Tom Miller - How Can You Turn Your Employee Investment into a Growth Driver?

Time is precious and so are our pets, so time with our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow-ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care. Hi everyone, it's Bill Black, the exit coach from the Exit Coach Radio show. You know, one of the biggest questions I get on the show is what exactly goes into a business exit plan and when should I start creating mine? Well, I always tell people that the best time to start was 5 years ago, but the next best time is now because you never know when you might need it. So we put together a free report that describes what an exit plan is and what you should know. You can get it free by texting exit plan with no spaces to 442-22. That's exit plan to 44222. Again, text exit plan to 44222. Welcome to the Exit Coach Radio show, the show for baby boomer business owners who are looking for cutting edge information as they plan their 3 to 10 year business succession and exit. Every week we interview top professional advisors for their best tips, strategies, and precautions so you can be well planned. And now here's your host, the exit coach Bill Black. All right, thanks so much for listening today. It's a pleasure to have you with me and my next guest, we're going to talk about something very important in your business, very important. So grab a pen, grab a pad of paper. Let's take some more notes. Tom Miller. He is in the business of compensation design for privately owned companies, and he'll describe how he helps business owners construct pay for performance strategies that turn employees into growth partners. I'll say that again. It turns your employees into growth partners. Compensation such as salaries. bonuses, commissions is typically the largest expense on a business's financials. How can this investment be turned into a driver of growth? That's the question Tom's firm, the Vision Link Advisory Group, is constantly striving to answer, and I'll be asking him some of those questions today. Tom, welcome. Thanks so much for joining me today. You're welcome, Bill. Thank you for having me. My pleasure, Tom. We've gotten to know each other a little bit. We're actually both here in beautiful Orange County, California, and you, you have a very interesting business in it. I think even more interesting story of how it got started. So could you share that with our listeners? Sure. Well, many years ago when I was uh providing benefit plans for companies, I started getting asked questions by owners, CEOs, CFOs about their compensation plans, and I discovered that small to mid-size businesses don't have too many. Sources to turn to to learn how to talk about compensation. How do we pay our employees to get our best results. So just kind of started experimenting with it a little bit and found out that this was a common issue. And so we formed in 1996 with my partners, a compensation consulting firm, and we've served over 600 clients since then. Very successful. And why do you think that, um, you know, when, when we think about HR issues and, you know, there's so many issues when you get people involved, right? There's so many regulations and rules and Other things, and I know there are giant compensation based companies that serve giant companies. Why, why aren't more people, uh, or why aren't there more groups like yours out there and what do most business owners do with their comp plans? Where do they get help? Well, there are some other compensation consulting firms out there. Most of them, if they're not super large global firms are small or regional firms that have certain specialties. What we learned was that business owners really have a diverse selection of. Problems or challenges and so we've tried to capture an understanding of what's on the CEO's mind relative to pay, and usually that means they want to know how to get their team to execute on the business plan, how they can create a pay for performance culture, and so the designer, what we call ourselves designers as much as consultants, has to be able to understand those kinds of issues that the CEO's dealing with. And then make the connection over to pay. Ultimately it turns into a pay for performance issue. If I ask a business owner, you know, do you have, do you have a pay for performance culture, the common response is, well, I certainly want to have one, but I'm not sure if I do right now, and we try and help them thread that needle. Yeah, I think a common problem I run into when talking to business owners is when I ask them how they determine bonuses, it's just year to year, you know, here's the one thing is employees sure expect a bonus out, especially if they've been receiving one for a few years. So I think that's a big mistake. But what do you think? What's the biggest mistake that most business owners make related to paying their employees? Yeah, well, there are probably a few, but one of the big ones is when they, when it comes to things like bonuses, you brought up bonuses, let's comment on that. They do not have a way to link the bonus payment to the company's most important business objectives. They tend to create bonus plans that try to manipulate behavior. And manipulating behavior through a bonus plan is a bad idea. It actually will backfire on you. You might get the exact opposite behavior you're looking for. that's been proven in a lot of psychological studies and in other forms. And so what the struggle in bonus plans, annual incentive