Executive Retention: How ‘Phantom Equity’ Plans Might Materialize

Spooking top execs into staying.
Spooking top execs into staying.

Staff retention is a nettlesome problem for boutique and mid-size PR firms. However, it’s even more challenging to hold onto the second tier of management, or the folks near the top who are going to run the firm once a sale is complete and the original owners have cashed out.

How to retain top talent and incentivize second-tier managers to stay on for the long haul took center stage earlier this week at a roundtable sponsored by Gould+Partners and accounting from Anchin, Block & Anchin.

“The first thing a potential [PR firm] buyer looks at is beyond the owners—who may be out four or five years after a sale—and to the next tier of management that’s going to get the buyer the ROI,” said Rick Gould, managing partner of Gould+Partners.

One vehicle is to offer senior managers a “phantom equity” plan, or a contract stipulating that an executive receive financial compensation based on profits or proceeds from the sale of an agency, said Gavin McElroy, Principal at Frankfurt Kurnit Klein & Selz, who chairs the firm’s M&A practice.

McElroy added that PR owners might limit all monies devoted to phantom equity plans to roughly 10 percent to 15 percent of total equity.

Michael Lasky, co-chair of the Litigation Practice Group & chair of the Public Relations Law Practice Group at Davis & Gilbert LLP, took issue with the term “phantom equity.”

“Using the term ‘phantom’ sound illusory,” he said. “You want to make [the offer] something like what it sounds, such as ‘contract equity’ or ‘key equity executive plan.’ It can be called a lot of things, but the devil is in the details.’

PR firm owners ignore developing executive compensation plans at their own peril. If they fail to develop such plans they may compromise their ability to attract serious buyers when they decide to sell. No one wants to invest in a product without a deep and committed bench.

“Structuring these programs are challenging, in terms of who among the second tier of management executives is getting a commission.” Gould said “And whether that person took the lead on new business.”

Another key to developing such plans: PR agency and top managers need to understand the distinction among phantom-type equity plans, profit sharing and bonuses. They are separate animals.

It’s also important that PR firm owners be as transparent as possible with the second tier of management about the financial direction of the company. In this case, over-communicating will not hurt you.