Succession Planning "PS"OPportunity-The PSOP: The Performance "Share-ing" Option Plan

Agency Sales,  Dec 2005  by Vrablic, John L

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Succession planning is the process of creating value for your rep agency, maintaining the value of the agency until you phase out, and ultimately transferring the value of your agency at death, disability and retirement.

A byproduct of this is the fact that the value of your agency is dependent upon your gross commission. To the extent that your sales force increases sales, this will ultimately increase the value of your business.

The Performance "Share-ing" Option Plan (PSOP) can help you create, maintain and transfer the value of your agency.

The Scenario

You may be a rep owner who has one or more key salespeople in your organization. You may not be ready to retire for another five to 10 years. The key salespeople are interested in future ownership of the company, and you know that at some time you need to address this situation. On the other hand, you would like to have a program that can give an incentive for the key people to stay, a disincentive to leave, and a feeling of being a part of the company's success. You may be a little leery of making the salespeople owners for a variety of reasons.

The PSOP may be a suitable solution to this predicament. This plan is technically known as a phantom stock plan. The thrust of this concept is that your key people will be able to share in the company growth of stock without having actual ownership.

Award

Rather than an additional bonus, this award will be phantom stock, or you may call it performance share-ing stock. You can base this award on performance or incentive goals. So whatever you feel will produce additional sales can be the criteria on how much this award is each year. If the goals are not met, no award is given. If the award is given, it most likely will not "cost" anything since it will come from increased sales.

Performance Share-ing Option Shares

If the award is $5,000, this money will be credited to their performance share-ing account. The value of these performance shares will be in direct correlation to the true value of the agency stock. So if, for instance, you had 1,000 issued and outstanding shares at a value of $l,000/share, the $5,000 award would be credited as five performance shares.

In essence the key person has a valuable beneficial interest in these shares. If the agency's value increases, so do his performance shares.

Each year you would credit performance shares into his account

Informal Funding

Since this plan is a non-qualified plan, you are basically promising the key person that in 10, 15, 20 years, or at retirement, that whatever the value of his shares will be, will be paid out to the key person. Because of this, if the award is $5,000, you will actually set aside $5,000 into a sinking fund to offset the potential liability. This sinking fund is an asset of the agency and could be used for any business purpose should the need arise.

Vesting

One of the benefits of this plan is that the key person will not be taxed on the performance shares until they are actually paid out to him. The benefit from the rep owner's standpoint is that you have control over the shares and money. You can put whatever vesting schedule on the plan that you would like. If the key person leaves in five years and is vested in 25% of the plan, then he would only receive 25% of the value of the performance shares.

Distribution of Benefits

You may give the employee an option to petition the company to receive the performance share value in certain time periods. Ideally you may put in a trigger year that may closely coincide with your retirement.

If the key person's performance share-ing account was worth $150,000 in 10 years and he was able to receive these shares, then the agency could either pay this value out in actual dollars or even pay it out as actual stock. Either way the potential for this money to be used as a future downpayment for the owner's buyout is appealing.

Create Value

This plan can help create value because the key person will now have a financial beneficial interest in the company. He will realize that there is an incentive for the company stock to be increased in value. They will be able to share in the growth of decrease in the value of the agency. By incorporating this ownership mentality with an incentive for sales to increase, you will ultimately help create value for your agency

Maintain Value

It is all well and good to create the value, but in order for the owner to benefit, the key person must stay in the plan and have a disincentive to leave. Implementing a vesting schedule allows you to maintain the value of your agency. To the extent that the vesting schedules assist in retaining the key person, this in effect does help to maintain the value of the business

Transfer Value

When the vesting schedule is complete, the key person may petition the company to release the value of the performance shares. If this plan has worked and this key person is a potential successor, then he may use this plan to buy actual stock from you. So ultimately, the owner may even be able to transfer this value back to himself.