10 Ways to Attract and Retain
Great Employees - Part 2
5 and 6 Phantom Stock and Stock Appreciation Rights Stock appreciation rights (SARs) and phantom stock are both specialized deferred compensation techniques designed to provide an employee with the economic benefits of stock ownership without the employee actually owning any company stock. When an owner cannot or will not change the existing ownership structure, SARs and phantom stock are often used, to provide an employee with some sort of incentive compensation based on the actual business performance. A SAR is simply a grant to an employee which gives that person a right, at some specific time in the future, to receive a cash award equal to the appreciation in value of a certain number of shares of company stock. In concept, SARs are similar to stock options, but different in several points. Stock options require the employee to purchase the company's stock at the grant price. However, SARs do not require a cash outlay from the employee. The employee only receives the appreciation in value of the stock. Phantom stock on the other hand can be viewed as units of value, which directly correspond to an equivalent number of shares of company stock. These phantom stock units are then granted to an employee for a specific period of time. When the maturity period is reached, the employee is then compensated directly in cash, based on the value of the phantom stock. Unlike SARs, the amount of compensation with phantom stock usually includes the underlying value of the stock as well as any appreciation above the grant price. Another difference is that SARs are typically paid out when the employee chooses to exercise the SAR, while phantom stock typically has a fixed award date. 7. Deferred Compensation Deferred compensation is a method for producers to build long term value for their efforts directly related to their books of business. We recommend using deferred compensation instead of ownership in the producer's book of business. The plan is often phased in over time until the producer is fully vested in the plan. The agency benefits by having a system that encourages the producers to build their books as well as remain with the firm. It must be noted that a deferred compensation plan (as well as SARs and phantom stock) creates a contingent liability for the firm, which does negatively affect agency value. However, deferred comp is also "consideration," which helps uphold the covenant not-to-compete in a producer contract. This is another good reason to include deferred compensation as part of a producer agreement. 8. Split Dollar Life Policies A split-dollar plan is a way to provide life insurance for an employee or their spouse at a reduced cost to that individual. The premium for the insurance is shared by the employee and his or her employer (thus the name "split dollar"). It is an effective way to retain key employees while the business is reimbursed for every dollar it advances. From the employer's perspective, split-dollar is an inexpensive method of buying life insurance for any personal or business needs of select employees. It enhances employee loyalty by providing substantial insurance benefits. Some split dollar policies can provide funds, which may be used for additional employee benefits in the future (deferred compensation, salary continuation, stock redemption, or retirement income). From the employee's perspective, split-dollar can help replace needed family income that would be lost at the employee's death or help pay any estate taxes. If the employee owns the policy and collaterally assigns the policy to the employer, the employer can borrow against the cash value to the extent allowed by the collateral assignment form. 9. ESOPs Employee Stock Ownership Plans (ESOPs) are a way for business owners to sell shares in the company or to provide an additional benefit to all qualified company employees. These plans were initially created as a win-win for business owners and employees. ESOP contributions are tax deductible as are dividends if they are paid to employees directly, on their behalf to the ESOP or applied to the loan payments of a leveraged plan. Because the ESOP is funded with pretax dollars, the company's tax savings may increase even further. The selling shareholder can also defer the capital gains on stock sold to an ESOP as long as the ESOP owns 30% or more of the company's stock and the seller rolls over the sale proceeds into qualified replacement property (stocks or bonds of domestic companies). Employees pay no tax on the contributions until they are entitled to receive the stock when they leave the company or retire. At this point, the company generally buys back the stock through a buyback provision in the ESOP. ESOPs are expensive to set up and maintain. Businesses need to be a certain size before it makes financial sense. We recommend that agency owners do their homework before seriously considering this option. 10. Stock Equity Stock ownership usually conjures up visions of importance and respect. Producers and employees feel that having the word "Owner" on their business card will improve sales and stature. Often the employees only understand the benefits of stock ownership and the drawbacks are ignored or not understood. Agency owners are often unclear themselves whether or not they should offer stock to an employee. They usually first think about it either when a current employee is about to walk out the door and may not come back. Owners might often feel that they are forced to offer stock in order to entice a new producer to join the firm or to retain the currently employee, such as a producer with a book of business. We recommend that owners think long and hard before offering stock to an employee. The decision whether or not to make an employee an owner needs to be based on a review of many factors. The right decision can propel the agency forward for many years to come. The wrong decision can mire the firm in unimportant muck. A Final Thought A good principle to follow is that if you want outstanding results, you need to be prepared to pay outstanding rewards. Implementation of a "total compensation" plan will motivate employees to improve not only their own performance but the performance of the firm as well.
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