Every business owner knows a horror story about key employees. Some employees are poached by competition, leave and take coworkers or clients with them, or have held the business sale hostage, renegotiating their compensation packages right before the sale finalizes. With our economy growing so quickly, golden handcuffs are more important than ever to retain and attract key talent.
What are “Golden Handcuffs”
These “handcuffs” are tools used by employers to encourage personnel to remain with the company and a recruitment tool for key talent. Since majority of business owners agree proper incentives are important to maintain key employees, the main question is, why do more owners not utilize such benefits to protect their business?
Employers typically have three misconceptions about golden handcuffs:
- They are expensive to implement
- The business will not benefit
- Employees do not truly care about it
With a variety of programs available, it is easy to customize an incentive plan that motivates your whole workforce or key individuals either immediately or in the future. Programs can be designed as tax deductible, paid for through employee initiatives, or value added to employees (or a combination of all three).
Examples of Golden Handcuffs
Employee programs such as retirement savings plans are tax deductible and assist employees with their retirement planning. A 401(k) allows the employer to match contributions to an employee’s retirement, supporting them in their golden years.
Other programs can pay for themselves such as phantom stock or cash bonus plans, which are typically designed for key talent.
Stock options
Stock Appreciation Rights (SARs) and Phantom stock are not real stock, so owners do not have to worry about adding additional partners to ownership. Participants do not have voting rights, access to the financial books, or any authority outside of what was already given to them in their position.
These pseudo-stock options track the company’s real value. As the company’s equity increases or decreases, so does the virtual stock. As the employees work to increase the business value, they will be rewarded through the pseudo stock proportion to the company’s value.
As their portion of fake stock increases, they can receive the difference in basis according to the employment agreement. This allows for the employees, through their efforts, to pay for the bonuses themselves.
Cash bonus plan
The same principle can be applied to a cash bonus plan. If employees help increase the overall company’s value, they will be achieving various benchmarks through revenue or net profit.
As certain metrics are reached, the employer can provide a cash bonus of X percent to key employees. As with the phantom stock and SARs, it is through the employees’ efforts the company is succeeding and so they receive a portion of the profits. The plan continues to pay for itself.
Golden Handcuff best practices
These types of programs that provide financial incentives to employees are the most common and appreciated. By setting up a plan with simple, quantifiable benchmarks, the employees can build the business and pay for the golden handcuffs themselves.
By creating a clear and easy-to-understand hybrid option, employees will be motivated to remain with the company and grow it. When setting up these plans, it is important to establish a vesting period and forfeitures for additional benefits. This will help employee retention and protect the company’s interests.
Utilizing a hybrid option, a combination of short-term and long-term benefits will provide employees a well-rounded benefits package they are unlikely to get anywhere else. The employees need to have something short-term that they can grasp immediately.
In today’s world, many people want instant gratification. If employees are struggling financially or they can receive a higher salary elsewhere immediately, they are willing to lose some long-term benefits for instant satisfaction.
Combining short-term with long-term benefits will encourage the workforce to remain with the employer and prevent potential competitors from poaching key management.
Getting past the misconceptions
Employees are the most valuable tool any company has. The employees are literally the value any buyer or employer’s successor wants to keep.
If they disappear, the company’s value disappears with them. Use golden handcuffs to build the value of your company, protect its important assets, and reward your employees for all their hard work. Consult with an advisor about how to put a suitable program into place at your company.
Disclosure: Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Cambridge and Langan Financial Group, LLC. are not affiliated.
