View this presentation that talks about key employee incentive and retention plans in the construction industry. For more information, please contact your local CBIZ MHM Office.

1. WELCOME
to
CBIZ MHM

2. KEY EMPLOYEE INCENTIVE AND
RETENTION PLANS
Creating a Motivated Management Team

3. Construction Industry Overview
3rd largest segment of
World economy
2nd largest employer
2nd highest failure rate
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Key Employee Incentive/Retention Plans

4. Construction Industry Overview
Top Five Greatest Challenges
Challenge %
Shortage of trained field help 60%
Sources of future work 16%
Healthcare insurance costs 10%
Lack of qualified project
managers 9%
Financial condition of federal,
state or local government 5%
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Key Employee Incentive/Retention Plans

5. 5 CBIZ & MHM
How many business owners or executives take an
extended vacation – more than a month at a time?
Key Employee Incentive/Retention Plans
Why consider?

6. 6 CBIZ & MHM
How many business owners or executives believe they can
throttle back and not be at the office every day?
Key Employee Incentive/Retention Plans
Why consider?

7. 7 CBIZ & MHM
How many sophisticated buyers will seriously consider
acquiring a company that lacks a good management team?
Key Employee Incentive/Retention Plans
Why consider?

8. 8 CBIZ & MHM
How many business transitions to family members are
successful in the absence of Key Employees who will remain
with the new ownership?
Key Employee Incentive/Retention Plans
Why consider?

9. 9 CBIZ & MHM
No matter what language you speak the answer is
NONE
Key Employee Incentive/Retention Plans
Keiner
Никто

10. 10 CBIZ & MHM
Each of these scenarios highlights an owner’s need
for Key Employees who:
Provide motivation to others
Provide management skills within their departments
Provide leadership to fellow employees
Would stay with the Company after the current owner has
departed
Key Employee Incentive/Retention Plans

11. 11 CBIZ & MHM
The talent and contributions of Key
Employees are often cited as one of
the most significant value drivers
within a successful Company:
1. Help build profits
2. Help build up the value of the
company
3. May increase Company morale
4. May provide a challenging and
dynamic work environment
Key Employee Incentive/Retention Plans

12. 12 CBIZ & MHM
Contractors that plan to transition ownership:
Internally – Need to entice non-family talent to stay the
course.
Externally – Need to have capable, motivated and a loyal
group of Key Employees in order to maximize the sale price.
Key Employee Incentive/Retention Plans

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First Step - Who are your Key Employees?
Key Employee Incentive/Retention Plans
IDENTIFY the Company’s Key
Employees and understand what is
IMPORTANT to THEM!

14. 14 CBIZ & MHM
The majority of a Company’s
employees do NOT fit into the “KEY”
category….the non-key employees are
attracted to the Company and
motivated by the usual items:
- A pleasant work environment
- A stimulating job
- Good wages and benefits
- Job security
Key Employee Incentive/Retention Plans

15. 15
KEY Employees act and think more like the owner does:
- They want challenges and opportunities
- They want to prosper and grow as the Company does
- They are attuned to industry trends
- They want the Company to have competitive advantages
- They appreciate and nurture customer and vendor
relationships
- They thrive on productivity
- They offer input on how to improve the Company
(whether solicited or not)
Key Employee Incentive/Retention Plans
Basically, they behave like OWNERS!

16. 16
You may have “KEY” positions in your organizational chart
You need to make certain the persons filling those slots are
“KEY” Employees
Key Employee Incentive/Retention Plans

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Most Key Employees are known within an industry – Making
them a focus of recruiting efforts by competitors
Key Employees want tangible recognition and appreciation
for their efforts in helping the company succeed
So, how does a Company encourage high-caliber talent to
stay the course?
Key Employee Incentive/Retention Plans

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Most common response –
Why don’t we just pay the Key
Employees a higher salary?
Key Employee Incentive/Retention Plans

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The most common response is not always the best response:
- Does not stop competitors from offering even higher pay
or a better opportunity
- Does not encourage a leadership mentality
- Does not invoke loyalty
Key Employee Incentive/Retention Plans

