A piece of the pie
Private companies offering equity to executives as retirement perk
By Charles Rathmann, of SBT
Federal and state regulations make it difficult for highly paid executives and managers to set aside pretax reserves sufficient to maintain their lifestyles after retirement.
However, gap-planning tools such as nonqualified deferred compensation plans can help companies close the retirement gaps for their key people. Those plans work around federal discrimination laws that might otherwise require all employees to receive identical benefits.
"If a company has a key employee it wants to take care of and wants to do an extra benefit for that person, (deferred plans are) the easiest and most often used," said Terrill Jannsen, managing shareholder and president of Jannsen & Co., Waukesha. The accounting and business consultancy firm works with privately held businesses.
"The big thing with deferred compensation is that you need to pay it out for it to be deductible for taxes," Jannsen said. "It cannot be deducted until it is paid out to the individual. Companies can choose either to fund it or not fund it and just pay it out of current earnings. Some will use a life insurance product to fund it."
In an uncertain economy, some companies are loathe to guarantee income or pay a premium not tied to results, and that is affecting the types of deferred benefits companies are using in the last two years.
"We will see all different types," Jannsen said. "There can be a fixed-payment based on years of service, situations where they base it on production of a person. Specifically in an insurance situation, they will base it on their last 10 years of production. In our firm, it is based on years of service and value of the firm."
According to Executive Search Partners president Nick Curran, risk aversion is having a major effect on gap planning, inducing many owners to ask executives to take a stake in the company instead of a free ticket for the gravy train. Curran represents free-agent executives and also works with companies recruiting talent.
"Businesses in these times are not willing to take all the risk because they have felt the pain of that upside," Curran said. "They are looking for execs that are willing to be tied to the success of the organization. You have to put some skin into the game if you want to play."
This situation might actually work in favor of executives interested in ownership, according to Curran.
"Equity is more likely now than it has ever been … More execs would love to say they would like to have some equity," Curran said. "In good times, if the company is doing well, the company is more likely to tell an executive interested in equity, ‘We don’t need you.’ But with more companies having trouble, there is more opportunity for ownership."
An example of Curran’s assessment is Bob McCormick, chief executive officer of Xymox Technologies, Milwaukee. McCormick was recruited in 2001 from a position as president of Newell-Rubbermaid’s Mirro cookware division. The move from the publicly held sector and attractive supplemental executive retirement program (SERP) benefits to the private sector was a major change.
"That was a very attractive program for key high-level presidents or people working in a corporate executive capacity," McCormick said of the SERP. "If you worked with the company for 10 years and you retired at a normal age, your additional retirement benefit would be 80% of your highest five consecutive years of earning."
The switch to Xymox also involved a move from flying on corporate jets to low-dollar commercial air travel, but McCormick knows he will get his share of each dollar saved. Xymox is owned by Horizon Partners of Milwaukee and Naples, Fla., a private-equity group that is expected to sell the company within a five-year timeline. That means McCormick can expect a taste of the increased value of the company.
According to Curran, an investor with Horizon Partners, executives can do very well managing a company like Xymox – if they are effective.
"They might say, ‘Give me a base of $250,000, plus incentives, plus options,’" Curran said. "And we might say, ‘How about this: $150,000 and 2% equity in the company?’ With a $50 million company that might sell for more than that in a few years, they say, ‘OK; I can make a million dollars.’
"What is interesting about the privately held company, owned by a private-equity group, is it still has the base and the bonus, but the way private equity groups work, they buy, build and sell businesses. Their top-level execs make their money on the sale … There is the big carrot out there called the potential, based on what you could make on the successful sale of the business," Curran said.
To build that potential, McCormick is implementing the strategic and management moves he learned in corporate life to Xymox, a 400-employee company that manufactures switches used in flat-panel displays on items such as dishwashers and microwave ovens.
The company has eschewed some markets for others where it can compete more profitably and has nailed down about 98% of the gas-pump market.
"We have just recently won a major business segment at Whirlpool in the appliance industry," McCormick said. "We were the only new membrane switch supplier brought into the fold at Whirlpool. We were in the process of testing and launching the product."
McCormick is tightening up the strategy even further and is already working on the first revision to the company’s first-ever strategic plan.
"That was part of everyday business at Newell, but there are certainly smaller businesses out there that don’t think that way," McCormick said.
McCormick also has filled Xymox’s executive-level stable with a new chief financial officer, vice president of global operations and vice president of global sales. Strengthening Xymox’s Asian manufacturing presence is also on the company’s agenda, according to McCormick.
As Horizon Partners reaches its five-year liquidity event, McCormick looks forward to taking on another assignment with another company in the area.
"Financially, I think you can come out ahead," McCormick said, comparing working in the private vs. corporate sector. "The normal formula is about a five-year period of time for a private equity firm. If you are 40 years old and you begin doing business in the private equity market, by the time you turn 60, you could have theoretically done four of these."
June 13, 2003 Small Business Times, Milwaukee