Dec 10, 2014
One-size-fits-all retention packages are usually unsuccessful in persuading a diverse group of key employees to stay put. Instead, companies that tailor retention approaches to the specific interest of each executive, as well as the current corporate position, benefit with higher retention rates.
Studies show the employer cost to replace one executive-level employee ranges between 150 to 400 percent of the employee’s salary. Traditional tools, such as deferred compensation plans, have not been the most effective solution. These plans do not offer employers current tax deductions. What’s more, those executives who remain on board are subject to the claims of the employer’s creditors.
THE CASE OF HOW TO PLEASE EVERYONE
When executives at a fast-growing biotech company looked beyond the standard retention package (deferred stay bonuses) and focused instead on the needs of individual employees, they found a more balanced situation than anticipated.
Among the key people at risk were two senior executives with exceptional industry experience. The biotech company edged near profitability and decided to offer executives a three-year “stay bonus.” They agreed to set cash aside on its books for payment to executives at the end of three years. But this decision did not motivate the executives; they saw considerable risk in being a general creditor of the company. If the company released monies and failed, the executives could lose the bonus payment. For the company’s part, it worried over the liability it faced on its balance sheet, as well as earnings cost to the company.
What’s more, when the executives received the payments at the end of year three, those payments would be ordinary income taxed at 50 percent, factoring in state and federal taxes.
THE IDEAL PLAN
The ideal plan provides the executives with a fully secured payment, not subject to creditors, and with a favorable tax treatment when paid. For the company, it needed to make this arrangement a two-way street. It offers the executives something of value, but what does it cost if the executives depart? The biotech company wanted protection, too, without a hit to the balance sheet.
After studying many alternatives, overlooked by others, BFG helped find a solution that met both company needs and the executives’. Even better, the company can tailor the payout to meet each executive’s needs while protecting itself, too.
In structuring a special arrangement, the company was able to fund it on a tax-deductible basis, with no income tax to the executives until they received payout. These benefits were held off the company balance sheet and fully protected against the company creditors.
Another executive wanted proceeds paid to his children instead of taking the proceeds into personal income to avoid capital gains on the payout in three years, required with ordinary income in traditional deferred compensation.
For the company, it was able to obtain a policy to pay itself if the executive left the company in the first three years, thus, protecting its shareholders.
When you consider the far-reaching application of this special arrangement, one can see how it can benefit small to mid-size companies who also need to attract and retain key employees. They also want current tax deductions for contributions and capital gains treatment on distributions, with full creditor protection. And why not? They deserve it every bit just as the major players.