Tom Rogers is a business owner in the Construction industry. He relies on four key vice-presidents to help run his very successful business. Their salary and benefit packages are well above the industry standard. All four vice-presidents own their homes and have developed substantial wealth outside the company.
Like most in his industry, Tom’s business was hit by the recession, and he was forced to downsize. Fortunately, he was able to keep his four key employees, but their compensation was lowered and their bonuses eliminated as a result of the difficult economic times. Recently, however, business has been steadily improving, and the four vice-presidents have a new enthusiasm and confidence. Their business is well on the road to recovery, and their futures look bright.
And yet, Tom is uneasy as he faces a new challenge. At least two of his vice president’s were approached by a competitor from outside the area. This competitor is looking to expand, and is positioning to enter Tom’s market as the economy recovers. Tom asked his CPA to find a consultant to help him create special incentive programs to keep his key employees happy and the company infrastructure secure.
Tom’s CPA came to us for ideas. Our suggestion: create an “Exchange of Promises” program for his executive vice president and a program of smaller scope for the other three VP’s. The turnaround of the economy and the company provides the perfect timing to establish a program to include:
- Retirement income above and beyond the 401K
- Income in the event of a disability
- Income for the family in the event of premature death
- An employee ownership plan (ESOP)allowing employees to share ownership in a successful growth and the future
- Use of “synthetic equity” (e.g., phantom stock, stock appreciation rights plan, etc.) in lieu of actual ownership of company stock
- A stock option program (with or without tracking an external index or “basket of stocks”) in publically traded peer companies, if available
Tom knows that he must do everything he can to retain his four vice presidents. Losing any one of them is just not an option at this stage in the company’s growth. They are far too valuable to Tom and the business and would be far too expensive and difficult to replace.
Tom is not alone in his thinking. As posted by the Fenton Report on Mar 22nd, 2009 in an article by Alan Goldfarb, “Golden Handcuffs” Can Hold Key to Locking Up Top Executives, he writes, “Historically American companies have used various methods to retain executives, including extra bonuses, promotions and pay raises, or perks such as company cars, travel privileges, extended vacation time, etc. Unfortunately, these one-time benefits rarely make much difference, studies show. They may keep someone around an extra month, or however long it takes to exhaust the benefits, but that’s about as far as they go.”
“What has made a difference are “golden handcuff’’ agreements, and an increasing number of companies are adopting some version of them. Although the name of these agreements may be a bit off-putting, at least it’s honest. Golden handcuff agreements indeed tie an executive to the company, but the reward can be substantial and may even include a share of ownership.”
“For owners, a golden handcuff agreement can be an expensive way to lock in top executives. Part of the company’s assets will have to be given up either through stock options, deferred payments, phantom stock, or a similar plan. However, if it keeps the top employee on staff, it’s a move that actually should enhance revenue, and therefore should be seen as an investment and not an expense.”
By creating special programs for his top performers, Tom is making it much more difficult for them to be lured away by a competitor. The “cost” of funding a golden handcuff program may be one of the best “investments” he has ever made in his business – and that makes everyone happy.
Written by R. J. Kelly – June 2011