Incentive Plans

Client Success Story: Incentive Plans

Background

The owner of a business-to-business import, distribution, and sales company wanted to retire in 5 years. In order to meet his personal financial goals he had to grow the company from $19 mm in revenue with a 2.35% profit margin to $36 mm revenue with a 5% profit margin. To provide the incentive necessary to achieve the goal, the owner offered to share a portion of the growth with his leadership team in order to retain and engage them in achieving the exit strategy objectives.

Assignment

ISG was hired to develop annual sales incentive plans and a phantom stock plan that would retain and motivate the leadership team. ISG implemented incentive plans where the sales force earned cash for annual revenue and gross margin performance and the leadership team earned phantom stock units based on annual revenue and net income performance. The units were valued at a percent of the target market value at the projected time of sale (the exit value). The actual value of the units would depend on the actual sale price. The design of the plan motivated the leadership team to achieve aggressive annual revenue and net income goals, and to increase the market multiplier by enhancing the company brand.

Results

At the end of four years, revenue had grown from $19 mm to $29 mm (a 53% increase) and net income increased from 2.5% to 4.25%.

To capture the potential gain indicated by these numbers the owner delayed his retirement an additional 5 years. The revenue performance target was revised from $36 mm to $65 mm. The profit performance target was revised from 5% margin to 7% margin. The market multiplier estimate was revised from 5 to 7 in response to the increase in company size.

The target rewards to participants increased from an average of $355,000 to $775,000. The target net-to-owner increased from $10.7mm to $32.3mm.