Succession income needs
Ensuring remuneration is on commercial terms
In many small and medium businesses, the owners arrange their remuneration from the business to meet their needs rather than being reasonable compensation for the roles undertaken.
This can result in the business either paying too much or too little.
Under a generational succession there should be an increased level of formality around compensation to directors and shareholders. Compensation should be matched to roles and where performance incentives exist these should be clearly structured.
The compensation for all executives should be agreed at a business level first. Thereafter, all of the parties can assess the adequacy of the compensation to their needs and expectations.
Operating and management control
Once the capability and capital assessments have been completed, it is important to look at the transition of control. This can be a very sensitive area.
It’s essential to establish and agree in advance how operating and management control will be maintained and transitioned. This is important not only for the generational stakeholders but also for the business.
Where uncertainty exists around management and decision making there is likely to be either confusion or a vacuum – either will adversely impact the business. Tensions can easily arise because:
- The incoming generation want freedom of decision making and the ability to put their imprint on the business
- Without operating control they feel that they have management in name only
- The exiting generation believe that their experience is necessary to the business and entitles them to a continued say
- Perception that capital investment should equate to ultimate operating control
- An uncertainty by either or both generations about the extent of their ongoing roles