One of the biggest concerns for business continuity is that key employees might leave the business — and worse, that they might take some of the most important or valuable customers with them.
Unfortunately, many common methods of retaining employees are ineffective because so many of them are just expected. For example, 401(k)s are simply expected everywhere. Annual performance bonuses have no deferred rewards, so there’s no assurance you’re going to get them to stick around.
Even a non-qualified deferred compensation plan has its issues — a huge expense right now that you might not be able to afford.
Fortunately, there’s a method you can use to increase the likelihood that these key employees will stick with you through changes in your business like transitioning management..
It’s called the selective employee retention income and security plan (SERIS), and it’s extremely effective.
The 6 Vital Elements of a Successful Employee Retention Strategy
For an employee retention strategy to successfully retain your key employees, there are a few things it needs to do:
- Provide recognition for the employee
- Include a timeline for the employee to perform
- Have an executed written agreement
- Include immediate benefits for the employee
- Include a deferred reward
- Be funded through a reputable financial institution
SERIS fulfills all of these requirements.
How the Selective Employee Retirement Income Security Plan Works
How this strategy works is a bit complex, but here’s essentially how it works once you determine how long you want to retain the employee and how much the employee is worth to you.
First, you take the amount that you’re willing to pay to keep the employee around (say 10% of their salary per year for 10 years) and put them in a special account. Essentially, a loan is taken out for the employee that will be forgiven if they stick around for that 10 years.
This stays on the books as an asset yet leverages several immediate and deferred benefits for the employee as long as they stick with the company.
The strategy is built on a patented life insurance chassis approved by the Treasury Department specifically for this purpose.
Once the employer and employee agree on the terms and the money is put into the account, the employer receives the cash during the rollout, which is a one-time taxable bonus for the employee. An insurance contract provides the funds for the employee to pay the tax, and the business gets a significant tax deduction.
The Benefits of the Strategy for Employees and Employers
There are many benefits for the employee here. For example, if the employee passes away before the agreement is over, their heirs will receive a substantial income-tax-free survivor benefit in multiple of salary. The business then receives a death benefit up to the amount contributed so far, completely refunding the amount invested.
This greatly reduces the risk of this strategy and ensures both employee and employer are covered in the event of the employee’s death.
If the employee just decides not to complete the agreement, the employer can remove all the available cash value up to the cumulative premium’s pay and release the policy to the employee to do as they wish.
The strategy includes critical illness payments for the employee, which is an immediate benefit, as well as tax-free retirement income and chronic illness payments if they complete the agreement, which are deferred benefits.
On top of this, the employer has the ability to recover all or most of the benefits if the employee doesn’t complete the agreement.
How This Strategy Is Superior to Traditional Retention Strategies
In many ways, this strategy is superior to other strategies, like 401(k)s:
- The employer has complete discretion over the plan because there are no ERISA or DOL restrictions
- The employee gets both immediate and deferred cash benefits, incentivizing them to stick around for the full term of the agreement
- The funding is much more manageable for the employer
- The charge to earnings for the employer decreases each year and is typically positive after year 4 or 5
- The employer gets to negotiate the timeline for the employee to stay at the business and perform AND has discretion over what to do if the employee fails to perform
- If the employee fails to perform, the employer retains most, if not all, of the contribution value
- There’s a significant tax deduction for the employer or a buyer who purchases the business
This strategy can be put into place upon sale or can be put into place well before the planned sale. This allows you to ensure your employees won’t up and leave while you’re building up your business’s value in the years leading up to your target sales date.
While the strategy definitely has complexity to it, it’s extremely effective. If your business is in danger of taking a significant hit — or even outright failing — in the event that a key employee leaves, then it’s worth the time and effort to set up something a bit complex that has a high chance of keeping that employee around.