QUESTION: I have several key employees who have helped me grow our small business. They feel they should share in the profits they generate. Is there a way to do this without giving up equity in the business?
ANSWER: There are several ways to compensate key people in your employ without actually giving them stock in your company. Let’s explore a few:
A Stock Appreciation Right or SAR works kind of like a non-qualified stock option. Essentially what you are giving the employee is the right to benefit from your stocks appreciation from the time you grant them the SAR(s) to the time they vest.
The Grant date is the date the SAR is given to the employee. The Exercise Price is he market price of the stock on grant date. The Vesting date is the first day the SAR can be exercised. The Expiration date is the last date the SAR can be exercised.
Employees like the SAR because there are no immediate tax consequences, as would be the case if they received stock. When the SARs are ultimately exercised, the difference between the then market price and the original exercise price, is taxed as earned income and subject to payroll tax.
Profit Sharing Plans can take many forms and are usually structured to give a percentage of the profits to employees based on the company’s earnings. However, if only a few key employees are to be considered, the plan can be specific to the individual.
As an example, say your super salesperson is generating profits far in excess of the salary he or she receives. You could structure a plan that gives him or her a percentage of the net profits generated by their own production. The payments could be immediate or vested over time.
Remember, a really good employee, whose individual efforts contribute to your bottom line, costs you nothing because they are generating more income than you are paying them in salary and benefits.
The whole idea behind these incentive plans is to reward and keep good people both loyal and motivated. These are two good ways to do just that without having to give up equity in your company. Whatever you decide, be sure to have a qualified attorney assist you in the plan design.
Gray Poehler is a volunteer with SCORE Naples. Business counseling on this and other business matters is available, without charge, from the Naples Chapter of SCORE. Call (239) 430-0081 or visit https://naples.score.org/mentors The SCORE business office is located at 900 Goodlette Road North, in the Fifth Third branch bank building.