienced counsel and thinking but we can also recruit these special people for you.
These candidates are motivated by the opportunity to a) grow an agency or build a practice and b) make substantially more money based on their success.
We’ve found that the right candidates believe strongly in themselves and are willing to take the risk of accepting lower base compensation in exchange for greater incentive rewards. They’re also motivated by sharing risk/reward with the owner.
We’re here to help you prosper.
Prosper Group exists to help the owners of independent marketing and communications agencies achieve their ambitions and maximize the value of their life's work.
Our team of former agency leaders and owners focus their 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.
To learn more about us, please visit our Services page.
