FORESIGHT NEWSLETTER: WINTER 2010 

Family-owned businesses offer rich opportunities, both personal and professional. But often, promises of real career advancement or ownership are only for family members. Non-family employees sometimes feel that they can only go so far in the business — a serious disincentive for the most talented and ambitious workers.

In order to keep valuable non-family employees motivated, progressive companies look for innovative ways to compensate them. Here are three to consider:

1.  Employee Share Option Plans

Some families are wary of diluting company ownership. But an Employee Share Option Plan (ESOP), especially one comprised of non-voting shares of stock, will allow the family to retain control of the business while still allowing key employees to share in the benefits of ownership.

Family executives can hand-pick employees they want to include in the ESOP, determine a vesting period to keep these employees at the company, and choose the number of shares to be issued.

The idea is that key non-family employees will be motivated to stay with the company, work hard and contribute their best because they have a personal stake in the company’s long-term success.

2.  Phantom Stock Plans

Also known as a “mirror,” “shadow” or “unit” stock plan, a phantom stock plan is a contractual agreement between the company and an employee, designed to mimic actual stock ownership.

A typical phantom stock plan creates deferred compensation “units” at a set value equal to the company’s common stock. As the stock appreciates, or dividends are paid, the employee’s phantom stock account is “credited” equally, as if the employee held actual stock.

Account proceeds are typically paid to the employee when he or she leaves the company at retirement or at a future specified date. The value of the stock is determined by periodic professional business valuation.

3.  Golden Parachutes

Golden parachutes are arrangements that provide an employee with a set amount of money in the case of a change in company ownership. Essentially golden parachutes are a way to keep key employees at the company until it is sold.These agreements can be structured in a variety of ways. For example, the parachute may be tied to the sale price of the company — if it sells for X amount, the employee gets Y amount.

With golden parachutes, the crucial benefit to the employer is management continuity. The benefit to the employee is job security and a potentially hefty chunk of change at the end of a healthy career.