episode 172 – transcript

Dave Cain: Welcome to unsuitable on Rea Radio, the award winning financial services and business advisory Podcast that challenges your old school of business practices and their traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie, while offering you meaningful modern solutions to help enhance your company’s growth.

Dave:  And, I’m your host, Dave Cain. Business owners everywhere struggle with employee recruiting and retention and have to make companies stand out from the competition. They’ve got strategies to deal with the talent gap to get new job candidates through the door and retain these key employees.

Dave:  In the past, the term Golden Handcuffs was used to refer to the financial incentives employers offered to key employees to encourage them to stay with the company. And today, with so many businesses and competing for top talent, have to wonder how many businesses are using this technique and whether it’s successful.

Dave:  Nevermind. We got the answers for you guys. Kevin Monaghan, owner of Intuitive Compensation Group out of Charlotte, North Carolina is back with us on this week’s episode of unsuitable on Rea Radio to talk about the concept of Golden Handcuffs and whether or not they help or hurt employee retention.

Dave:  If you hadn’t had a chance to listen to last week’s episode with Kevin, we recommend it, especially if you own, work in, or stand to inherit a family owned business.

Dave:  Welcome back to unsuitable, Kevin.

Kevin Monaghan: Thank you. It’s been a week, but your voice still sounds raspy.

Dave:  Well, you know, it takes a while to get better. So, thanks for coming back to Ohio.

Kevin: Look, thank you for having me.

Dave:  You got those frequent flyer miles from Charlotte.

Kevin: Yes. The hope between booking the hotel and the flight. It was a … .

Dave:  Seems like I just saw you a few minutes ago.

Dave:  So, tell me a little bit about Intuitive Compensation Group. So, what do we got going on? Give me the elevator speech. You’re an entrepreneur.

Kevin: Sure. So, we work with business owners who’ve got that all star employee. So, somebody who helps add to the bottom line, somebody who helps with the culture, can help run the business when you are not there, is valuable to the organization, whether you keep it, sell it, want to transfer it. And because of that, you’re worried that you’re gonna lose them, they’re going to go to a competitor or they’re going to get unhappy and start their own firm because they don’t think you gave them enough control or so forth.

Kevin: So, our solutions help business owners work together to explore compensation structures that create a win win between the two.

Dave:  You know, in our opening we always talk about, Think outside the box. You guys bring, Out of the box situations and solutions.

Kevin: I bring the box. I bring in the box.

Dave:  You bring the big box and here we go.

Dave:  So, I want to start this out. We’re going to talk about money. We’re going to talk about compensation, incentives. But, let’s start with how do business owners really think about compensation?

Kevin: Sure. So we always say that there’s six pillars of compensation. There’s pay and this is going to include, no matter what your business is, it might be commission based, it might be pay and salary, it might be bonuses and incentives. So, all under the pay structure.

Kevin: Then we have benefits. So, as companies, we either have benefits or we don’t. We don’t see too many people leaving one firm saying, Hey, they match 5% down the street, only 4% here. So you either have them or you don’t. If you have Group Life then great, if you don’t, it’s just a cost to them. It kind of falls back into pay. Do you offer health insurance or not? The most common ones are going to be equity. So that’s the third pillar or profit sharing plans.

Kevin: So, equity is a very difficult decision to make. And too many people go here too quickly. So, the positive to equity is it’s easy to give away. The negative is, it’s very difficult to get back. So, one of my favorite books was, The Richest Man in Babylon. They say, Be wary of endeavors that subject you to another man’s burdens. So, you don’t know what’s going to happen to this younger employee.

Kevin: We’ve seen law firms where they’ve given 40% to put the name on the building and that person has still left and now, I can’t imagine a worse scenario than training somebody up who now owns 100% of their own firm with your processes, your skillset and still owns 40% of yours. It makes the K-One distributions interesting.

Dave:  Yeah, … So you lose it.

Kevin: Yeah, you lose that ability. So, people decided to go to the fourth pillar, which was profit sharing plans. And profit sharing plan is the best intention and it sounds the best.

Kevin: It goes something like this:

Kevin: If I’m making more money, Dave, I’ll share it with you. And, it feels like it should be good and easy. The problem is, is that you as a business owner, have to make business decisions that may not align with the profit sharing plan. So we hear it all the time from key employees, is they have a good year and the owner shows up in a new F-150 and it was kind of like, Wait, that was bought on the business. I was supposed to have that.

Dave:  Oh Yeah.

