Remember when it was hard to find a job? A person felt lucky to have and hold on to one.
An employee quitting to go to the competition was not a real threat to an employer, because it always had five other, more qualified people waiting in the wings to take the spot.
How the tables have turned. With today’s booming economy and record low unemployment rate, attracting and keeping key employees is a challenge facing many business owners. What can you offer that your competitor won’t that will help solidify your employee’s loyalty?
One thing is a nonqualified deferred compensation plan. Unlike qualified plans, which can’t discriminate, nonqualified deferred compensation is designed to be selective. You, as the employer, decide to which employees you wish to offer extra incentive, what that incentive is, and what the vesting schedule is to qualify. This type of arrangement can act as “olden handcuffs by providing a long-term financial incentive to your valued employees to remain with your company.
Here’s an example. Jane, a 50-year-old married woman with two grown children, is your best salesperson. While she has always been a loyal employee, competitors have begun to notice, and you are concerned that she might decide the grass is greener elsewhere. You would like her to stay with your company until she is 60.
So the two of you enter into an agreement: In exchange for Jane’s promise to stay, she will receive an additional retirement or death benefit. This agreement, which can include a noncompete clause, should be drafted by your company’s attorney.
The agreement states that, if Jane stays until age 60, she will receive an additional $15,000 a year of retirement income for 10 years. If Jane dies prior to age 60, her beneficiaries will receive the $15,000 a year. If she dies after the age of 60, the income will continue to her beneficiaries until the 10 years is over.
Your company will informally fund this arrangement by purchasing a $150,000 life insurance policy on Jane’s life that the company owns and controls.
Under this arrangement, you win as the employer because you have increased Jane’s commitment and loyalty. The additional benefits to Jane also may be deductible to the company as an ordinary business expense (depending on how your particular plan is structured). Jane wins because she has an additional source of retirement income.
You can find many ways to creatively structure and fund a nonqualified deferred compensation plan to meet the needs of you and your valued employees. Such a plan could present a golden opportunity for you and your key employee. Think about it.
Ruth Forsyth, CFP, is a senior account manager of market development with The Acacia Group. She co-hosts the “All Things Financial” radio programs Wednesdays from 7-8 p.m. on KQV-AM (1410). Reach her at (412) 922-4360 or by e-mail at [email protected].