If you went to the office one morning and someone gave notice, whose departure would make you feel irreparably harmed? Think about the key people you need to take your company to the next level of growth or become the next leader of the business. Also, consider who you consult with when making a critical or strategic decision. These are the employees who need to be the focus of your retention efforts. Retention strategies for executives are absolutely critical to the long term and sustained success of an organization. Although compensation is only one component when an executive deliberates on whether to stay or go, it is an important starting point and one that is easy to measure.
The following 8 concepts are a great starting point to both protect your business and keep your executives financially motivated:
Key Employee Split Dollar Critical Illness
I’ve talked about this as a strategy for business owners but can also be beneficial for key employees. The concept is to insure a key employee in the event he/she gets a critical illness. The company pays the critical illness portion of the policy, and the key employee pays the return of premium component of the insurance. The company is the beneficiary of the policy in the event the employee contracts a critical illness. The employee has the ability to get both portions of the policy back should they remain healthy through the qualifying period. Some may frown upon betting whether your health remains intact or not, but the policy is guaranteed to pay out in one scenario or another. Here is a recent article that may help with the interpretation and a couple of examples.
Health Spending Accounts (HSAs)
This is often used as a supplement to a benefit plan. It allows the employee greater flexibility on how they spend their healthcare dollars. Whether they have children requiring braces or in need of a more robust optical benefit, this can offset any out-of-pocket expenses that a benefit plan doesn’t pick up. Similarly to employee benefit plans, this is 100% business expense and a non-taxable benefit to the employee. These can be set up by employee class and/or of length tenure depending upon the incentive you’d like to create. These benefits can be set up yearly to roll over unused portions to the following year or expire at the end of each calendar year. The cost to administer an HSA is considerably less than an insured benefit plan. Also, it gives you future cost certainty over a portion of your benefit expenses, something that an insured plan doesn’t afford you.
This is similar to an HSA except there isn’t a pre-determined amount assigned each year by the employer. These are more ad-hoc in nature or a one-time type of health expenses incurred by an employee. Typically, it is not as universally used as an HSA and therefore doesn’t cost as much to the company. Cost-Plus Arrangements got a bad reputation in the past as many business owners used this as a vehicle to push unlimited health expenses through his/her company. CRA looked at this as a “shareholder benefit” because it needed to be made available to more than only business owners.
Guaranteed Standard Issue LTD (GSI)
GSI is a Long Term Disability top-up for executives. One of the limitations of Group LTD plans. However, they guarantee LTD coverage for all participants, for executives the LTD amounts are often insufficient for higher paid executives and senior managers. Many are unaware of this shortfall unless they need to make an LTD claim. This income shortfall can prove disastrous to an executive forced to go on LTD benefits. The GSI is an additional layer of coverage for these senior managers that can protect these employees incomes and protect the rates that they will be paying in the future. How many of your key executives would receive less than 50% of their income should they become disabled? How many are truly aware of this shortfall? Does this pose a potential legal issue for your business? This could significantly protect your key employees and protect your business from a huge potential exposure.
Total Rewards Statements
Sometimes awareness is as important as receiving a benefit. Benefits and different forms of compensation are complicated and not always easy to understand, nor is it always easy to attach a monetary value to what you’re receiving from your employer. A Total Reward Statement itemizes all forms of compensation and attaches a value. Someone who receives an annual salary of $100,000 with no benefit plan or additional incentives can’t compare a similar compensation arrangement that may include $90,000 salary, benefit plan with health spending account worth $10,000 and a Group RRSP/DPSP plan that is worth $15,000 per year. A Total Reward Statement helps the employee understand all the benefits and true value they receive from their employer. It helps offer an apples-to-apples comparison to see how your employer is really compensating you.
Personal Pension Plan (PPP)
This not only represents a great strategy for business owners but can offer a tremendous incentive for valued employees. It’s a Defined Benefit Pension Plan that is guaranteed by your employer. The employer establishes the parameters but is a hugely valued incentive and key employee retirement opportunity. It’s a 100% business expense to the company and is not considered a taxable benefit since taxes are paid when the employee starts receiving the pension benefit. As a business owner, you would likely set up the investment component of the PPP differently for an employee than as a business owner. Read more
Retirement Compensation Arrangement (RCA)
An RCA is an arrangement as defined in the Income Tax Act in which an employer or former employer makes contributions to a custodian on behalf of a high-income earner that wishes to sustain their standard of living into retirement. It allows for larger contributions than with RRSPs and PPPs and thus allows an opportunity to increase retirement assets to the maximum allowable level. Read more
Group RRSP/Deferred Profit Sharing Plan (DPSP)
Group RRSP and DPSP plans are not uncommon, however, how you structure these pieces for Executive Compensation can have a significant effect on how you use them to retain top talent. You should have this tiered by employee class but also tiered to reflect how long they have been with your organization. By creating an incentive for executives to receive greater amounts by staying longer also makes good business sense.
All these strategies need to properly structured, thought out and communicated. The greatest retention strategy that is poorly communicated will likely not yield the results or desired intent. If you’re looking at incorporating any of these retention strategies, they should be discussed in detail with a qualified Financial Advisor, Accountant and/or Legal Counsel.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.