There are numerous temptations that can lure key executives and key decision makers away from your firm. The promise of financial security from competitors is likely the most appealing reason. In fact, having enough retirement income continues to rank a top concern for most Americans.
You may think offering bonuses sounds like your best option, however, you are only as good as the last bonus, or the ability of a competitor to match or exceed a competitive bid for your employee. Rewarding your key employees with an arrangement using life insurance, which primarily provides retirement income and death protection, may be an effective way retain your key executives.
Golden Handcuffs: What Are They?
Golden Handcuffs is a method to help attract, retain, and reward key executives. Companies that design and implement effective golden handcuff plans can accomplish the following important outcomes
- Reduce the risk that top employees leave prematurely or unexpectedly
- Provide a benefit that cannot be matched by competitors or individually
- Create incentives for top job candidates to join your company
- Protect the company against the risk of losing customers, employees, or trade secrets should an employee who has those relationships and information leave
- Thank top employees for their service with the company
A golden handcuff strategy must provide a key employee benefit that a competitor could not easily or even possibly replace. An Executive compensation plan utilizing life insurance with its tax benefits and corporate pricing is the preferred golden handcuff program for both employees and employers. This allows a company to provide permanent life insurance as a select benefit to your top employees. This may only be offered to only key employees. In fact, unlike any other benefits, it does not fall under the ERISA legislation, which protects the interests of employee benefit plan participants and its beneficiaries from discrimination.
Golden Handcuffs: What They Are NOT.
Bonus Plan- The employer is only as good as the last bonus, or the ability to match and exceed a competitive bid for your employee. A Bonus plan is not an effective way of providing true golden handcuffs
Pension or profit-sharing plan- A pension plan or profit-sharing plan must be offered to all employees. It can be more expensive and may give the savings an employee needs to fly away and become a competitor or switch to a competitor, much like bonuses.
Equity Interest of Stock Option Plan- As a stock owner one can create some real legal issues for your business adding extra stress as a business owner. It also may be transferred to a spouse or required to be liquidated on an unexpected death. In either case, it is not a good plan for either party unless that employee is with the company until the exit, if there is one. From the employee’s point of view, it does not guarantee a job, it does not guarantee a dividend or distribution. It only guarantees a percentage of the company in the event of a sale.
Many business owners and advisors assume that a golden handcuff plan requires sharing actual ownership interest with the employee who will be included. This is not true and sharing ownership with employees presents significant risks and downsides.
Real Life Example of Golden Handcuffs
Imagine an employer is trying to hire you, and they explain you have two different options: I do not recommend employers lay out that choice to employees or prospects.
- Salary of $150,000
- Salary of $145,000 with a benefit that if you die while you are employed, your named beneficiary will receive 15 years of continued salary.
Most employees with family members will clearly see a valued benefit that would be (and will be) hard to obtain themselves especially if there are health problems.
Employers should design compensation proposals for the key employees they need to attract or retain with the strategic goals to have the “Golden handcuff” effect.
Plans may be designed to provides a specific amount of retirement income or equity-based valuations to determine benefits triggered by sale, retirement date or death are available.
How Life Insurance Can Offer a Competitive Edge
There are three designs incorporated with life insurance that can be your competitive edge in the struggle to attract and retain top-level executives. The design you choose will depend on your priorities.
- Non-qualified Deferred Compensation Plan:
This plan will allow employers and or participants to systematically defer their compensation until retirement without the use of a qualified plan. To executives who have already maxed out contributions to their qualified plan, an NQDC plan can be an attractive alternative or accumulating supplemental retirement income. There are three types of Non-qualified Deferred Compensation Plans
- Voluntary Deferral Plan
- SERP
- 401(k) Mirror
Company Benefits:
- Avoids most of the cost and ERISA requirements of qualified plans
- Participation can be limited to executives without violating anti-discrimination rules
- Benefits are generally deductible to company when paid to executive
- Many design variations available, including cost-recover
Executive Benefits
- Allows executive to accumulate supplemental retirement income
- Can provide executive with benefit proportional to total compensation
- Earnings in plan grow tax-deferred
- Deferrals or company contributions not taxed to executive until distributed
This is a great option for employers concerned with flexibility, and customized compensation packages for your key executives.
- Executive Bonus Plan
An executive bonus is a very simple benefits arrangement, that doesn’t even require a separate agreement. The Employer can simply bonus the premiums to the executive or pay them directly to the insurance company. In both cases, however, the premium amounts will be taxable to the executive and tax-deductible for your business. This offers numerous benefits to the company, and to the executive
Benefits for the Company:
- simple to implement
- Bonuses may be tax-deductible
- Certain size groups of key employees get guaranteed underwriting, aiding employees to get insurance regardless of health history concerns
Benefits for Executives:
- Life insurance policy is a portable benefit
- Life insurance cash value grows tax-deferred and can be accessed tax-free
- Death benefits paid to the beneficiary are received income-tax free.
This is a great option for companies prioritizing simplicity in benefits arrangements.
- Split-Dollar Arrangement
A split-dollar arrangement is a method of sharing the benefits of a cash value life insurance policy. Typically, the employer either pays the bulk of the premium while the executive pays a small portion of the premium equal to the reportable economic benefit, which is the term cost of the death benefit coverage. If you are an employer who either already owns key-person policies on your executives, or are anticipating purchasing those policies, a split-dollar plan is a great way of offering death benefit protection to your executives at no extra cost to you.
Benefits for the Company:
- If the company owns life insurance policy, it owns the cash value
- Cash value is general asset of the company that can be accessed tax-free
Benefits for Executives:
- Federal income tax-free death benefit protection
- Can be used in conjunction with NQDC
This is a great option for Companies prioritizing affordability in a benefits arrangement.
The Best Solution for True Golden Handcuffs:
If your company is truly looking to attract, retain, and reward your best employees you must offer the following qualities in your golden handcuff plans:
- A True Benefit- You must offer something to your employee that they cannot receive cost-effectively anywhere else.
- Customizable- It must provide the employer a cost-effective way to provide a benefit to only key employees. It may be customizable to each person’s needs whether it be retirement income or widow/family income needs or both.
- Pot of gold- Your plan must discourage valuable employees from leaving your company for whatever reason prior to fulfilling the intended employment goals. They would have a hard time walking away from a valuable pot of gold. As the employer the company keeps the gold to hire a replacement or enhance the remaining key employees.
Conclusion:
One of the biggest threats your business faces is the possibility that your top employees will move to a competitor. Not only does this result in a loss for your organization, but it results in a gain for your competition. It is essential that you put in place the proper arrangements that will ensure your key employees stay where they belong. Whether you’re looking for control, flexibility, simplicity, or deductibility in a benefit design, using life insurance may provide the added incentives to keep your key executives with your organization, and keep your organization at the top.
The Exemplar Team Can Implement The Right Plan
At Exemplar we are experienced in designing Key Employee benefits specifically to the needs of each employer and employee. A one stop suite of professionals; attorneys, CPA’s, HR services and insurance underwriters all working together to implement the right plan for you to get the “Golden Handcuff” results you need.
Stephen White
Managing Director, Insurance & Financial Services, Exemplar Companies, Pbc
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Wow. I never thought of using insurance in this manner. Excellent article!