20. 20 CBIZ & MHM
A properly designed key employee incentive/retention plan:
- Allows owners to hand-pick their plan participants
- Plans are subject to minimal IRS intervention
- Carry no minimum or maximum contribution mandates
- Encourage productivity and loyalty
- BEST of All – the plans should pay for themselves in the
form of increased productivity
Key Employee Incentive/Retention Plans

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For both the Company and the Key Employee, a well-
designed Key Employee incentive/retention plan is a
Key Employee Incentive/Retention Plans

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A well-designed plan must include four variables:
1. Substantial financial awards to Key Employees
2. Financial / performance benchmark attainment
3. Deferred benefit payout
4. Communication in writing
Key Employee Incentive/Retention Plans

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1. Substantial Financial Reward
- The financial reward must be substantial
in the eye of the Key Employee to
positively impact and motivate behavior
- Substantial could be as much as one
month’s salary and up to 25% (or
higher) of the Key Employee’s base pay
- Remember – this is an incentive /
retention plan NOT a seasonal bonus
paid to all employees
Key Employee Incentive/Retention Plans

24. 24 CBIZ & MHM
2. Financial / Performance Benchmark Attainment
- Identify at least one financial and/or performance
benchmark that must be achieved in order to earn an
award
- Benchmarks:
- Easily identifiable
- Translate to an increase in bottom-line profit
- The Company’s obligation to fund the award only exists
when the Company reaches its profitability targets
Key Employee Incentive/Retention Plans

25. 25 CBIZ & MHM
Financial benchmarks:
Easier to identify than performance benchmarks which are
usually subjective
Examples of financial benchmarks:
• Percentage of profits above a certain threshold
• Percentage of increase in net profit or profit margins
• Revenue growth if expenses are below a certain
percentage of gross sales
• Percentage of savings from reduced expenses as a
percentage of sales
Key Employee Incentive/Retention Plans

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Benchmarks may be achieved as a team or individually
Team benchmarks:
• Departmental - percentage of growth or sales
• Sales/estimating team – number or new or returning
customers
• Project Managers – Percentage of profit per job
Individual benchmarks:
• Percentage of sales to budget
• Individual productivity reward
Key Employee Incentive/Retention Plans

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3. Deferred Benefit Payout
- A portion of (if not all) of the annual reward must be
deferred for future benefit payout – at least 50%
- This where the retention feature is achieved
- Absence of a benefit deferral is the most common mistake
when designing a plan
Key Employee Incentive/Retention Plans

28. 28 CBIZ & MHM
Deferred Benefit Payout
- The deferred benefit payout and/or years or required
participation are determined solely by the owner
- Payout age and/or years of participation can be
individualized or consistent among all participants
- Payout can be lump sum or over a period of years
- Vesting prior to payout, is also left to the owner’s discretion
- Stringent vesting = tighter retention attributes
Key Employee Incentive/Retention Plans

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4. Communication
The plan must be communicated via a written plan summary
for each chosen Key Employee
The Key Employee must understand:
1. Motivation behind the offer
2. Why they were selected to participant
3. How the plan is going to operate
4. What they might expect in projected benefits once
benchmarks are achieved.
Key Employee Incentive/Retention Plans

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Types of Incentive / Retention plans
Key Employee Incentive/Retention Plans
CASH OR EQUITY-BASED

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Key Employee Incentive/Retention Plans
Equity- Based (Stock) Plans
 Provides opportunity for stock ownership:
 One of most powerful motivators
 One of most powerful employee retention strategies
 Stock ties the Key Employee to Company
 If the Plan requires the Key Employee to pay for the stock
then they are making a personal investment and
commitment
 Stock ownership provides a strong incentive for increasing
company value

32. 32 CBIZ & MHM
Key Employee Incentive/Retention Plans
Equity- Based (Stock) Plans
 Owners should realize before starting an equity-based plan
that even the smallest of ownership carries with it
significant rights:
 Right to access the company books and records
 Right to be informed about the financial condition
 Right to be informed about salary and “perks” of other
stockholders
 Right to be consulted and even vote on major corporate
decisions

33. 33 CBIZ & MHM
Key Employee Incentive/Retention Plans
Equity- Based (Stock) Plans
 If decided that stock is the appropriate incentive for Key
Employee, then the timing should be based on:
 Key employee has been with Company for a sufficient
time (several years) and is a proven commodity
 Key employee would be more motivated by stock than
cash
 Owner is prepared to award the Key Employee a
meaningful amount of stock
 Willing to bring new stock owner into confidence

34. 34 CBIZ & MHM
Key Employee Incentive/Retention Plans
Equity- Based (Stock) Plans
 Besides the timing when to award, must also consider:
 Voting or non-voting stock
 Amount of stock to be awarded
 Valuation formula to be used when award or re-acquire
 Agreement to buy back stock if employee leaves
 Performance standard to be attained before Key
Employee has right to receive an award or purchase
 If purchase, how will payments be made
.

