Key Employee
Compensation Consulting

Key Employee Compensation Consulting

Growing a family business is an uphill battle. In fact, an estimated 70% are never passed on to the next generation. A common challenge is how to properly compensate working family members.

Compensation rears its ugly head in many ways. Often, we find that Dad doesn’t want to hurt feelings so he doesn’t complete performance evaluations and pays all second or third generation siblings the same salary.

Sometimes family members are overpaid, typically when the business is thriving. More often, however, the kids are underpaid, compensated via an “allowance” because the elder generation of shareholders—for a variety of possible reasons—finds it difficult to recognize valuable work by one family member over another.

Our work with employers and their salary levels gives us the background to help family business owners assess the compensation of younger generation shareholder-employees.

Family business consulting projects typically originate from referrals by family business consultants such as Tom Hubler of Hubler Family Business Consultants who prefer to focus on family relationships and vision issues, and outsource issues such as compensation.

According to the 2002 Hay Benefits Report, benefit costs as a percentage of payroll have been increasing steadily, and now equal 26.2% of payroll. Benefit costs included in this report usually include only core benefits.

Core benefits are determined on behalf of all the employees, and can’t be customized for individual employees. This core package typically includes retirement, group insurance, paid time off and statutory benefits, etc.

Selective benefits exist apart from the core package, and this benefit category is where employers can put benefits to work on behalf of selected employees. Some options include:

• Golden Executive Bonus Arrangement (personal life insurance as a tax-preferred accumulation vehicle with the accumulation forfeited if employee quits prior to a certain date)
• Car Allowance (everyone knows about this one!)
• Salary Continuation Plan (supplemental disability coverage with continuation of salary during waiting period)
• Long Term Care Insurance Plan (helps protect employee assets even after age 65, pays certain costs of care when on claim)
• Preventive Healthcare Plan (executive physicals)
• Financial Planning (pays for services of planner)

Call us for the advantages (and disadvantages) of these options.

Why would anyone want to defer compensation? Deferred Compensation is a tool used primarily by small employers to help highly compensated employees receive income at a later date, often following retirement.

Small employers (less than 100 employees) typically offer a 401-k plan as the means to allow employees to accumulate retirement funds. The employer’s typical contribution is a “matching contribution,” i.e. the employer matches a portion of the employee’s contribution. If the employee puts in nothing, the employer puts in nothing.

The trouble is: the 401-k may not work well for highly compensated employees if non-highly compensated employees do not contribute much, on average, to the plan.

Therefore, key employees are often willing to defer compensation to a future date—especially if the employee’s spouse is also highly compensated. The option tends to come up when key employees are offered selective benefits as part of their employment contract. These contracts are written agreements that “lock in” both parties to various obligations and describe compensation and benefits for the key employee.

Often, the employee will agree to non-compete and non-solicitation clauses in exchange for deferred compensation arrangements specified in the contract. These types of agreements can be very complicated and require the services of a highly qualified attorney.