Kevin: That affects the profit sharing plan. So what you’ve done, is you’ve actually dinged. Every time you go to lunch or you go on vacation and you mix business and pleasure and you’re writing off some of it, it now becomes their point of … They don’t have any control and it becomes their point of disgruntleness, if you will, that starts planting a seed. So it really backfires on people.

Kevin: The fifth pillar was invented, not really invented, but became popular by private equity in the past couple of years, which was phantom stock or phantom equity. It was designed to solve the problem of giving away equity. It’s like you own equity, but you don’t really own it. And usually-

Dave:  Kind of sorta of.

Kevin: Right. So if you leave now you don’t have that problem of how do we get it back? Or if they go through a divorce, you don’t have a new partner who’s the wife and they’re these types of scenarios, other people’s burdens.

Kevin: So, phantom stock was supposed to come along. The problem is, is that the triggering mechanism for our phantom equity is typically selling the business. So, we’ve seen a lot of people who, they communicate, We’re going to give you 10% stock and we’re going to try and sell this in five years. What happens as a business owner though, is sometimes it doesn’t make sense to sell it. So now all of a sudden there was nothing there and it’s five years of their time and no pay off. So you know, it’s not fair.

Kevin: The other one is if you’re going to sell a company, and this is where private equity who invented the beast is now, kept backtracking on it a little bit, which is, Who wants to buy a business where the key employees just won the lottery?

Kevin: People who are coming in and hustling and staying late are now strolling in at 10 and leaving before the traffic to go to their lake house. So, we had a scenario where there was a family owned business and the son had a 30% phantom stock. They sold it for 70 some odd million dollars. He was supposed to stay on and run, said, Yup, Yup, Yup. He got the check and gone. So phantom equity-

Dave:  … the sports car.

Kevin: He disappeared, as well, so maybe.

Dave:  Off the grid.

Kevin: Yeah, off the grid and that’s the downside to that pillar. So, and then there’s the six pillar, which is where we come in and help business owners understand structures such as, 162 leverage bonus, executive bonus, double bonus, SERP’s, very split dollar plans, very, what would seem to be a combination of legal, CPA and insurance, where we try to make the people understand this.

Kevin: And so, having kind of run through some of the positives and negatives to each of the pillars of compensation; if it’s okay, I’d like to share national story with you-

Dave:  Sure.

Kevin: And then we can dive into-

Dave:  We love stories.

Kevin: Okay.

Dave:  ‘Cause I have questions. I got all kinds of questions for you.

Kevin: All right. Good. So, we use and I know I’m in Ohio state nation here, but we use Jim Harbaugh’s, we use Jim Harbaugh’s as example of, at the University of Michigan. So-

Dave:  We don’t talk about a team up north here in Columbus.

Kevin: Is there a code word I should use?

Dave:  Yeah … Good story.

Kevin: The Michigan University? No, but we’ll go to uh … Oh, I’m getting glares. So, we’ll go to … I’ll take his story. He went to San Francisco 49ers and he took a noncontending team and in two years he made them a playoff contender, just like a manager or a salesperson or any type of key person within an organization. Now all of a sudden you want that person to stay. But the San Francisco 49ers didn’t have anything to keep him, so just when they thought things were going good, like a lot of business owners, that person’s went out the door and the magic was gone.

Kevin: And what happened was, the University of Michigan came in and they said, “Hey, we want you to come on board with us, but we want to make sure that we’re doing something to help incentivize you to stay here with us.” So, what they did was they said this, We’ll make you the highest paid coach out there, but we’re going to do it in a unique way. We’ll pay you $5 million dollars in salary. I hope to have these conversations one day. We’ll pay $5 million dollars-

Dave:  Me too.

Kevin: Yeah. $5 million in salary. That doesn’t make him the highest paid. Then what we’re going to do, is we’re going to take $4 million dollars and we’re going to loan it into a bucket between us and we help people structure these. They’re done with CPA’s and they’re done with attorneys as well, and various ways of structuring them. But it works something like this, we’ll put $4 million in here this year, $4 million in next year. Now if he leaves and he walks away, the University of Michigan gets the bucket back, whatever the value is of that bucket at that time.

Kevin: So, I always say this at this point, How many business owners there would pay their employees more if they knew that if they left, they could get it back? So that was kind of the retain-

Dave:  Yeah.

Kevin: Is that there’s a … bucket story out there.

Dave:  Yeah, yeah.

