| Winter 2008 |
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INFOLETTER
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Partner's Perspective |
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Executive Compensation: Holding On To Your Key
Employees
By Richard C. Fedorovich, CPA, Managing Partner
With the national unemployment rate continuing to hover near what is
considered "full employment," it's as difficult today as it has ever been for
companies to find and keep top-notch employees. Highly skilled employees will
always be in great demand, but even more so in a tight labor environment.
Given this, it's imperative to do everything possible to hold on to your
employees—especially key employees. The loss of a top executive or manager can
set your company back months, or even years, in terms of its strategic and
growth plans, not to mention the disruption such losses can cause within the
company and among your employees.
Compensation Is Key
There are many factors that go into employee satisfaction, of course—work/life balance, flexibility, perks and benefits, and opportunities for
advancement, to name a few. But when push comes to shove, Jerry Maguire probably
spoke for most employees with the classic line, "Show me the money!"
You cannot realistically expect to compete with larger companies when it
comes to retaining key employees without a competitive compensation package. In
fact, there's a good chance that other companies (including your competitors)
are trying to lure your key employees away from you right now. What is keeping
your employees from saying "no" to them and "yes" to you?
The good news is that there are many different options available to help
employers create executive compensation packages designed to engender the
loyalty of key employees.
Following is an overview of the most popular options.
Sharing Equity—Without Sharing Equity
Phantom Stock and Stock Appreciation Rights (SARs) plans, while technically
different, operate in much the same way. They allow businesses to share the
economic value of equity without having to share the equity itself.
The plans are essentially a promise to pay a bonus equivalent to either the
value of company shares or the increase in their value on a fixed, predetermined
date or event in the future, thus allowing you to share some of the financial
rewards of ownership without actually distributing company shares. This not only
lets you keep ownership consolidated, but it also avoids some of the risks and
complications that can accompany equity sharing.
In addition, since they are designed to pay out years in the future, they
force participants to consider the long-term impact of decisions that are being
made today—or in other words, to think like a shareholder. Access to the value
in a participant's account is subject to a vesting schedule, so aside from
forcing participants to think long term, these plans also provide a strong
incentive for key employees to stay with your company.
You can design vesting schedules to meet specific objectives. For example, if
your primary objective is employee retention, you could implement a vesting
schedule with zero percent vesting until after five or 10 years. The result is
"golden handcuffs" that help keep employees with your company at least until
their shares vest.
Employees are subject to FICA and Medicare tax when they receive the right to
the benefit (i.e., when they vest). Federal and state taxes are owed upon
payment. Your company, meanwhile, receives a deduction during the year the
payout is made.
Profit-Sharing and Bonuses
Companies have long used profit-sharing and/or short-term bonus plans to
reward both key employees and rank-and-file workers, and there are many
different variations on how these plans can be set up. The most important factor
with any profit-sharing or bonus plan is that the rewards be tied to performance
standards that:
- the employees' activities can influence,
- help meet short-term (usually annual) company goals, and
- will increase the value of the company.
In short, like shared equity plans, your bonus plan should encourage
employees to think and act like owners and shareholders.
For example, assume that your company's primary goals in the coming year are
to retain clients and increase revenue. After determining what base percentage
of profits to set aside for the bonus pool, you could then create "overlays"
that would increase or decrease this amount based on your company's performance
against defined and measurable revenue and retention targets. So if revenue
grows at plus or minus 20 percent of the goal, the bonus pool would go up or
down by 20 percent—ditto for client retention rates.
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Must Haves
Whatever form your executive compensation plans
take, they should:
- Be clearly communicated to the employees who
are participating.
- Be tied to specific, measurable performance
standards.
- Be formally documented in writing.
- Include both short- and long-term components
that are aligned.
- Provide a large enough financial reward so
that employees are motivated to strive to achieve it.
- Give executives a strong incentive to remain
with the company for the long term.
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Although bonus plans are intended to correlate with performance and
compensation, they can place an undue emphasis on short-term gains and losses.
This can present a difficult scenario for executives, who might feel compelled
to make decisions that result in a large bonus in the short run but damage the
company's long-term health. For this reason, many companies are adding long-term
incentives, such as phantom stock plans, to their executive benefit packages.
What About Stock Options?
Until recently, stock options were a key part of many executive compensation
plans, particularly in publicly traded companies. But the shine has dimmed
somewhat from stock options.
For starters, the bursting of the stock market bubble (especially tech
stocks) revealed the potential limitations of stock options as a compensation
vehicle if the value of shares goes down. And not every company is eager to
spread ownership among employees, no matter how valuable they may be.
In addition, there is the issue of the lack of marketability of shares in a
closely held business. Therefore, most experts recommend strategies other than
stock options for compensating key employees in non-public companies.
Deferring the Compensation—and Taxes
Many companies also offer basic non-qualified deferred compensation plans to
key employees. These plans carry a nominal administrative cost for the company
but allow executives to defer salary or bonus compensation in excess of the
401(k) limits ($15,500 in 2008, or $20,500 for employees age 50 or over).
In designing executive compensation plans, it's important to work closely
with an attorney who specializes in compensation and benefits, as well as your
accountant and other professional advisors. The details can be complex and the
regulations (including newer regulations first effective January 1, 2008)
governing non-qualified plans are subject to the whims of Congress, so expert
guidance is a must.
Please call or email me at rickf@bobermarkey.com for assistance in creating
and designing a plan to help you attract and retain key employees.
