Business Compensation Plans Increase Profits

p A companyrsquo;s compensation structure can be an excellent platform and tool to help energize employees to reach and exceed company goals. The increased profitability from the compensation program will more than pay for the program. When setting up a compensation package, here are some things to consider, including some workable compensation strategies./p
pstrongOwnership Strategies/strong/p
pstrongem– Founders Stock Strategy/em/strong/p
pIn your a href=http://www.businessconsultingabc.com/Writing_An_Effective_Business_Plan.htmlBusiness Plan/a, have you considered issuing convertible preferred stock to outside investors and reserving common stock for founders and key employees?/p
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liConvertible Stock should have a liquidation preference large enough to eliminate the book value of the Company, and in subsequent funding rounds the liquidation preference of each stock class should be increased to cover the current book value./li
liThe Convertible Preferred Stock should have Senior Dividend, Preemptive and Redemptive Rights; registration rights and rights of co-sale./li
liHolders of Common Stock own only the remaining Shareholdersrsquo; Equity after the convertible stock preferences has been satisfied./li
listrongThe Goal:/strongnbsp; The taxable fair market value of the common stock can be substantially reduced by combining the superior rights of the convertible stock with the anticipated profit and loss of the new business venture. The company founders and other key employees can get common stock at reduced pricing and tax liability than what will be paid by outside investors.nbsp; /li
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pstrongem– Stock Option Incentives/em/strong/p
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liAn Incentive Stock Option Plan (ISO) provides employees with tax preferable stock acquisition./li
liThere are many rules, conditions and tax implications for an ISO, so the ISO Designer should be knowledgeable with factors the IRS considers instrumental to a fair market stock valuation.nbsp; Penalties can be severe for miscalculations./li
liA Qualified Stock Plan is a fantastic way to attract and keep talent, as long as, the design and use of the program understands potential issues, such as the Alternative Minimum Tax, Sequential Exercise Rule, Loans, Holding Period Requirements, ISO Exercise Conditions, Stock Exchange and Fair Market Valuation./li
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pstrongemNon-Qualified Stock Options/em/strong/p
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liMaybe good to mix with ISO plans for certain employees to balance tax implications./li
liExcellent vehicle if want to grant an option to an Outside Director, Consultant, Adviser, or Supplier./li
liIssues to consider when utilizing a Non-Qualified Stock Option Plan include Inadvertent ISO Qualification; Institute withholding, Shareholderrsquo;s Grants, Loans and Valuation Methods./li
listrongConsiderations:/strongnbsp; In some situations a Non-Qualified Option can be more advantageous over an ISO; however, an ISO has a lower tax burden at exercise, and the time value of money is superior.nbsp; Also, long-term capital gain implications are often better tempered through an ISO.nbsp; Again, it is very important to hire experts in this area to fully seek Qualified and Non-Qualified Stock Option Plans.nbsp; /li
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pstrongemSubordinated Common Stock/em/strong/p
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liJunior Stock can allow key employees of startup firms or high growth companies to acquire a subordinate class of Common Stock at a fraction of the value of regular class Common Stock./li
liHave an option to possibly convert into the regular Common Stock./li
liThis stock structure awards key employees from substantial improvements in the Companyrsquo;s Sales and Earnings./li
liThe associated rights of Junior Stock conveys inferior rights to those of regular Common Stock, such as, reduced voting and dividend rights, and inferior liquidation preferences./li
liHowever, if the Company achieves specified a href=http://www.businessconsultingabc.com/Strategic_Plan_For_Business_Success.htmlStrategic Plan/a and a href=http://www.businessconsultingabc.com/Developing_and_Writing_A_Winning_Marketing_Plan.html target=_blankMarketing Plan/a Goals in Sales and Net Income, the Junior shares convert to regular shares on a one to one basis.nbsp; /li
liJunior Stock Plans should restrict ownership of shares to continuing company employees and include transfer limitations, repurchase provisions and rights of first refusal.nbsp; /li
liJunior Stock can be offered through an ISO or Non-Qualified Stock Options.
