The Advisors' Blog

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

Following up on last week’s Part I, here is some advice for folks looking at their employees and worrying about retention:

1. If you haven’t already done so, identify your high potentials, those employees whose loss would hurt your business. Think about the different areas of your company and which people in each area whose loss would be difficult on the company. Keep in mind that high potentials typically are no more than 10% of your employees and are easily identifiable as such by almost everybody who knows what these individuals do and how. Having a limited number of folks identified as high potentials makes the company’s special treatment of them easier for everybody else to accept and understand.

2. Communicate to your high potentials that they are viewed as such (though that evaluation may change over time if they do not continue to display the same qualities and efforts that got them placed on the list in the first place) and challenge them to live up to that assessment.

3. Assess what motivates your company’s high potentials and determine whether they perceive those motivating factors as existing at your company. If not, take steps to develop such motivating factors and effectively communicate the existence of these motivating factors to your high potentials.

4. Assess whether your high potentials have a sufficient long-term stake in the company to ensure that they will have to think twice about leaving and that they’ll have to walk away from a significant amount of compensation (on a relative basis compared to their regular total compensation) if they do leave. Assess the quality of your high potential’s equity stake in the company. Is it mainly in stock options that are largely underwater? Is it in the form of performance shares the past few cycles of which have not paid out? Is the stake sufficient “glue” to keep your high potentials?

5. Assess the state of your business and the economic realities that are confronting it. If your business is going through a tough business cycle right now, what do you need from your high potentials? What would happen if some of them left? Are your high potentials fully engaged in their work and with the company? Do they have sufficient opportunities to grow, develop and pursue their passions?

6. Monitor the turnover rates for both your broader employee population and your pool of high potentials.

7. Do not take the easy way out and implement a retention program that treats all employees equally based on level or position. Sure, such a solution is quick and easy to implement and you don’t risk angering too many folks. But this “peanut butter approach” may not be terribly effective and could end up wasting scarce company assets – money and equity – on individuals who are not key to the company’s success. The peanut butter approach also might not be all that effective in retaining your high potentials. Avoid the urge to take the easy path and instead embrace the more difficult path of identifying high potentials, evaluating what motivates these folks and using a retention plan, if needed, to target your high potentials to ensure they stay focused, engaged and at your company.

8. While you need to consider the reaction of media and shareholders to any potential retention effort, you should also consider the likely consequences if no retention efforts are made and you lose high potentials. How would the media and shareholders react if they learned that the turnover rate of your high potentials was greater than your turnover rate for all employees? What if you could state that that the turnover rate for high potentials was lower? Would that change how these constituencies might view retention efforts?

9. To help with your retention efforts, you might want to explore a portfolio approach to equity grants, i.e., a mix of equity grants that together can address multiple goals. For example, if your company has decided to be solely focused on pay for performance and has instituted performance plans, you might also want to consider also granting restricted stock or restricted stock units with longer vesting provisions to your high potentials to act as “glue” to keep them at the company.

10. Periodically review and re-assess your list of high potentials to ensure that all the employees who should be on the list are on it and that all those who were on the list from your last assessment should continue on the list.