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The beauty of a well-designed key employee incentive program is that as employees meet their physical and financial goals, you, as the owner, attain your goal of making your company more valuable and, perhaps, more marketable. 

The first task in key employee incentive planning is to identify exactly who your key employees are. Most of your employees do not fit into the key category. Instead, they are attracted to your company and motivated by the usual items: a pleasant work environment, a stimulating job, good wages and benefits, and job security.

Key employees, on the other hand, act and think more like you do. They want more challenges and opportunities. They want to prosper and grow as the company does. In short, they behave like owners. You may have key positions in your organizational chart. Make certain the persons filling those slots are key employees.

Keep in mind that people who are in key positions are not always key employees. If employees do not respond well to the incentive plans described below, it is questionable whether such employees truly are key. With these guidelines in mind, let’s look at how to motivate this small, yet vitally important, group.

Motivating Method
A well-crafted incentive plan is one that does more than make both owner and employee feel good. In fact, five criteria are present in a well-designed plan.

1. The plan provides substantial financial awards to key employees.

• A potential bonus equal to at least 10 to 30 percent of annual compensation is necessary to motivate an employee to modify performance.

2. Performance standards are specific.

• There must be determinable performance standards such as certain company net income or revenue levels.

3. Performance standards are tied directly to increase in the company’s value.

• As the key employee achieves measurable objective standards, the net income of the company increases. Put another way, unless the company’s net income increases, the key employee does not receive a bonus.

4. Part of the bonus is deferred and subject to vesting.

• This characteristic of incentive plans is commonly referred to as golden handcuffs. If the employee severs his employment before he is fully vested, he forfeits at least part of the deferred compensation.

5. The plan is communicated in writing to key employees.

• In order to be successful, key employees must understand exactly how the plan works. The plan must be simple, easy to read, communicated face-to-face to employees with advisors present to answer any questions, and contain a summary for easy reference.

Having identified the elements that make a successful plan, you (as an owner) and your advisors must determine whether a stock-based plan or a cash-based plan (or some combination thereof) will best motivate your employees and cause them to stay with your company.