35. 35 CBIZ & MHM
Key Employee Incentive/Retention Plans
Equity- Based (Stock) Plans
Issuance of Stock:
 Non-qualified stock bonus
 Restricted stock bonus plan
 Allow Key Employee to purchase

36. 36 CBIZ & MHM
Key Employee Incentive/Retention Plans
Equity- Based (Stock) Plans
 Non-Qualified Stock Bonus:
 Key Employee receives stock at
no cost
 FMV of stock is determined and
taxable to Key Employee as
ordinary income – W2 income
 Company receives a deduction

37. 37 CBIZ & MHM
Key Employee Incentive/Retention Plans
Equity- Based (Stock) Plans
 Restricted Stock Bonus Plan
 A stock bonus is awarded but Key Employee does not
take possession until:
 Vesting period
 Performance goal achieved
 All basic rights of ownership at time of award
 Election to be taxed when awarded – 83(b).
 Ordinary tax on value when received award
 Capital gains on any future increases in value

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Key Employee Incentive/Retention Plans
Equity- Based (Stock) Plans
 Stock Purchase
 Cash bonus used to purchase stock
 If stock purchased below fmv:
 The Key Employee is taxed on difference
 The Company will have offsetting deduction

39. 39 CBIZ & MHM
Cash based incentive plans are the most prevalent in
small- to mid-sized, privately owned companies.
Key Employee Incentive/Retention Plans
 Non-qualified deferred compensation plans
 Stock Appreciation Rights (SAR) and
Phantom Stock Plans
 Supplemental Executive Retirement Plan
(SERP)
 Restricted Executive Bonus Arrangement

40. 40 CBIZ & MHM
Non-qualified deferred compensation plans
 If properly designed, this plan is often the simplest, most
effective, and single best method of motivating and
retaining Key Employees
 Promise to pay benefits in the future based on current or
past services of a Key Employee
 With the exception of withholding for FICA taxes, in certain
situations the benefits awarded to a Key Employee under
this plan are not taxable until the date on which such
benefits are actually paid to the Key Employee
Key Employee Incentive/Retention Plans

41. 41 CBIZ & MHM
Key Employee Incentive/Retention Plans
Non-qualified deferred compensation plans
 Liability must be accrued and expense recorded for GAAP
purposes in the year earned
 Not tax deductible until amounts are paid

42. 42 CBIZ & MHM
Key Employee Incentive/Retention Plans
Important characteristics of Non-qualified
deferred compensation plans
1. A Benefit Formula
 Motivates the Key employee to increase the
profitability of the Company
 Unless the Company meets its profitability
objective, the Key Employees can not meet theirs
 Company obligation to fund only exists when the
Company is profitable

43. 43 CBIZ & MHM
Key Employee Incentive/Retention Plans
Important characteristics of Non-qualified
deferred compensation plans
2. Vesting schedule
 “Handcuffs” the Key Employees to the Company
for an extended time period, i.e. Retention
 Consider a continual or “rolling” vesting schedule
applied separately to each year’s contribution

44. 44 CBIZ & MHM
Key Employee Incentive/Retention Plans
Important characteristics of Non-qualified
deferred compensation plans
3. Forfeiture provisions
 Allows for the termination of a Key Employee’s
vested rights in benefits
 A Key Employee loses all deferred comp if he /
she leaves the company and violates an
agreement not to: compete, take trade secrets,
or take vendors, customers, or company
employees.

