Employee Incentive Choices That Work!
Jun 9, 2016
Start your employee incentive plan with a good understanding of your own business plan and ownership timeline (i.e., when you plan to sell, retire, or reduce your holdings). Follow that up with a thorough knowledge of the resources available and you can determine how to match various incentives with the cash resources of the company.
Before you consider incentives, dig deep into what motivates your employees:
- Are you trying to improve performance (= incentives) or continuity (= retention programs).
- What do the habits of the employee tell you (e.g., like bonuses, travel, event tickets, family benefits).
- Can you offer incentives for individual employees or does it need to be a group offering (e.g., managerial level, shop, administrative staff).
- What are your competitors offering (to avoid losing key employees to more attractive benefit packages offered by competitors).
- What can the company afford.
Some of the more common incentives and retention opportunities:
- Money (Usually Incentives) – (a) bonus for achievement of performance metric (e.g., sales achieved, product shipped, leads generated, etc.), (b) profit sharing from a pool (g., 5 to 10% of net profits) aside for distribution to all employees at the end of the year if the company overall achieves certain profit or sales goals; or (c) one-time payment for particular achievement, successful customer capture, innovative concept to improve production or service offerings of company.
- Benefits (Both Incentives and Retention) – Many employees are more motivated to perform and stay with a company based on take home benefits: (a) health insurance in the form of full coverage or partial contribution to a health plan menu selected by the employee from a company list; (b) including full or partial coverage for family members; (c) dental insurance; (d) life insurance and/or disability insurance; or (e) education contribution for employee seeking training or a degree.
- Awards – (Usually Incentives) - Often times very simple recognition awards can make all the difference in the performance and retention of employees (a) Employee of the Month recognition; (b) Recognition awards at company’s annual summer or Christmas party; (c) Merit awards (e.g., pin for achievement, special shirt, or hat); or (d) The trip to Las Vegas, Hawaii is always a home run.
- Deferred Compensation – (Usually Retention) - Any arrangement where an employee receives wages after they have earned them (usually for corporate executives and highly compensated corporate employees). A written agreement is set up, to have part of their compensation withheld by the company, invested on their behalf, and given to them at a pre-specified point in the future (a non-qualifying plan).
- EIO Status – (Usually Incentive and Retention) - A limited liability company can provide for an economic interest ownership (EIO) status where an employee shares in some defined percentage of the profit and loss of the company (for an S corporation the equivalent is SARS or stock appreciation rights).
- SARs or Stock Appreciation Rights – contract rights to permit an employee, investor or key contractor to share in the profits and losses of the corporation (include a time of sale if still employed with corporation) without have a vote (tantamount to tracking stock with a percentage share of the profit and losses of the corporation).
- Equity (Last, but not Least) – (Usually Retention)
(A)Equity Options. A company can offer to grant a non-taxable option (for LLC a non-statutory option or NSO) and for a corporation an incentive stock option or ISO) to acquire units or shares in the company in return for (a) commitment to term of employment, (b) accomplishment of certain strategic or innovative tasks, (c) or other factors not part of the normal job description. Biggest Risk – When they leave the company has to buy back the units or shares, which can be expensive.
(B) Percentage Share in Profit from the Sale of Company.
If you would like legal assistance developing and/or executing your employee incentive plan, contact Pacific NorthWest Law Group today. We have years of experience helping businesses of all sizes with employee incentive plans that work!