Kevin: But that doesn’t make them want to be productive or inspire them to do great things. So, the nice part is they said, You know what? After you coach here for 10 years, this bucket becomes yours. Now when you do this and always consult with your CPA firm. I know a great guy who can help, but always consult with your CPA on these. But in 10 years when this bucket comes over to you, this is going to be taxable.

Kevin: Now, if during your tenure, you win or you qualify for the top four champion or you win two top 10 bowl games, we could bonus you the money out to pay the taxes on that. So, you’ve got the retain, inspire and reward aspect to a package that’s creates a win win between two people.

Dave:  Incentive, big time incentive. Yeah.

Kevin: Correct. And so, while that’s a national example, we’re seeing it for … In this day and age, it is so simple for somebody to take a computer, get an internet connection at Starbucks … Every time I go in, I see somebody who’s starting a business, just sitting in the corner running it.

Kevin: It’s so easy to spin off these days that compensation almost has to keep up with the times and say, Hey, how do we retain, inspire and reward you within our organization and, How do we give you clarity but make it fair for both sides? ‘Cause nobody wants to overpay and nobody wants to make mistakes, but they need clarity on what working together looks like going forward.

Dave:  You know, we talked in kind of the opening of phantom stock, a private equity 162 double bonus. By the way, I want a double bonus. I don’t know what that is-

Kevin: It sounds good, doesn’t it?

Dave:  Yeah, it sounds good … Those are terms that, you know, as I kind of listen, I thought, Wow you guys work with big companies, huge companies. I know that’s not the fact. You’re taking these concepts and bringing them down to startups …

Kevin: How business.

Dave:  Startups, you name it.

Kevin: Yep, so, not just startups, but from … Really we’re seeing it in and companies under $500 million in revenue. But, we get a lot from just startups and we always say this, Key employees, even partnerships as you … You’re going to have compensation come up as an issue. So, for most of the time that we’re seeing key employees, is that somebody has … A company has brought on and it could be doing $200,000 a year, but they brought in somebody who’s very important to the organization and if that person left, the business owner would have to stop growth mode and go back to then serving this position. And, that could be in a small business, an 18 month process to find and train and replace to get back to where they were.

Kevin: And, time being of the essence, it’s, it’s very important to address incentivizing that person to remain there. And so, we get five person companies that have a key person, three person company, we did the other day. So, you get these companies that have somebody who’s important to the organization and they know that there’s a lot more things out there. They know. A lot of times they’re underpaid compared to where they should be, but they liked the energy, they liked to build, they like this.

Dave:  Right.

Kevin: And too many business owners wait until it’s too late. They wait until the growth has happened. They’ve been visionary, so they’ve made all these promises of, Oh, when we get here, we’ll do this or we’ll expand and you’ll get this and you’ll get that. And those become promises that are now being unfulfilled, while a business owner breathes a sigh of relief, invests in something else, catches up on the four years of vacations he hasn’t had with his family, moves into that school district he wants to.

Kevin: And the key employees are sitting there going, You know, I helped build this. And, and from a young company to a very mature company with hundreds of employees saying, If these three people left right now, it would lower the value of the company and I want to position for sale. I want to sell, but I need to do something that’s fair for everybody. And so, did I answer kind of the range-

Dave:  Sure.

Kevin: That we-

Dave:  Yeah, yeah. I think what you guys specialize is, is taking these, what I’ll call them, Big Company Concepts, maybe publicly traded company or the larger company of concepts and bringing them back to smaller, closely held family businesses, generational businesses. These are concepts that work in businesses of any size and shape.

Kevin: Correct. The difference of what you just said, there was the bigger companies have some advantages, which is liquidity. So, if I’m a publicly traded big company, then I have a lot more options. But with K-One and … you can’t really create … You know, you share classes and have the liquidity and have a trade. When I was the key employee over in China, I had 10%, I couldn’t sell it and nobody wanted to buy it from me. In fact, the new guys, even if I wanted to sell it, they wanted it the same way I got it, which was just, I got it for being there.

Dave:  Let’s talk about the value of retaining your talent. We know whether it’s your industry, our industry, retaining talent is big, finding talent is big. So if you have a company that has these plans in place and is retaining their talent, did I just increase the value of my business?

Kevin: It could be, they could-

Dave:  I would fast fall right down the middle.

Kevin: Yeah, I know. We’re working on this. I have to be careful of compliance statements to promise that it will increase the value of the business. You’re right, the logic is there, which is, if key employees are happy in working in a business and have something that they’re working on that will benefit them, like Jim Harbaugh, if an ownership changed, if the owner removed from the business, if the owner sold the business, then theoretically it doesn’t effect and there was a lot of clarity in it for the key person in there. And would somebody pay a premium for that?

