Compensation in the Owner Managed Company

You need an experienced, capable colleague to help take your business to the next level. You have invested a lot in the search and you have now found the perfect candidate. You want to seal the deal, make a statement that you are serious. What better way than to offer ownership in the company, some skin in the game?

Well let’s just take a look at that.

• A serious, senior practitioner will want skin in the game right? You will want to align their interests with yours, but how well do you really know this person, their track record of value creation and why they are available at this time?

An equity stake in your business might be the right thing but not straight away. Think about deferring ownership especially if you have not worked with the candidate previously. Notwithstanding the due diligence that you have already been through grant yourself some time to assess ability, contribution, and values. Make sure there is a fit with culture and values. Share grants can be subject to vesting at a time in the future or you may provide an option to buy later. If there turns out not to be a fit a shareholder agreement should clearly state what will happen at separation.

• If you are in the habit of paying dividends remember that you will now be paying those to your new colleague. Someone who has yet to contribute to the business. Think of this as handing over some of the value that you have created. Are you prepared for that to happen?

Think of dividends as a return on investment. That would be your investment of hard work and forgone vacations. What investment has your potential colleague made? Have them earn the grant in lieu of compensation but be clear up front on what happens to pay when that has been achieved.

• How much will you involve your new colleague in decision making? An executive would be expected to contribute to important issues. A shareholder however, will have an emotional involvement are you confident that they can be objective and respect your controlling interest.

With one other shareholder an operating model can easily be worked out and before ownership transfers. With multiple shareholders things get more complicated. A governance model is required and a structure for decision making that may include voting, will be necessary. Care should be taken too, that minority shareholders do not create a majority causing you to lose control.

If you need independent advice on how to structure executive or employee ownership transfers, generational transfers or management buyouts related to compensation perhaps we can help. Reach out on 905 842 7916 or by email.