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Episode Summary
You’ve got two or three people without whom the company stops running. You know it. They know it. And the plan you have for keeping them through a transition is either nothing, a vague handshake, or a bonus check at Christmas that they’re already counting on by November. I sat down with Dyanne Ross-Hanson, founder of Exit Planning Strategies and one of the pioneers in this work in the Twin Cities. We got into the part most owners get wrong: the assumption that retaining key people means writing more checks out of your own pocket. If you design the plan right, it’s funded entirely through profit that wouldn’t exist without them. We walked through the four design variables Dyanne uses on every plan (a real financial benchmark, an award that actually moves behavior, meaningful deferral and vesting, and clear communication). We got into the cash-vs-stock decision, why phantom stock is the most underused tool in family businesses, the lifetime stay bonus as the last-ditch option when you’ve waited too long, and the brutal lesson from my own copier business: no bench, no Xerox rollup, no deal.
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## Top 10 Takeaways- A properly designed key employee incentive plan isn’t a new line item. It’s funded entirely through the profit it creates.
- Be very careful giving equity to a new hire before they’ve proven their value. Two years is the floor.
- Minority owners have voting rights, a duty of loyalty claim, and the ability to challenge your country club membership.
- Top-line revenue is a garbage benchmark. Your GM will sandbag bad deals to hit the number and you’ll pay him for it.
- The plan needs four pieces: a financial benchmark, a meaningful award, real deferral with vesting, and direct communication to the person.
- If the potential award can’t hit at least 25% of salary, it won’t change behavior. You’re just adding overhead.
- Defer at least half of every annual award. Outright cash gets spent, deferred cash gets you another year.
- Phantom stock gives you ownership mentality without a minority shareholder on your cap table. Use it more than you do.
- Without a non-compete and a stay bonus, your key person can blackmail your deal or walk to a competitor mid-close.
- The right key person bench can move your multiple from a four to a five. That’s where the real money is.
Sound Bites
“These key employee incentive plans aren’t an additional line item on your balance sheet or on your income statement. If properly designed, they’re being completely funded through increased profit.” (@TBD) — Dyanne Ross-Hanson
“100% of the companies on the planet, I always say, the most important thing you can concentrate on is working your way into employment insignificance.” (@TBD) — Dyanne Ross-Hanson
“Minority owners are the ones that help make litigation attorneys rich.” (@TBD) — Dyanne Ross-Hanson
“Unless this incentive retention plan can produce the possibility of 25% of salary or more on an annual basis, it’s not going to incent the type of behavior or loyalty that an owner generally is looking for.” (@TBD) — Dyanne Ross-Hanson
“Phantom stock is synthetic ownership. It’s got all the advantages of ownership mentality development, but without the hassles of an actual minority owner.” (@TBD) — Dyanne Ross-Hanson
About This Episode
Dyanne Ross-Hanson is the founder of Exit Planning Strategies, which she launched in 2005 after years of working with owners on qualified retirement plans and business continuity. She is one of the early pioneers of the exit planning discipline in Minnesota and has built a deep technical specialty in key employee incentive and retention plan design. Ryan first met Dyanne while he and his father still owned their copier business, which puts her in the small group of advisors who have known the iBD story from before there was an iBD. This episode is a technical deep-cut on a topic most owners avoid until it’s too late.
Resources Mentioned
- Exit Planning Strategies — Dyanne’s firm. — exitplanstrategies.com
- The Value Advantage — Ryan’s peer group and 1:1 platform for building a sellable company (episode sponsor).
Connections
Phase + Module:
- Module 2 — Expand Knowledge — Knowing how key employee comp design actually works before you need it
- Module 8 — Executive Compensation — The home for short-term, long-term, and equity-linked plans
Milestones:
- Milestone 5 — Market Value — A retained key bench is one of the largest market value drivers
- Milestone 22 — Company Bonus Pool — The financial benchmark + pool funding logic Dyanne walks through
- Milestone 23 — Short-Term Incentive Plan — The annual award piece of the design
- Milestone 24 — Long-Term Value Plan — Deferred comp, phantom stock, and vesting as long-term retention
Concepts referenced:
- The Four Value Levers — Key bench retention sits inside the people lever
- Normalized EBITDA — The benchmark cash flow these plans are funded out of
- The Owner-Operator Trap™ — Why owners without a bench can’t get out from the hub