Date post: | 16-Apr-2017 |
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Key Employees — Compensation Issues
Prepared for: Business OwnersPresented by: Jack Benke
The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Workman Securities
Corporation, its employees and representatives are not authorized give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
Key Employees — Compensation IssuesOverview
Key employee retention Compensation strategy Compensation & benefit options Stock-based compensation Nonqualified plans Employment agreements Tips & strategies for acquisitions & initial
public offerings
Key Employee RetentionEmployment Trends
A changing employer/employee relationship (Consultants)
Multiple jobs/careers Less benefit & retirement security
The Importance of Retention Turnover is expensive Profitability & growth Key employees are critical to succession
planning.
Key Employee Retention
Key Employee Needs Accumulation Protection
Compensation Strategy
Developing a Compensation StrategyBuild a team of compensation professionalsDetermine/anticipate business needsTailor plans suited to key employee needsReview your program on a periodic basis
Compensation StrategyCompensationProfessionals
Benefit ConsultantsAccounting firmsLaw firmsInsurance &
investment professionals
Attorney
Accountant
Life Insurance Agent
Compensation and Benefit OptionsSalary & Bonus Plans
Competitive base salaries/raisesBonus programsFixed/variable compensationCurrent/Deferred Compensation
Group Insurance ProgramsDisability Income InsuranceLife InsuranceCarve-Out programs
Compensation and Benefit Options
Qualified Plans The importance of retirement income Defined contribution plans Defined benefit plans Nonqualified plans
Stock-Based CompensationStock Ownership Plans
Value (perceived/real)Sales (corporate/shareholder)Stock awards (restricted stock)DilutionBuy back provisions
Stock Option PlansNonqualified optionsIncentive stock options
Stock-Based CompensationPhantom Stock Plans
Form of Nonqualified Deferred CompensationKey employees allocated “hypothetical shares”Taxation/accounting treatmentFunding options
Stock Appreciation RightsForm of deferred compensationCompensation driven by future appreciationTaxation/accounting treatmentFunding options
Nonqualified Plans
Provide accumulation and/or protection benefit
Supplement group benefit and/or qualified pension plan benefits
Reward and retain key employees Bonus plans Split Dollar plans Deferred Compensation plans
Nonqualified PlansBonus Plans
Employer funds all or part of the cost. Life insurance or other financial vehicles Owned by a key employee
How are Bonus Plans used? Accumulation and/or protection needs Retirement supplement Supplement group life & disability coverage Fund buy-sell plans
Nonqualified Plans
Pros & Cons of Bonus Plans - EmployerPROs
Totally selectiveCurrent tax deductionEasy to set up and terminate
CONsLimited “Golden Handcuff” potentialNo cost recovery potential
Nonqualified PlansPros & Cons of Bonus Plans - EmployeePROs
Employee owns and controls benefitBenefits are portable
CONsBonus not received in cashEmployer premium payments are taxable
income
Nonqualified PlansSplit Dollar Life Insurance
Life insurance plan Splits the benefits of permanent life insurance
between employer and employeeHow Split Dollar Plans are used?
Increase life insurance benefits Supplement group term insurance coverage Fund estate tax or buy-sell needs
Nonqualified PlansPros and Cons of Split Dollar Plans - EmployerPROs
Totally selectiveCash values provide cost recovery optionsEasy to set up and terminate
CONsPremiums are non-deductibleRequires an attorney to draft a Split Dollar
agreement and corporate solution
Nonqualified Plans
Deferred Compensation PlansRetirement incomePre-retirement benefitsSupplemental plansDeferral plans
Nonqualified Plans
Pros & Cons of Deferred Compensation Plans -EmployerPROs
Totally selective“Golden Handcuffs” potentialLife Insurance offers tax-advantaged
opportunities for cost recovery.CONs
Deferred Compensation requires accrual of plan liabilities.
Unfunded or “inadequately funded” plans may create future cash flow problems.
Nonqualified PlansPros & Cons of Deferred Compensation Plans-EmployeePROs
Supplemental retirement income Many Deferred Compensation plans offer significant
pre-retirement death benefits.CONs
Employee is a general creditor of the corporation. Supplemental benefits which are tied to risks of
forfeiture may never be paid if employee terminates early.
Employment AgreementsEmployment Agreements
Key employees Term of years (indefinite) Compensation & benefit provisions Severance benefits Arbitration & assignment Confidential information Non-compete clauses Exclusivity of services
Tips
Acquisition Consult your compensation professionals
before the acquisition. Review and benchmark your entire benefits
program. Consider the needs of your business and its
key employees.
Tips
Initial Public OfferingConsult your compensation professionals
before the initial public offeringReview and benchmark your entire benefits
programConsider the needs of your business and its key
employees