The Advisors' Blog

– Ed Hauder, Senior Attorney and Consultant, Exequity, LLP

I had a conversation with a client recently about retention issues. The company’s past several performance and bonus cycles had not paid out and are unlikely to do so and most stock options that remained outstanding after the company switched to performance shares were granted at prices far in excess of the current stock price. A top executive recently left as well as one of the executive’s direct reports. The client was concerned about the potential loss of employees across his organization. We talked more and it turned out that he believed while his Board of Directors would be concerned about the loss of key talent, they would first want to see evidence that employees were leaving before addressing the issue.

There is definitely a concern that you don’t want to address an issue that doesn’t exist, i.e., grant retention incentives where none were needed. This is especially true given the general take of the media and reaction of certain shareholders when retention efforts are disclosed. But companies also need to consider what would happen if they did lose employees. An ounce of prevention is worth a pound of cure (and is generally cheaper).

So what should a company in this type of situation do? I discussed analyzing the compensation packages (i.e., equity holdings and bonus potential) of key employees – those employees whose loss would cause alarm or the loss of key institutional memory or impact the company’s ability to achieve its strategic objectives or shareholders’ view of the company (“high potentials”). If these employees didn’t have a sufficient “at risk” stake that they’d have to turn their backs on to leave, then it might be appropriate to ensure that they were granted such a stake.

Of course, you could look at the situation from the point of view that the economy is bad in general. Therefore, employees are less likely to change jobs and put themselves at risk for down-sizing, etc. at a new employer. You might then think you should just wait and see whether there is a significant jump in turnover of employees before acting. While this approach has a certain appeal, the problem with it is that if high potentials leave, it will be too late to address the situation. In good and bad economic times, it is often a company’s high potentials who will be most able to secure new positions outside the company.

During troubling economic times, every company wants to hire high potentials to help weather the storm and improve their businesses. Thus, even if the employee turnover rate itself remains constant, if the make-up of the employees who leaves is largely high potential employees, then a company that relies on the talents of its employees will be left a hollow shell of what it once was.

So, I asked my client if they had looked at their high potentials and I heard a fairly familiar refrain, “We haven’t seen any list of high potentials, and if such a list exists, it may only be in the head of our CEO.” Well, at least the CEO knows, right? While true, it makes it difficult to monitor the turnover of high potentials and to manage them like the valuable assets they are. What would happen if others had a chance to see and react to such a list or even assist in its creation? What if a high potential employee was told that he or she was on the list? Might not that recognition alone coupled with the challenge of seeing the company through these difficult economic times be enough to reenergize and recommit the employee to staying the course with the company? It might.

As well as being able to look at the group of key employees whose loss could hurt the company, knowing who is a high potential can enable a company to make rational decisions regarding which employees it should encourage to stay through recognition, greater assignments, compensation and other opportunities and, if needed, retention grants. That strikes me as a prudent way for a business to make decisions regarding the potential loss of a valuable asset. And make no mistake about it, high potential employees are a valuable asset who can help make a good company great or whose disappearance can condemn an “ok” company to remain mired in mediocrity and not develop into what it might otherwise have become.

In my experience, employees generally are not solely driven by compensation (heresy, I know, with me being a compensation consultant). Instead, after some base amount of compensation, high potentials look for career challenges – opportunities to learn, develop and grow – and recognition that their contributions are seen and appreciated by higher ups (which could be accomplished through something as simple as a personal note from the CEO – the type of low cost, high impact action that can help motivate your high potentials and keep them engaged and focused on your business). Another thing I’ve noticed is that most high potentials make their decision to stay at a company based on the people they work with and the challenges and opportunities they perceive they have.

Businesses usually make decisions regarding threats to other business assets without waiting to see a loss. Sure, some companies need to experience a huge data theft before IT security becomes a hot-button issue, but normally companies take prudent steps to protect their valuable business assets – they hire security services to protect their offices, plants and equipment or they file patents and trademarks to protect their intellectual property from others. So why can’t companies look at high potentials in the same way from a business perspective? If companies looked at high potentials the same way as any other valuable business asset, many would find that discussions and decisions concerning compensation, while likely initially more difficult, could in fact do a better job of helping the company achieve its strategic objectives.

However, let’s recognize that this is not an easy thing to do. Not everyone can be above average (or a high potential). Not all companies are headquartered in Lake Woebegone. That isn’t to suggest that all employees don’t contribute to the company’s success. Most of them do in some form or fashion. Instead, it simply recognizes the truth that some employees have a bigger impact on a company and should be treated as the valuable asset they are. Companies should at least be in a position to decide what to do with such valuable assets and be able to protect their investment of time, effort and resources in such individuals rather than allow them to slip away due to lack of knowledge or neglect. So why not identify your high potentials so you know who is critical to your organization, and then work out how to keep these folks engaged and committed to the long-term efforts of your company?