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liThere can be certain tax preferences to a Junior Stock Option Employee when purchased through a Qualified Plan, yet issues of Valuation, Lapsing Restrictions and Conversion should be considered by a tax professional./li
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/li
li
pstrongGoal:/strongnbsp; Junior Common Stock Plans is a very economical compensation structure for a Key Employee; yet clearly incentivizes Employees to contribute to the overall success of the Company.nbsp; While Convertible Preferred Stock and Junior Common Stock have many common features, the goals of each are opposite:/p
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liConvertible Preferred goal is to depress value of regular class stock into which a secondary class will convert./li
liJunior Common Stockrsquo;s goal is to depress value of the secondary stock class which will be converted to regular class./li
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pstrong Understanding Harvest Value – Rule 144 Implications and Restrictions/strong/p
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listrongemFounderrsquo;s Stock/em/strong is subject to Rule 144 Restrictions, which sets standards and procedures by which restricted and control stock can be sold.nbsp; The rule specifies when, how and how much restricted stock and control stock may be sold in the public market place by private company owners and is subject to the SECrsquo;s Securities Act registration rules.nbsp; /li
listrongemRestricted Stock/em/strong is stock acquired from a Company which has not been registered with the SEC through a Private Placement.nbsp; /li
listrongemControl Stock/em/strong is stock owned by Company Principals who control the business affairs of the stock issuing company, which would include Officers, Directors, Major Shareholders and individuals who influence Management Decision Making.nbsp; /li
listrongemChanges:/em/strongnbsp; There have been substantial changes in Restricted Stock Transactions whereby Small Cap Venture Funds have incentives to buy into small companies.nbsp; The holding and sales periods have been significantly shortened.nbsp; Please confer with a Tax Professional to measure any Rule 144 implications to your Companyrsquo;s Stock Structure and Plans.nbsp; These changes to restricted stock holding periods have made this type of stock a lot more marketable, as a result, much easier to determine fair market value.nbsp; /li
listrongemImplications:/em/strong Expert counsel should be utilized when designing your Companyrsquo;s Compensation Structure and Package to fully understand the extent of Rule 144 regulations, penalties and implications./li
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pstrongReturning Ownership and Termination Considerations/strong/p
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liA Company needs to be protected against founders, key personnel and major shareholders departing, to include disability, termination and death./li
liBuy / Sell Agreements help a company retain the ability to recapture the value of stock and ownership, normally through the use of insurance policies to fund the Buy/ Sell Agreement./li
liA Buy / Sell Agreement will protect the entrepreneurrsquo;s return on his or her efforts./li
liOther forms of protection are utilized through Vesting Programs for Stock Options and profit-sharing plans.nbsp; As a Company matures and achieves success, vesting plans can secure key employee dedication while maintaining adequate incentives to excel and increase company profits.nbsp; /li
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pstrongConclusion/strong/p
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liA companyrsquo;s choice of Compensation Structures and Programs should reflect both its ability to reward and incentivize employees and affect the companyrsquo;s future growth./li
liTypically, Founderrsquo;s Stock, an ISO and Non-Qualified Stock Option Plans are often best appropriate for early stage companies, while Junior Common Stock Plans may be more appropriate for recent IPO companies or later stage private companies./li
liExperts in tax, accounting and compensation structure, regulations and laws should be sought as laws governing compensation structure and package design and implementation change constantly./li
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pstrongAbout The Article Writer ndash; Frank Goley/strong/p
pstrongFrank Goley/strong is a business consultant, business turnaround consultant and business plan consultant for ABC Business Consulting. Frank is considered an expert in writing, developing and implementing business plans, business turnaround plans, business funding plans, marketing plans, strategic plans and web marketing plans. Frank offers comprehensive business consulting, business coaching, business turnaround consulting, along with web seo, web development and web marketing consulting, to small and medium size companies. Frank is the author of a business plan book, emThe Comprehensive Business Plan Workbook ndash; A Step by Step Guide to Effective Business Planning/em, and he has over 50 published articles and e-books on business success strategies. He also writes the Business Success Strategies Blog./p