plans, is on the one hand you're trying to manipulate behavior, and that's backfiring, or on the other hand you're being so generous that you're creating an entitlement mentality. Which can be just as disastrous if I, if you just paid me a $10,000 bonus last year because you were being generous and you probably were, and now this year I don't get a $10,000 bonus or higher. I'm going to wonder what's going on and I cause I'm starting to feel entitled. So we've got to find a way to make employees feel like they're as committed to the company's goals as the owners are and share value when they help create it. Interesting. Yeah, there are a lot of things that can go wrong in uh in bonus land, that's for sure. Um, what, what do you think the first thing a business owner should do in order to turn employees, as you say, into growth partners? Yeah, that's kind of a fun expression we we like to dwell on. Are your employees growth partners? And the response to that is, what do you mean by that? Well, are your employees as committed to helping you achieve sustainable, profitable growth over time as you are? So that question prompts some compensation discussion. At the beginning, an organization needs to adopt a compensation philosophy. We encourage our clients to even write it down, and we help them write it down. Here's what we believe about pay. Here's why we pay our employees. Here's what parts of pay or components of pay we use. Imagine being able to have that conversation with a new hire. Let's imagine, Bill, I was gonna offer you a job today and we're getting down, you want to join me and I want you to join us and um we're getting down to that pay discussion. But before I put the offer on the table, I present to you my 1 page or 1.5 page compensation philosophy statement, and it tells you what I believe about pay, what we pay for and what we don't pay for. And now we can have A meeting of the minds that's a bit philosophical, but it's about things we should agree on now so that somewhere down the road we don't have confusion about why we're not paying for certain things or providing certain benefits or so forth. So establishing a pay philosophy is the first thing an organization should do, and it serves as the framework for building excellent pay programs going forward. Very interesting, very interesting. I noticed, yeah, on your website at VAdvisors.com, there are a lot of outcomes that you help people achieve increasing ability to attract and retain high performers, improved employee ownership of results, creating value, improving productivity, profit. And sustain belief in the company's ability to to exceed. So there's there's a lot of um issues that go into this design. When you look at a company's compensation strategy for the first time, is there usually a glaring omission? Yeah, in many cases there is. Now we're seeing this problem less often than we used to, but it's still the most common omission for small to mid-sized companies, and that is the use of an effective long-term incentive plan. So many companies, most companies have some type of short term plan, an annual bonus, as we mentioned earlier, it may or may not be effective, but they have it. They recognize the obvious need if they're going to compete for talent to have some type of annual incentive plan, but most private companies still don't have an effective long-term incentive plan. So think about the public market. Public companies clearly for their executive team are going to have stock options or restricted stock units or some type of stock program and equity plan. Most private companies don't want to share stock and properly so they don't need that headache or the delusion. But you can create other types of long-term incentives. Many of your listeners may be familiar with the term phantom stock. We're starting to see that as a more regular addition to comp strategy, and I believe a long term plan like phantom stock or something similar. There's actually 9 different types people can check out on our website of Of long term plans. In fact, one of our websites is simply phantomstock.com. People can go there and check out long-term plans of all types, but if you don't have a long term plan in the market today and you want to grow, you're going to have a hard time attracting and retaining premier talent. Yeah, you're, you're in a big competition for long term talent. Now my observation has been that a lot of our listeners, baby boomer business owners, are getting to the point where they're starting to say, you know, I don't know if I want to sell this business, but I sure want to slow down and let somebody else do the heavy lifting in the business, and that's going to be a key employee. And if I don't have one, I'm going to have to attract one. And if I do have one, I better, I better darn well protect against someone else trying to steal them away. So in today's environment as you see it, is it really, really important to have one in place not only for your existing employees to keep them, but also to have something for that interview with the new superstar you're trying to recruit. Yeah, I think when you're when you're recruiting that superstar and you're getting to that compensation offer and discussion, to be able to present a view of the future is a super cool thing to be able to do. So in other words, rather than saying, again, I'll pretend I'm recruiting you here, Bill, rather than saying, Bill, here's your salary, and yes, we have a bonus plan and here's your likely bonus