Rewarding Key Employees
As an outsourced CFO with our clients, many CEO’s have been asking us how to promote longevity and retention in key employees? When you have employees that have been with the company for a decade or more and have contributed to the growth of the company, how do you encourage them to stay long term? Let’s face it, if they leave your company, your job as CEO becomes more difficult.
Many of our CEO’s immediately turn to ownership, wanting to offer equity to key employees. While this may be a good option in some cases, there are many other options that can accomplish the same goals while keeping the ownership structure intact and flexible, and it doesn’t create the same legal, tax and administrative burdens that ownership may create. A few of those options are highlighted below:
Right to participate in equity: Stock options or stock grants offer a flexible and low-risk way for employees to participate in company success. If set up correctly, they can create an “owner” mentality with key employees and offer a lower risk way for employees to participate in company success. These plans, however, can be complex to administer, and there are some cash flow and tax considerations to consider carefully in advance. This plan also requires good communication with employees.
“Looks like equity” plans”: Stock appreciation rights (SAR’s) and Phantom stock are two options in this category. With SAR’s, employees get to participate in future appreciation, but only in appreciation and not initial value. With phantom stock, the employee receives cash based on the value of the phantom stock (which can include both the initial value and appreciation). Both SAR’s and phantom stock are flexible, can be used in conjunction with a deferred compensation plan, and do not require an appraisal. One consideration is that the value of the SAR is taxable to the employee when it is exercised and payment of phantom stock is treated as compensation to the employee only when paid. With both options, the company must evaluate future liability of the cash payments.
Non-equity payments: Deferred compensation arrangements are agreements between employee and employer to compensate for services rendered at some future date. This plan can be established for a few key employees without discrimination issues and, provided all qualifications are met, no amount of the income is taxable to the employee until it is paid out. There is also no deduction to the company until it is paid out and the company must evaluate future liability of the cash payments.
This is an important decision and every option should be carefully evaluated in light of specific circumstances, corporate structure and tax consequences of the company. Overall, CEO’s need to ask themselves what are they truly trying to accomplish and seek guidance and expert advice to create a plan that achieves those goals. Call CFO Strategic Partners today to have a conversation with one of our Orlando financial consultants about these options as they related to your long term strategy.