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Recruit and Retain Top Talent With Executive Benefit Plans

Insights & Ideas Team •  March 7, 2016 | Business and Careers, Your Finances

For the third year in a row, business owners in the U.S. say retaining valuable employees is their biggest worry. A 2015 survey conducted by Payscale shows that 63 percent of businesses report “employee retention as their #1 concern ... a massive (125 percent) increase in concern since 2009.”1

John Alcantara knows the challenge all too well. As a Northwestern Mutual wealth management advisor and small-business owner, Alcantara waged his own war for talent not long ago when one of his two full-time employees approached him with unexpected news.

“She said she’d been offered a position in an entirely new and different career, and that she wanted to resign,” said Alcantara. “But I didn’t want to lose her; she’d been with me almost from the beginning of my practice. So I pulled together a financial incentive plan with the hope of getting her to stay. Fortunately I was able to prevent her from leaving.”

Today, in light of his experience, Alcantara says he makes it a priority to talk with his business-owner clients about ways to reward and retain their most valuable contributors.

“I think most business owners recognize that there are certain people who are key to the success of their business, and they worry about what might happen if they lose those people,” said Alcantara. “What they may not understand is that they can control some of that risk with customized nonqualified benefit plans.”

If you’re a business owner, nonqualified benefit plans let you reward the commitment of your most important employees with financial incentives. Unlike qualified plans (such as 401(k) plans), which must be made available to all employees, you can select which key employees will receive these nonqualified benefits, and you determine the level and types of benefits provided.

Some of the most common nonqualified benefits are:

1. Elective Deferred Compensation Plans. With an elective deferred compensation (EDC) plan, you give key employees the option to defer a portion of their income—from their current salary or from a bonus, for example—until a later date. Typically, employees who take advantage of these plans want to set aside pre-tax money for retirement beyond the maximum contributions they can make to their 401(k)s. Under this EDC plan, employees choose whether to participate, and they contribute to the nonqualified plan by deferring their own income.

Business Succession: 6 Steps to Achieve Your Vision2. Supplemental Executive Retirement Plans (SERPs). A SERP is another type of deferred compensation program, but it differs from elective deferral in one significant way: SERP plans are funded by the employer, who agrees to pay supplemental compensation in the future to select employees in addition to their current salary and other benefits. This is the type of plan Alcantara designed to retain his key employee.

“Of course, as a business owner, you have to contribute to these plans, and you can design them in a number of different ways,” he said. “But life insurance tends to be the favored informal financing mechanism because it accomplishes two things at once: You can insure the person to whom you’re providing the incentive plan; and the policy’s cash value grows tax deferred, which can be used to help pay the SERP benefit at some point in the future.”     

The downside, according to Alcantara, is that business owners don’t get an immediate tax deduction on initial contributions made to a SERP like they do with matching pretax contributions to an employee’s 401(k). Employers may claim a deduction when the SERP benefit is paid to the employee. In addition, the business owner maintains ownership of all the funds set aside for the SERP—and can tap into these company resources, if need be—until it’s paid out.

“In that respect, a SERP is one tool that allows you to retain control of the plan payout; at the same time, it lets your key people know that you have an interest in their future and you care enough to invest in them.”

3. Bonus Plan. A bonus plan allows you to provide added compensation for your key employees. The employee can choose to use that bonus to purchase life, disability income insurance or health insurance or even investment products; and you can pay the premiums directly to the insurance or investment company. With a bonus plan, you are able to take a tax deduction on the paid compensation, while the amount bonused is taxable to the employee.

Incentives like these can be useful tools when looking for ways to retain your most valuable employees. They may also give you a competitive edge in attracting new talent. “I haven’t yet used nonqualified benefits to recruit new employees, but I can imagine sitting down with a really great prospect and offering these kinds of incentives as a way to bring him or her on board.”

If you’re considering the use of nonqualified plans to recruit or retain people who are critical to the success of your business, talk to a financial professional. He or she can help you design a plan that not only meets the needs of your business and its key employees, but fits well within the context of your overall financial plan, including the personal goals you’ve set for your family.

1Payscale, 2015 Compensation Best Practices Report, http://resources.payscale.com/rs/payscale/images/2015_PayScale_CompensationBestPracticesReport.pdf, p.3.

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