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Middle Market Business: Planning for the Next Generation

A successful middle market business that thrives for generations will eventually outlive its founders.

To protect it’s intrinsic value and long-term survival, top management must prepare to turn it over to future leaders.

That’s when succession planning can pay off in spades.  Finding and training the company’s top future executives is at the crux of that planning.

While most middle market business leaders have good intentions, many don’t follow through.  Roughly 25 percent of top executives surveyed by RSM, a midmarket audit, tax and consulting firm, reported having no succession plan for the departure of key leaders.  Another 45 percent said they only had an informal succession plan, according to the 2016 survey published on RSM’s website, “Survey Highlights Succession Planning in Middle Market Business.”

A leadership succession process can take years of planning and thought.  But remember that, while you’re planning for retirement, or to sell the company or turn it over to family members, middle market businessyour best employees are thinking about they own career progression.  They want to know they will have opportunities to grow, make an impact and be compensated for their contributions.

Succession planning not only promotes the orderly transition of management, it helps ensure that successors will be ready for their future roles, according to a 2015 report from Deloitte, “Business Succession Planning: Cultivating Enduring Value.”

Especially now, in a tight labor market, leaders need to identify a time frame for the transition and establish the company’s growth objectives and critical functions.

First, it helps to focus on the critical roles that have the greatest impact on the company performance and the positions that are the hardest to fill.  Usually, that involves the company’s top levels, but it makes sense to take a deeper look.

Management developers and human resource professionals can assist the succession team with coaching, networking and formal training programs to help the candidates reach their potential.

This process also offers another benefit: Employees usually feel more engaged when they believe their employer is concerned about their growth and provides ways to achieve career goals while fulfilling the company’s mission, according to the Society for Human Resource Management (SHRM).

It takes smart planning to retain, reward and compensate future presidents and executive team members with the talent, drive and agility to lead the company into the future.  Compensation planners should collaborate with development managers on competitive strategies that recognize, stimulate and reward excellence.

Compensation for future business leaders may include:

  • Base salaries
  • Short-term incentives or annual bonuses tied to the company’s financial performance
  • Long-term incentives, including stock options, restricted stock, cash-based performance plans or a cash payment tied to a designated time or event in the future
  • Qualified fringe benefits that can reduce the employee’s income tax and provide deductions for the employer
  • Deferred compensation plans, either a defined contribution or a defined later benefit, based on a contract to pay at a later date

Succession planning can help retain and encourage important company leaders with a future role to play.

“If a future leader has the appropriate amount of intellectual potential, people potential, motivational potential, and change potential, that leader will likely have the “headroom” to grow during his or her tenure in the role,” the Deloitte Succession Planning Report said.