opportunity and we've got a great benefits plan. If I can say to you, uh, we also, Bill, I want you to have a stake in the company's future. And we talked about our business growth goals and our strategy, and you believe you can contribute to them. If you do, Now let me lay this piece of paper in front of you. Here's what your future compensation may look like. Let's look at the total wealth accumulation opportunity that you might achieve or obtain if we achieve those business goals over the next 3 years, 5 years, or even longer. So painting a future picture of pay for that recruit. It is an excellent way to make sure that they understand the full value of your compensation program. Now, I've known about Phantom stock plans for quite a while. I was kind of in my wheelhouse for quite a while, but a lot of people don't know about them, and they think, you know, do I really need that? Things are just fine, but as you say, if you want someone to come in and work hard to help grow the company, and a lot of key employees that have been around for a long time are starting to think, well, what's in it for me? What do I get out of working hard in helping grow the company? Yeah, how does phantom stock bridge that gap for an employer? So that attitude, you know, what's in it for me shouldn't be viewed as a negative or selfish perspective. That should be viewed as a positive thing, right? Employees thinking, hey, this company's going somewhere and I want to contribute to that. So I would like to know what that means to me, and that meaning isn't strictly financial. They want to feel like they've got a way to contribute to that because of their personal growth goals too, but If they don't have a stake in it sooner or later, if they're really a talented executive or leader, they're going to look for it somewhere else. That's the nature of today's marketplace. It's also been reinforced by the recent turndown in the market due to COVID-19. We're finding the use of phantom stock is a great way to say to our our employees. or to your employees, since we may not be able to pay bonuses this year or our bonuses will likely be diminished, let us show you how we're going to give you something that can pay off in the future. We want you to stay. We want you to help us rebound and grow, and the family. Stock plan which pays out in cash under certain events in the future is a perfect way to demonstrate that commitment to your employees. So I think it's kind of the hottest topic out there right now, at least in our market. Yeah, I tend to agree because like you said, people are looking for their slice of the pie down the road, and a lot of baby boomer owners are thinking they're going to sell their company whether they're wrong or right about that. A lot of them are going to try and they think, you know, that could be a way that I'll have the money if I sell the company to reward this person, but if I lose the person, I'm probably going to get a much lower sale price. So this is actually a strategy that, like you said, it helps retain and reward your key employee, but it also adds value when you're showing your business to a potential buyer, right? You've retained your key employees. It does. It can help no matter how you're trying to exit. If you're in the example you're giving, going to attract an outside buyer to be able to say you, Mr. Beer, have a way to help retain the employees who have been so important to helping me get the business to this point. Also, if you're going to potentially sell it to internal leadership, so if you're doing an internal transaction. The phantom stock that they own can be converted to actual stock to assist in that transition. So, whether you're selling internally or to an external buyer, phantom stock program can be a very attractive and helpful tool. Good point. Now, I think a lot of our listeners might have been in the position where they've, they've thought, well, I was going to give my employee real stock. Why, why would I consider, uh, a phantom stock type of a plan instead of a, a real stock type of a plan? What's, what's the harm? So there are circumstances where actual stock may be the best solution, and as a consulting firm we're not biased to phantom stock, so we explore with our clients all of the options and help them determine what will work best for them. Once they do evaluate the pros and cons of all the options, phantom stock is selected much more frequently than actual stock, and there are a lot of reasons. I'll just mention a couple. One, from the ownership perspective, there's no dilution. So the ownership relationship does not change whether you're one owner or 2 or 33, you're not adding a new owner to dilute the pie. The second issue is a tax issue. If I give you actual stock, someday you want to sell that stock back to the company. When I, if I buy it back, I'm being the company here. If I buy it back, I don't get a tax deduction for that. I buy that with after-tax dollars. If I give you phantom stock, I will get a full tax deduction for any redemption of those shares in the future. So it's a better after tax program for me, the company, or the shareholder or shareholders. Now employees might say, yeah, but I'm going to pay capital gains if I get actual stock, whereas I'm going to pay ordinary income taxes on phantom stock. That's true. That said, you also have to pay excuse me, tax up front. When you receive the stock on day one, so Bill, if I give you stock in Vision Link today, you're going to incur some