Finding quality people has always been hard. Now more than ever, keeping them seems even harder. As we enter 2022, most experts agree that the post-Covid world will never fully return to the workplace of old. In light of this reality, what strategies can you use to effectively retain and incentivize your team while still managing costs?
The competition for talent is as intense as it has ever been and shows no signs of easing. In light of the challenges to recruiting and retaining great talent, business owners must continue to focus on creative ways to attract and retain people over the long term. Providing long-term incentives that are tied to value creation can be an effective way to create alignment of interests, give employees a direct incentive to adopt a more long-term focus on the business, and increase the overall size of the pie that all stakeholders can share in.
Numerous studies have shown that the primary things that keep talented employees at a company can be summarized as follows:
- Employees want to do work for a company with a strong and positive culture.
- Employees want to work for a company that is making a positive contribution to the world.
- Employees want to be compensated fairly.
- Employees want to have an opportunity to advance and progress in their career.
- Employees want other benefits besides a paycheck, including healthcare, retirement, time off, etc.
If you are not offering these attributes to your employees, you can bet that your competitors are. More and more employers are recognizing that the intangible aspects of work can be more important than the financial aspects, especially when it comes to retention.
If you are offering a workplace that encompasses these attributes, congratulations. You are well on your way to maximizing retention. But are there other things you can be doing to make it even more likely that your best people stay with the company long-term? Are there ways to structure financial incentives that reward long-term performance?
The answer, of course, is yes, and these long-term incentives, generally referred to as deferred compensation, can take various forms and be tied to various measures. At a high level, they can be broken down into qualified plans and non-qualified plans.
Qualified plans are so named because they “qualify” for certain tax benefits and are regulated under the Employee Retirement Income Security Act (“ERISA”). In exchange for certain tax benefits, ERISA imposes contribution limits, prohibits discrimination, and imposes other rules that can sometimes result in outcomes that do not fully achieve the goals of the business owner or key executives.
Non-qualified plans, on the other hand, do not afford either the business owner or key employees the same tax benefits (or other benefits including protection from creditors), but are also free from contribution limits and other restrictions.
While many business owners are familiar with qualified plans such as 401 (k) plans and defined benefit plans (“DB Plans”), many are not familiar with strategies involving an Employee Stock Ownership Plan (“ESOP”). At its core, an ESOP is a qualified retirement plan that affords benefits to employees based on the value of the underlying company where the employees work.
It also serves as a tax-advantaged exit vehicle for a business owner, enabling a seller to avoid the taxes on the capital gains arising from the sale, and also enabling the sponsoring company to eliminate the payment of any corporate income taxes. The benefits of an ESOP are generally broad-based and can be an effective way to augment corporate culture while providing meaningful incentives for workers to help grow the value of the company.
When an ESOP falls short of the benefit levels desired for key leadership, if an owner is not interested in a complete or partial exit or if an owner would prefer to limit the long-term incentive plan to key people, phantom stock, or stock appreciation rights (SARs) are often a viable alternative. In an ESOP context, SARs can be granted to key employees to augment the benefits afforded by the ESOP without the limitations imposed by ERISA. Where an ESOP is not in place and an owner is seeking to incentivize key leaders to grow the value of a business, SARs can be an effective way to accomplish this goal.
In summary, a SAR unit is designed to track the increase in the value of the underlying company. The growth in value is the benefit that is paid out at some point in the future. To accomplish this goal, SARs are generally granted “at the money” or at the current value at the time they are granted. In this way, they have no “intrinsic value” and therefore do not trigger a taxable event either to the company or to the recipient. As the value of the company increases, the SARs increase in value, but no tax deduction is generated by the company and no income is allocated to the employee. When the SARs are ultimately paid out, the corporation receives an income tax deduction and the recipient is taxed on the amount received as ordinary income. Maximum flexibility exists in terms of who participates, when the SARs are granted, whether they will be subject to vesting, the terms, and timing of when any appreciation will be paid out, etc.
For a more detailed look at stock appreciation rights, please stay tuned for our next article. For more on ESOPs, please visit our website www.acuityadvisors.com and click on our Resources page or reach out to us directly by phone or email at (714) 380-3300 or [email protected].