45. 45 CBIZ & MHM
Key Employee Incentive/Retention Plans
Important characteristics of Non-qualified
deferred compensation plans
4. Payment schedules
 Determine when payments of vested amounts
commence and for how long after a Key Employee
leaves
 Multiple year payout assists the Key Employee as
he/she is taxed on monies received
 Multiple year payout assists the Company by
deterring the Key Employee from using the
deferred comp to compete

46. 46 CBIZ & MHM
Key Employee Incentive/Retention Plans
Important characteristics of Non-qualified
deferred compensation plans
5. Funding devices
 Ensure the cash is available when needed
 However, tax restrictions exist which prevent the
Company from formally funding the plan
 Proper investment should be guided by income tax
considerations

47. 47 CBIZ & MHM
Key Employee Incentive/Retention Plans
Phantom Stock and Stock Appreciation Rights
Plans
 Key Employee receives something that:
 Looks like stock
 Grows in value like stock
 Can be turned in to cash just like stock
 But is NOT stock
 No actual ownership changes

48. 48 CBIZ & MHM
Key Employee Incentive/Retention Plans
Phantom Stock Plan
 Phantom shares corresponding to shares of stock are
allocated to the participating Key Employee’s account
 As the value of the true stock increases (or decreases), so
does the value of the phantom stock
 When Key Employee terminates employment, the
Company will “buy-back” the phantom stock at the per
share value of the true stock
 The amount paid is deductible to the Company

49. 49 CBIZ & MHM
Key Employee Incentive/Retention Plans
Stock Appreciation Rights Plan
 Value of benefits is tied to the value of the Company’s
stock
 Only entitled to receive appreciation on a certain
percentage of SAR units valued against the Company’s
stock, not the entire principal amount

50. 50 CBIZ & MHM
Key Employee Incentive/Retention Plans
Supplemental Executive Retirement Plan
 Agreement to provide supplemental retirement income to a Key
Employee if certain pre-agreed eligibility and vesting conditions are
met
 100% Company funded with no option for salary deferral
 At retirement, the Key Employee receives supplemental income paid
out from the cash flow of the Company
 Company owned life insurance should be in place to cover a
premature death to provide a lump sum benefit to beneficiaries
 Benefits are taxable to Key Employee when received and tax
deductible when paid

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Key Employee Incentive/Retention Plans
Restricted Executive Bonus Arrangement
 Company deposits annual bonuses into a cash-
oriented life insurance policy for the benefit of the
Key Employee and his/her dependents.
 Key Employee owns the policy but has restricted
access to the cash values until the terms of the plan
have been met
 Key Employee owns policy; thus, bonuses are
considered taxable to in the year paid
 Company receives an immediate tax deduction

52. 52 CBIZ & MHM
Key Employee Incentive/Retention Plans
SUMMARY:
No matter what type of incentive plan you institute, it
must meet the following criteria:
 As Key employee attains goals, the Company value should
increase
 The plan “handcuffs” the Key Employee to the Company
 Plan objectives are meaningful, realistic, and well-
communicated
 Benefits are substantial
 Guidelines on how to achieve the benefit are specific

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Key Employee Incentive/Retention Plans

54. ?
QUESTIONS
?
??
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55. Speakers
Please contact Joyce with any questions at:
816.945.5121 or jfarris@cbiz.com
Joyce Farris, CPA, CGMA
Shareholder, Mayer Hoffman McCann
Managing Director, CBIZ MHM, LLC
55 CBIZ & MHM
Joyce, who has more than 30 years of accounting experience, serves as a CBIZ MHM, LLC
Managing Director and Mayer Hoffman McCann P.C. Shareholder in the Kansas City office. Joyce
is responsible for managing the entire client relationship as she coordinates the attest work with
tax and consulting services. The majority of her clients are entrepreneurial-owned and privately-
owned companies in the construction, real estate, and whole-sale distribution industries.
Joyce’s primary responsibility is to manage and direct the firm’s regional Construction Industry
Services Group. From the day she started with the Firm, Joyce has been involved with clients in
the construction industry from performing audits and preparing tax returns to consulting on
mergers and acquisitions and transition planning. Joyce serves a variety of construction clients
including general contractors, heavy/civil contractors, specialty contractors, engineering firms,
landscape architectural/land planning firms, home builders and real-estate developers. Her
clients have local, national, and international operations.
During her career, Joyce took a leave from the Firm to pursue an opportunity as a CFO in private
industry. This unique experience has provided Joyce with an in-depth knowledge of and respect
for the issues affecting her clients and their respective COOs and CFOs.

56. THANK YOU!
COME SEE US AGAIN!