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Holding on to Your key Employees
By: Donald H. ClaytonWith the national unemployment rate continuing to hover near what is considered "full employment," it's as difficult today as it has ever been for companies to find and keep top-notch employees. Highly skilled employees will always be in great demand, but even more so in a tight labor environment.
Given this, it's imperative to do everything possible to hold onto your employees - especially key employees. The loss of a top executive or manager can set your company back months, or even years, in terms of its strategic and growth plans, not to mention the disruption such losses can cause within the company and among your employees.
Compensation Methods are Key
There are many factors that go into employee satisfaction, of course - work/life balance, flexibility, perks and benefits, and opportunities for advancement, to name a few. But when push comes to shove, Jerry Maguire probably spoke for most employees with the classic line, "Show me the money!"
You cannot realistically expect to compete with larger companies when it comes to retaining key employees without a competitive compensation package. In fact, there's a good chance that other companies (including your competitors) are trying to lure your key employees away from you right now. What is keeping your employees from saying "no" to them and "yes" to you?
The good news is that there are many different options available to help employers create executive compensation packages designed to engender the loyalty of key employees. Following is an overview of the most popular options.
Sharing Equity - Without Sharing Equity
Phantom Stock and Stock Appreciation Rights (SARs) plans, while technically different, operate in much the same way. They allow businesses to share the economic value of equity without having to share the equity itself.
The plans are essentially a promise to pay a bonus equivalent to either the value of company shares or the increase in their value on a fixed, predetermined date or event in the future, thus allowing you to share some of the financial rewards of ownership without actually distributing company shares. This not only lets you keep ownership consolidated, but it also avoids some of the risks and complications that can accompany equity sharing.
In addition, since they are designed to pay out years in the future, they force participants to consider the long-term impact of decisions that are being made today - or in other words, to think like a shareholder. Access to the value in a participant's account is subject to a vesting schedule, so aside from forcing participants to think long term, these plans also provide a strong incentive for key employees to stay with your company.
You can design vesting schedules to meet specific objectives. For example, if your primary objective is employee retention, you could implement a vesting schedule with zero percent vesting until after five or 10 years. The result is "golden handcuffs' that help keep employees with your company at least until their shares vest.
Employees are subject to FICA and Medicare tax when they receive the right to the benefit (i.e., when they vest). Federal and state taxes are owed upon payment. Your company, meanwhile, receives a deduction during the year the payout is made.
Profit-Sharing and Bonuses
Companies have long used profit-sharing and/or short-term bonus plans to reward both key employees and rank-and-file workers, and there are many different variations on how these plans can be set up. The most important factor with any profit-sharing or bonus plan is that the rewards be tied to performance standards that:
- The employees' activities can influence
- Help meet short-term (usually annual) company goals
- Will increase the value of the company
In short, like shared equity plans, your bonus plan should encourage employees to think and act like owners and shareholders.
For example, assume that your company's primary goals in the coming year are to retain clients and increase revenue. After determining what base percentage of profits to set aside for the bonus pool, you could then create "overlays" that would increase or decrease this amount based on your company's performance against defined and measurable revenue and retention targets. So if revenue grows at plus or minus 20 percent of the goal, the bonus pool would go up or down by 20 percent - ditto for client retention rates.
Although bonus plans are intended to correlate with performance and compensation, they can place an undue emphasis on short-term gains and losses. This can present a difficult scenario for executives, who might feel compelled to make decisions that result in a large bonus in the short run but damage the company's long-term health. For this reason, many companies are adding long-term incentives, such as phantom stock plans, to their executive benefit packages.
What About Stock Options?
Until recently, stock options were a key part of many executive compensation plans, particularly in publicly traded companies. But the shine has dimmed somewhat from stock options.
For starters, the bursting of the stock market bubble (especially tech stocks) revealed the potential limitations of stock options as a compensation vehicle if the value of shares goes down. And not every company is eager to spread ownership among employees, no matter how valuable they may be.
In addition, there is the issue of the lack of marketability of shares in a closely held business. Therefore, most experts recommend strategies other than stock options for compensating key employees in non-public companies.
Deferring the Compensation - and Taxes
Many companies also offer basic non-qualified deferred compensation plans to key employees. These plans carry a nominal administrative cost for the company but allow executives to defer salary or bonus compensation in excess of the 401(k) limits ($15,500 in 2007, or $20,500 for employees age 50 or over).
In designing executive compensation plans, it's important to work closely with an attorney who specializes in compensation and benefits, as well as your accountant and other professional advisors. The details can be complex and the regulations governing non-qualified plans are subject to the whims of Congress, so expert guidance is a must.
