By Maurie Cashman
Stay incentives are underutilized as a vehicle to combine performance incentives to grow the value of a company with an incentive for key employees not to leave. I was asked by a colleague this week for some advice on the types of plans that were available. There are three principal types of plans that are typically used in some form. Let’s examine each briefly.
LT Bonus Plans. A Long-Term bonus plan is typically a cash or stock-based plan with an element that handcuffs the employee to the company, such as a vesting schedule. These plans are sometimes referred to as “Golden Handcuff” plans. In essence, the employee is granted a bonus – usually cash, stock or a stock option. The rights to all or part of this bonus are restricted however for a vesting period before the employee can gain access to these assets. Until then, they remain assets of the company. Sometimes part of the benefit vests immediately while part vests over time.
There are as many vesting schedule plans as you can conjure up and none is right or wrong. It is critical that you tailor the vesting schedule to the purpose for which you are setting up the plan. In order for this to be done correctly, you must have a solid plan for your business transition and for why you are putting the plan together in the first place. Without these two elements you risk putting a plan in place that may cost you a significant amount without accomplishing what you had set out to do.
Insurance-Based Plans. These plans can provide LT incentives for employees. By placing a permanent life insurance plan in place that becomes the property of the employee at some point you can accomplish two things:
- Provide an incentive for the employee to stay with the company for the long-term and;
- Provide an insurance benefit for the company in case the key employee is incapacitate in some way.
ST Stay Plans. These are often implemented for key employees when you are putting your business up for sale. These are somewhat less common and I have been involved in negotiating very effective plans. The concept here is to put in place a cash incentive for your very key employees whom you need to be involved in the successful sale of your company to a third party. Often-times buyers will wish to speak with these key employees to both understand the operations of the company and to learn more about the capabilities of the individuals.
This is the most underutilized type of stay incentive. Owners make the mistake that they can keep the sale of their business confidential and that the key employees will remain loyal even if they find out. Neither is likely to be the case and part of your transition plan should be to consider providing a say incentive to certain employees whom you will need to be in place when a buyer comes to your door.
These agreements are often tied into non-compete and confidentiality agreements and can be an effective way to get a non-compete in place if they haven’t had one in the past and an inducement is needed to get employees to sign. Vesting is often tied into compliance with these agreements.
It is important that you have good legal representation when crafting one of these agreements. They come under the jurisdiction of Section 409(A) of the IRS code for non-qualified compensation and also 101(j) for company-owned life insurance. My colleague was having problems finding an attorney who even knew what she was talking about. These stay incentives exist, they are effective and they may become the difference between a successful ownership transition and one that can turn into a nightmare. Be sure you have a qualified and experienced team of advisors to guide you through this important planning process.
© 2016 Aspen Grove Investments, Inc.