Your employees can be a huge differentiator in terms of building your business’s value. However, it’s important for you to understand how to properly motivate your employees based on their skills, ambition, and how they fit into the business.
Let’s look at three general types of employees, how to properly identify your employees, and how you can motivate them to help build your business’s value.
Keys, Cogs, and Next Levelers
Generally, there are three kinds of employees in any successful business:
- Key employees: Employees whose absence would have a noticeable, negative effect on business operations and thus business value
- Cogs: Employees who keep the daily functions of the business moving
- Next-level managers: Those whose strategies and execution take the business to the next level
The point of classifying these employees is not to rank them but to determine what motivates them so that you can best incentivize them to do their best work.
When properly identified and incentivized, these employees can help you grow your business’s value more effectively.
Important Note About Employees
It’s tempting to think, “I should just focus on finding next-levelers and key employees because they’re the best.” However, it’s a trap to think that you should only focus on finding key employees or next-level managers.
These employees tend to be more expensive and may not have the interest, skill, or desire to do the things that the cogs do every day. Your business needs the cogs to make the machine run.
But how do you identify who’s who and keep all of your employees rowing the boat toward increased business value?
Identifying and Motivating Your Employees
There are three relatively simple strategies that you can implement to identify the kinds of employees you have.
- Ask
- Observe
- Act
How to Ask
The most straightforward way to determine the kinds of employees that you have is to ask.
Now, of course, you shouldn’t randomly go up to employees and ask them, “Are you a key, a cog, or next leveler?” When we talk about asking your employees what they are, this means asking them probing questions about their motivations so that you can determine what kind of employee they are.
For example, if you notice that a junior employee makes good leadership decisions but may not have the authority to implement them, you might ask that employee if they have interest in developing their leadership skills throughout their career. How they answer the question could give you a baseline to determine whether that employee is happy where they are or has greater ambitions.
Likewise, asking employees about their ambitions is a powerful way to avoid overwhelming them.
For instance, you may have an employee who you think has the skills to transition into ownership. But that employee may have no desire to ever own a business and may be happy doing what they’re doing. If you were to try to elevate that employee beyond what they’re comfortable with, it could overwhelm them and motivate them to leave entirely.
It’s just as important to ensure that you’re not positioning employees for failure as it is to find the right people to eventually run your business after you leave it.
How to Observe
While asking is a good starting point, it’s not the end point. After all, employees may wonder if you’re asking them these questions as a test. In addition to asking your employees about their ambitions, it’s important that you and your Advisor Team observe their performance.
As a business owner, you’ve likely run into employees who think they can do what you do because you make it look so easy. But when the chips are down, they may not be able to live up to what they thought they could do.
Though this may indicate that those employees aren’t cut out for ownership or next-level management, it doesn’t necessarily mean that they’re bad employees. This is a common and potentially harmful assumption that business owners and employees can easily fall into without the right process.
How to Act
Once you and your Advisor Team have identified and classified employees properly, you can begin to act to incentivize them in ways that build business value.
While each incentive plan will vary based on your business’s unique situation, there are a few general rules to follow with incentive plans.
Don’t Offer Only Equity
Offering equity can be a powerful way to motivate employees, but it’s not for everyone. In general, equity-based incentive plans are most effective for employees who have ambitions for ownership, more specifically, next-level managers.
However, key employees and cogs may not respond to equity-based incentive plans. This is especially true if those employees have no ambitions for ownership.
Instead, you might consider performance-based incentive plans that offer large bonuses when employees reach ambitious but realistic goals.
Consider an example of a rain-making sales representative. While that sales representative may not have interest in becoming a manager or owner, their performance can still help you increase your business’ value as long as that employee is properly motivated. You might consider large cash bonuses paid out over several years for exceeding a challenging goal that has a tangible effect on business performance.
Give Employees a Chance
Although different employees may require different incentive plans, it’s important that you give your employees a chance to access an incentive plan.
Before we go farther, let’s be clear: These incentive plans don’t need to be available for every single employee you have. Nearly every business has employees who are replaceable. The incentive plans should be targeted at employees who perform well, fit into your company’s culture, and can potentially help you increase business value.
That said, it’s important to not create a blanket incentive plan for all of the employees you want to incentivize. Just as a cog may not have interest in company equity, a next-level manager may not have interest in just a cash bonus.
Tailoring your incentive plans to the type of employee you’re trying to incentivize can take time and be challenging if you try to do it by yourself. Fortunately, your Advisor Team can help you craft appropriate incentive plans for the types of employees that you’re trying to motivate based on what motivates them.
Leverage Tax Strategies
Creating incentive plans can have tax implications for your business and your employees. You might think to yourself, “Everyone likes to get paid extra money, so the incentive plan will just be extra money if they reach their goals.”
However, in addition to being an improper fit for some types of employees, such an incentive plan may have unforeseen tax implications for you and your employees.
It’s important to make sure that tax implications don’t cut into the incentive plan and make it less valuable for your employees. This can do more harm than good in the worst-case scenario.
As you craft incentive plans for the different types of employees that your company needs to grow its business value, consider working with a tax professional to ensure that your plans align with both your business goals and tax law.
Motivated Employees Can Increase Business Value
The goal of an incentive plan is to get the most out of your employees. When your employees are firing on all cylinders and are motivated to do more, it can increase their performance, which can lead to smoother operations and the development of a turnkey business that does not require your presence to thrive.
Each of these elements is a Value Driver for your business. The more Value Drivers your business has installed, the more likely it will be to increase in value. And the reason is simple: Potential buyers like businesses that are easy to run; proven to be successful; and have an established foundation of institutional knowledge from next-level managers, key employees, and cogs.
In short, the less a potential buyer has to do to make the business more valuable, the more likely you are to get top dollar from that buyer. And the more motivated your employees are, the more likely they are to perform in ways that increase business value.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.
About Altus Exit Strategies
David Jean is the Director of Altus Exit Strategies and a Principal at Albin, Randall & Bennett, where he is also the Practice Leader of the Succession Planning, Business Advisory, and Construction & Real Estate Services Teams. David works with business owners who want to improve their business’s value before they sell through the Seven-Step Exit Planning Preparation™ process. He has worked with companies from $5 million to $50 million in revenue across a range of industries.
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