Keeping Someone in Your Firm

Sep 03, 2004

It’s hard to grow if you can’t keep the people you already have working for you. Every time someone leaves you have to replace them. And it’s as hard or harder than ever— as well as risky— to hire new employees who work out over the long haul. There are a variety of methods that A/E/P and environmental firms employ to keep good people working at their companies. And, while there are many tools and techniques, most seem to fall into one of two pots— threats if you leave, or incentives for you to stay. Let’s take a quick look at some of these methods, and I’ll share my thoughts on them with you. Threats Non-compete agreements. Employees at a certain level (associate or principal status in our industry, typically) may be asked to sign a non-compete agreement. This is typical for 20-40% of the folks in these jobs. The non-competes often specify what kinds of firms the employee could work for, whether certain clients are off-limits, what the geographical restrictions are, and what the time limits are that the employee has to comply with or be sued for damages. While I used to be opposed to non-competes in other than a selling-owner situation on moral grounds (I have had to be on the employee side of the non-compete equation twice in my life!), I will concede that there may be a time and place for them. I don’t think specifying certain clients of the firm at the time of the employee’s departure or within a year or two of it as being off-limits is unreasonable. However, once you try to keep someone from practicing engineering or architecture in the city they have grown up in and lived their entire adult life, I think you are pushing it too far! While I think non-competes may keep some people at the firm— due to the risk associated with violating them— I would prefer another way to keep someone on board. Stock-buyback agreements. Oftentimes, shareholder-employees who leave the firm to compete instead of death, disability, or retirement, are subject to punitive stock-buyback provisions. These provisions may reduce the buyback price and/or extend the terms. This seems totally reasonable as far as I am concerned. The only weakness here is if the stock is going down in value instead of up. If it’s going down, the provision won’t keep anyone there who gets a better offer. Incentives Stock options. There are some A/E and environmental firms that try to get their key people to stay by granting them stock options at a certain price. These can be good ways to keep people around, at least as long as the option period, if the stock is going up. If the stock price is going the other way, however, the options are essentially worthless and will do little to keep a key individual tethered to the firm. Beyond that, the options usually have an expiration date. What happens after they expire? Deferred compensation. While I have never been a fan of deferred compensation because too often the plans were cooked up with no real understanding of the liabilities they create and how they will be paid for— I will say that deferred comp can be an effective tether to keep someone tied to the firm. The payoff has to be good enough to merit further suffering. And if it is, that could be costly to the firm making the promise. But the bottom line is deferred comp can work. Bonus programs with holdback provisions. These are the bonus plans that pay out half or a third of the bonus earned during the current year and then roll the balance to be paid forward into the next year. Therefore, any employee who leaves a profitable company will undoubtedly be leaving cash on the table. These plans, like deferred comp, can keep people there who otherwise might leave if they are “rich” enough. On the other hand, do you really want someone staying at your firm just for the money? How good of a job is that person likely to do if they are only interested in the money? Promises of future promotions or pay increases. This is where someone goes to turn in their notice, or lets the boss know that they aren’t completely happy and therefore possibly looking at other job opportunities, and the boss says, “You could be the next president.” Or, the boss may say, “I was just going to make you the Senior Associate Vice President, and now you are thinking about leaving?” Or the boss could say, “We’re planning on giving you a $10K raise in December.” Sometimes these kinds of promises do work on people to keep them around IF they are fulfilled. And if not, you are almost certain to lose the employee that you let down. Whether it’s threats or incentives, or both, that a firm uses to keep people employed there, I don’t really think the ultimate key lies in either. What matters most is the feeling people get by being part of a firm. Is it a name they are proud of? Has being part of the company made them more successful or less so? Is the firm doing something good, something worth doing, or not? These are the really important drivers to keeping key people working in any A/E and environmental business, and no threat or inducement can be a substitute for self-actualization through meaningful work and the ego gratification that comes from being part of a great firm for long. Originally published 9/03/2004

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