Compensation for Interim Executives Part 2 – Various Types of Fees to Choose From
Success fees can be tied to any number of factors. We typically see these in two types of situations:
• The company wants to additionally incentivize the interim executive and adds a reasonable success fee to the normal base rate based upon target criteria
• The company’s budget is limited, and the base rate is reduced in exchange for a share in additional profits, revenues, or savings (i.e., additional cash flow as a result of the executive’s efforts/expertise)
Success fees don’t necessarily need to be tied to the top or bottom line. This structure depends very much on what the company’s goals are. We have seen success fees tied to increasing valuations, selling the company within a specific period, establishing a set number of strategic partners, closing a merger by a certain date, and so on.
The client example of June and the interim president, Sam, who increased the valuation of the company where he worked, was a great example of how success fees can work. Although the family board was not one hundred percent committing to selling, it was committed to increasing the company’s value in the event of an exit. With the goal of increasing the company’s value, Sam accepted a daily rate of one-half his usual fee, and in turn, accepted a success fee based on the increased valuation amount over what it was the day he arrived as their interim president.
The board obtained an initial valuation; Sam reviewed the valuation and accepted it. After sixteen months, and once the board was ready to start soliciting bids for the company, a second valuation was performed, and Sam received a success fee equal to 17 percent of the difference between the initial valuation and the new valuation. The difference in valuation was ten million dollars.
Both the board and Sam experienced a positive outcome, especially since the board did sell the company six months after the second valuation for more than $14 million more than the original valuation.
Finally, there is always the opportunity to combine pay with equity, provided the interim executive can impact the value of the company. Business is a living, moving target. The needs of a business can change daily. Businesses need the flexibility of outsourced expertise that can work within their specific situation and a contract that matches it. Never let the finances or logistics of the contract get in the way of the expertise you need to grow your company. There is always a way to work it out if you are both willing.
You can find part 1 here.