Kevin: My logic and a lot of logic that we see out there says, Yes, but it doesn’t mean it’s going to be the case.

Dave:  Well, staying on the right side of the compliance issue and we can get that is … We’ll bail you out here. It’s certainly a positive for the company going forward and retaining more talent, better talent, keeping talent.

Kevin: Yeah and I think what we bring out of the process is really in working together. So, it’s not just keeping the talent, it’s exploring what’s in it for the talent? They’re putting their time and effort and coming into it. And how do you create something that can help that person because they’re working and they may have a family, they may have something that they’re working towards.

Kevin: We always say that when trying to structure something with a key employee, a business owner wants to, so they’ll make big statements sometimes if they’re a visionary leader. They don’t have to be. I’m a visionary leader, so I always think everybody does, but what they really want to do is boil down to a process because a business owner can’t go up to the key employee and go, Are you thinking of leaving? Are you thinking of starting your own company?

Kevin: They’re not going to get that answer. And so what we’ve done is, we’ve created a process that … My experience as a key employee, we relate, we share with them and we tell them why these conflicts exist and we get them to kind of open up. So we’ll get a business owner saying, They really care about retirement or they really want this. And by the time we finished talking to them, it was something completely out of left field, from adoption to giving to charity, to way different than any conversation they’ve had before.

Dave:  Right.

Kevin: Some people are very open, but not everybody. And so, when people are very open, then it’s usually easy to hone right in on what it is. When it’s a surprise though, it’s even funner because now they know and that’s kind of a cool experience to share between an owner and somebody who’s helped help them the entire way.

Dave:  One of the things we talked about earlier today was the disconnect between business owners and employees and what is important in regarding to compensation and benefits package. As the owner, I may think, Hey, that profit sharing, that 401K, that’s important, but that may not be the most important thing-

Kevin: Yep.

Dave:  To the employees. So, how does your company get in and kind of work through that and find out what’s going on?

Kevin: So, we clearly define to them the rules of our conversation, what’s going to come out and what can be shared and what can’t be shared. Our company, not only reputation-wise but even disclosure-wise, we can’t share anything we don’t have permission for. So when we work with people, we tell them the rules and then we’re able to find out.

Kevin: Now on that note, what’s interesting is sometimes we find out things that we get excited about because we go, Man, we could really help these to work together. Sometimes we find out intentions that weren’t on the table and now we’ve got to do it. So, we’ve had scenarios where, like a dentistry group, where we’re hoping that this was going to be the dentist of the future and that they’re going to stay and we get on them. And again, having these conversations all the time, when they’re not reacting away, I know how to call it out. And it comes out.

Kevin: So, when we’re able to dive into what’s in it for them or their why or how things work in their mind and what they’re driven towards, when we find out, we can address it and even if it’s a tough scenario, we always are and very encouraging that, Listen, you want to go within a year, and this wasn’t going to be something that anybody thought was going to come out of these conversations, but we’re a big fan of honesty is the best form of policy and then we help them structure how to bring it back to see if you can create a better environment.

Kevin: A business owner’s better for knowing even if it’s going to be an exit than anything else. And that they can still put together, it might not be our pillar of compensation, but they can still work out a bonus structure for you to help find a replacement during that time, to be aware of it.

Kevin: And, before we even talk to the key employee, we make sure that the business owner go … You know, we have the question, What happens if I find out that he wants to leave? You know, What does that look like for you?

Dave:  Right. Right.

Kevin: And so, hearing these companies story and both sides of the story, we always say this One person can’t serve two masters. And so, my role is to come in 80% psychology, if you will, comedy leading the way is to come in and play that role temporarily and then put numbers between two people that make sense for them to work better. And we help educate them on what those structures can look like and the professionals who can help put it in place and what our role would be.

Dave:  Let’s talk about, switch gears a little bit about maybe a little sensitive topic, but how do you promote the entrepreneurial spirit in a company among the employees? You know, specifically the key employees and any words of wisdom?

Kevin: So-

Dave:  I’m sure you do.

Kevin: Yes, it-

Dave:  And I don’t been for a loss of words yet, have you?

Kevin: I know. I know. It’s a never have been. I would say this, it depends on what the end goal is. So if the end goal is to bring somebody on as a partner, is not to give them equity right away, but to give them a choice and say, Hey, we’re gonna do a compensation package that in the future, gives us a way for you to onboard, has some protections against you working hard and increasing the value of the business and then having to buy us out. So, has some protections in place for that, has a solution for, What if you don’t want to buy it into the future?

