Golden Handcuffs: Incentives to Retain Key Employees

Below is our case study of the month. This month's topic is about golden handcuff types of strategies which can help to retain key employees. Written by Luke Rother.

Client

The owner of a collection of medical practices wished to retain a young, key executive that he hoped would take over as CEO in a few years.

Situation

The executive was already highly compensated, and the owner wished to include an added incentive to the executive’s comp package to incentivize her to remain at the company. The owner wanted to offer an asset that would be separate from the executive’s salary and retirement benefits. The owner also wished to maintain control of these assets by implementing a vesting period that required that the employee stay with the company for a certain number of years before she would be given control of the benefit. In addition, the company had a need to insure the executive for key person purposes.

Assessment

Businesses are limited to the contribution amount of certain benefits for employees outside of salary. The idea of giving more bonus money or increasing her salary was not attractive as that would increase the tax-burden for the employee and it would not allow the business to maintain control over the extra capital.

Solution

We determined that a 162 Bonus plan would accomplish the goals of the business owner. Under this plan, the business would purchase a cash value life insurance policy on the life the employee. The company would own the policy, pay the premium, and be the beneficiary of the death benefit during the vesting period.

The owner wished to implement a 10-year vesting period in which the company would contribute $25,000 per year for 10 years to the policy. The policy and the policy’s cash value would be includable as an asset on the business balance sheet. When the vesting period is complete in 10 years, the company will then “bonus” the policy to the employee by transferring policy ownership to the employee. This bonus would be deductible to the company and taxable to the employee.

Result

The company was able to enhance the employee’s compensation package while maintaining control over the asset and the timeline for accessing the “bonus.” The employee has a strong incentive to stay as she will earn a valuable cash-value life insurance policy in ten years to which the company will have contributed $250,000. This asset may be used in various ways by the employee when she is given ownership.