taxes, and that's kind of a, to use the term phantom again, kind of a phantom income, a tax on phantom income which is unattractive and sometimes impossible for the employee to absorb. So the way we make it up is in the long run, even though the employee will pay ordinary taxes, the employer might be willing to give a little bit more than they would actual stock because the employer's getting a tax deduction. I don't know if that was a little too convoluted to follow, but net net, the tax implications of phantom stock are much better for both the employer and the employee. Yeah, it makes a lot of sense. And you know, the other thing that I think a lot of you mentioned it in there, but a lot of employers that I talked to say, well, I was just going to give them, give my employees some stock, but, but hold on, you just can't give employees. You can give sons and daughters and blood relatives stock under gifting, but you can't just give stock to an employee without it being taxed as some form of compensation, right? Correct. That's exactly right. And that's, that's where there's an ordinary income tax. And sometimes, you know, some of these employees just don't have the extra cash to pay the taxes on that award of stock. By the way, don't believe us. Ask your tax adviser about tax questions, but there's that's a, that's a myth. I find a lot of people say, Well, it isn't I can't I just give them stock. So when I, when employees that I talked to Tom, say I want stock in the company, I say, Well, two things do you have money for the taxes because your employer may not be giving you that. And number 2, are you ready for the cash call because They say, what's the cash that's when the employer, that's when the owners, the stockholders are walking around with long faces because everybody got paid, but they had to pay in. Yeah, you're not ready for that. You're not ready for that. Maybe we should talk about these other programs, and there, there are a lot of different designs like you mentioned your website phantomstockonline.com. It's it's I guess it's just phantomstock.com. We'll get you there. Terrific overview, great job on that. And you also have one on on bonus plans that people can go to, right? We do. We have a site called Bonusrite, R I G H T, like as in do your bonus right, bonusrite.com that previews the way we help clients design bonuses, and there's even kind of a do it-yourself capability to that site. So if a business owner says, yeah, we kind of build our own bonus plans, well, no problem. Bonus right can walk you through how to do that. So. We've got a lot of resources for clients that want a lot of custom help or want to kind of do it themselves and they're looking for some guidance or coaching. Yeah, we're in the day and age when people like to poke around a little bit, figure out what's out there, maybe learn about some of these things so they can talk intelligently about them when they call people like you at Vision Link. And what's the best way for listeners to get in touch with you and or your team and talk about their particular problems or their their compensation strategies and their goals? So our main website, as you've heard we've got 3, but our main website is www.in advisors.com. We've got a lot of content there that talks about the kinds of outcomes most business owners are looking for and how to link comp to get those outcomes. We have monthly webinars and we have a whole backlog and history of webinars in our learning center as well as they can regist. for upcoming webinars if that's interesting. They're all complimentary blogs, all that sort of good stuff there, white papers, a lot of content, and there's a place there with our phone number to call in or just to click, you know, like talk to somebody, and we're happy for anybody to reach out and offer a complimentary consultation on any compensation subject. People can even email me directly if they want, and I'll respond or have one of my partners respond. My email is tmiller. At VL advisors.com. I think listeners, I think you'll agree once you start checking out VLAdvisors.com or Phantomstock.com or Bonusr.com. This is a great resource for you to start thinking about doing your compensation structure, maybe redoing it, revamping it, get get a bonus plan that matters, retain your key employees, attract key employees. I, I, you know, this is a very important issue as we move into a new normal. You don't want to lose your key employees, and here's the thing if you've got a key employee, somebody else wants them because if you don't have a key employee, you're going to hire them from somebody else. So you want to find one that nobody else is locked up and then, and then work with people like Tom Miller and Vision Link to to make sure that that key employee is motivated to stick around and help you grow the company. Did I get that right, Tom? Yeah, you did. Thanks, Bill. Yeah, it's great to have you on. I'm glad we we had you on this first time, but I think we better have you back pretty soon just to get do a deep dive into some of these other issues, maybe talk about phantom stock, the 9 designs of phantom stock, it sounds like would be a show and a half. So I look forward to having you back and really appreciate you taking the time today to help our listeners out. I'd be pleased. Thanks for having me on, Bill. Take care. Thank you for listening to Exit Coach Radio. Time is precious and so are our pets, so time with our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care.