Kevin: What if you’re in the magazine or newspaper industry and the industry looks like it’s going to go away in the future and you don’t want to buy in, what’s fair for everybody? And how do you position that to a key employee so that everybody can be on the same page, can be incentivized, and if things don’t turn out the way everybody wants? And it could be from the business owner side, who needs to make a tough decision and fire somebody or on the employee side and freewill is still exists.

Kevin: So, you can have a Golden Handcuff in place, but Freewill still is out there. If they do leave, that everybody knows where they stand and it was fair during the time and we can only make the best decisions today, so that in the future we can position ourselves if we have to make great … If everything comes true or if we have to make tough decisions.

Dave:  Yeah. Let me do a little commercial for you guys. Is that on the right side of compliance?

Kevin: Yes.

Dave:  I don’t want to get in trouble here.

Kevin: Just keep it simple.

Dave:  Keep it simple. You know look, these are tough decisions and there’s no plug and play solution. But, as a business owner and listener, if I want to have a chat with you, what’s the best way? How do I get ahold of you guys, just to have a conversation, tell my story.

Kevin: Sure. The best way to get ahold of us is go to our website, which is, Intuitive compensation.com. You can get a little bit more information there. We can’t do testimonials as an industry, but we did some quick explainer videos. The other best way is to call us, get on our calendar and tell us your story.

Kevin: So you know, Hey, I’ve got somebody who, this hit a nerve with me and tell us what you’ve been thinking, what you’d like to do, what success looks like for it? How does this person impacting you? And by hearing your story, we can then tell you what the next steps could be and how our process works.

Dave: And it’s not specifically industry specific. You guys work with manufacturers?

Kevin: From TAC manufacturers, engineering firms, dog grooming business, fisheries. It’s been all over the board, PR, CPA firms. Every industry has the problem of keeping great people.

Dave: You guys getting into craft brewery business?

Kevin:Yes. It’s a fast moving business right now. So, believe it or not, it’s very difficult to keep still because a couple who have come forward, have quickly been swept up or merged or acquired. And, we joke about it all the time and how many are out there? So, … he was my key employee, if you will. He has a taste for a brewery. So, I feel like I hear about this space all the time.

Dave: Oh, he likes the double IPA’s. He’s into those.

Kevin:Yeah. Too much. No, I’m just kidding. Teasing you.

Dave: So, okay, as a business owner and listener, action plan on my compensation, incentive plans, what do I need to do? What are some keys for me?

Kevin: If you want help and to kind of explore the different options, I always say learning is the best way so that you can make a best, an educated decision about what works best for you. Easiest way to get on our calendar is just give us a call at (877) 70-learn, that’s (877) 705-3276.

Dave: You got that down.

Kevin: Yes, I do. On paper, right in front of me.

Dave: Kevin, fantastic!

Dave: Thanks for joining us the last couple of weeks. Good stuff, stuff our listeners can relate to and things that we struggle with on a day-to-day basis.

Kevin: I hope your voice clears up by next week.

Dave: Oh, it will. I got another one to do next week.

Dave: So listeners, if you’d like to learn more about Kevin and his company, Intuitive Compensation Group, check out their website at, www.intuitivecompensation.com or you can message Kevin at, kmonaghan@financialguide.com. It’ll be on the right side of Compliance for sure.

Dave: And as always, if you like this week’s episode of unsuitable on Rea Radio, please like it and share it with your friends and colleagues. And don’t forget to check out the video of this past episode and future episodes of the podcast. You can find them on Rea & Associates YouTube page.

Dave: Until next time, I’m Dave Cain, encouraging you to loosen up your tie and think outside the box.

Disclaimer : The views expressed are those of Kevin Monaghan. The information provided is not intended and should not be construed as specific tax or legal advice. Neither intuitive compensation group nor Kevin Monaghan provides tax or legal advice. You should seek advice from your own tax or legal professional for such guidance. Kevin Monaghan is an agent of Massachusetts Mutual Life Insurance Company, Mass Mutual, Springfield, Massachusetts. Intuitive Compensation Group is not a subsidiary or affiliate of Mass Mutual.

Disclaimer 2:  The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation, so they can expertly guide you to the best solution for your specific circumstance.


CRN202101-242650: Monaghan – Rea & Associates Podcast 172 – Ke