BMF&C
What is keeping your
employees
from saying "no" to them
and "yes" to you?
Retirement Plans: Yes, You
Can Offer One
By Cindy H. Mitchell, Tax
Supervisor
 If
asked, most small business owners would probably say that they'd
like to offer retirement benefits to their employees, but
they're afraid doing so would be too cumbersome or expensive.
The unfortunate result is that most owners of small- and mid-sized companies
simply choose not to offer a retirement plan. Among companies with fewer than
100 employees, only 34 percent offer a plan, compared to 64 percent of all
companies, according to the Employee Benefits Research Institute.
But here's another way to look at it: in the continuing battle to attract and
retain the best employees, can you really afford not to offer at least a basic
retirement savings plan?
Positive Changes
The retirement plan landscape has undergone tremendous changes during the
past decade that are favorable for small businesses and their employees who want
to save for retirement. Specifically, legislation has made it easier for small
firms to offer some plans by eliminating cumbersome plan testing requirements,
increasing the annual contribution limits for all plans, and introducing
brand-new retirement plan options.
The Small Business Job Protection Act of 1996 brought about the first big
change, introducing "safe harbor" designs for 401(k) plans. Simply put, this
allows employers to bypass complicated non-discrimination testing if their plans
satisfy the design and notification requirements of the safe harbor rules. In
effect, these safe harbor provisions opened the door for small businesses to
offer 401(k) plans to their employees.
A few years later, another positive change was introduced as part of the
Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, which
increased the annual contribution limits for qualified retirement plans across
the board. It also introduced the concept of "catch up" contributions—additional contribution amounts made by participants age 50 and over—as well
as a new "hybrid" type of plan, the Roth 401(k).
Initially, these increased limits were only temporary—the provisions of
EGTRRA were scheduled to expire after December 31, 2010. However, the Pension
Protection Act (PPA) of 2006 made these increased contribution levels, catch-up
contributions and Roth 401(k)s permanent.
Types of Plans
As a result of these and other positive developments, a variety of low-cost
and easy-to-administer plans are now available that make it possible for even
the smallest companies to offer a retirement plan. The most popular plans are
detailed below:
Simplified Employee Pension (SEP) plan—This is probably the easiest
option, especially for self-employed individuals. The plan document is simple,
and annual IRS reports are not required.
Separate Individual Retirement Accounts (IRAs) are established for each
employee (including the owner), and the employer makes all contributions
directly into these accounts. A SEP provides maximum flexibility: you can vary
contribution amounts from year to year to suit your cash flow, or skip them
altogether during a year if you choose.
In general, contributions must be made as the same percentage of pay for
yourself and any eligible employees (generally defined as employees earning more
than $500). The maximum amount for each employee (including yourself) in 2008 is
$46,000 (or 25 percent of total compensation). The biggest potential drawback is
that SEPs are 100 percent employer-funded; employees don't contribute anything
to their accounts. Also, all contributions are 100 percent vested immediately.
SIMPLE IRA—With this plan, employees maintain their own separate IRAs,
like with the SEP. The main difference is that both you and your employees can
make contributions to SIMPLE IRAs.
Employees can make annual pretax contributions through payroll deductions of
up to $10,500 in 2008 (or $13,000 if they are age 50 or over), and there's a
matching formula for employer contributions, which are mandatory each year for
all employees who participate.
401(k) plan—As noted above, safe harbor 401(k) plans are now practical
for even small employers. They allow employees to save for retirement and reduce
their current taxes via tax-deferred annual contributions of up to $15,500 in
2008 (or $20,500 if they are age 50 or over).
Both the 401(k) and SIMPLE IRA place the primary responsibility for
retirement saving on employees, while giving employers the opportunity to get
involved by making voluntary matching contributions, which can be vested based
on years of service. 401(k)s also give employers the option of allowing
employees to take loans from their account balances.
Roth 401(k) plan—Created as part of EGTRRA and made permanent by the PPA,
the Roth 401(k) is a hybrid plan that combines features of the traditional
401(k) and the Roth IRA. The most attractive is the ability to save money on an
after-tax basis with tax-free accumulation of earnings and tax-free withdrawals,
as with the Roth IRA. The tradeoff is that there is no current deduction for
contributions, as with a traditional 401(k).
Roth 401(k)s are subject to the same contribution limits as traditional
401(k)s: $15,500 (or $20,500 for individuals age 50 or over) in 2008. This limit
is for both Roth and traditional 401(k) contributions combined.
By comparison, the limit for Roth IRAs is only $5,000 (or $6,000 if age 50 or
over) in 2008, and they are available only to those whose adjusted gross income
does not exceed certain limits. Discretionary employer matches to Roth 401(k)s
are made with pre-tax dollars and accumulate in a separate regular 401(k)
account that will be taxed as ordinary income at withdrawal.
Profit-sharing plan—As the name implies, these plans enable employees to
share in the company's profits. Up to $46,000 (or 25 percent of total
compensation) can be contributed to each eligible employee in 2008. Contribution
amounts can vary from year to year, based on the company's financial
performance.
Fiduciary Duties of Sponsors
In any discussion of retirement plans, it's important to note that as the
plan sponsor, you will have very specific fiduciary duties. In particular, the
Employee Retirement Security Income Act (ERISA) of 1974 states that plans must
be created for the exclusive benefit of employees.
One common fiduciary mistake made by plan sponsors is failing to deposit
deferral money withheld from employees' pay into their accounts in a timely
manner. Employers are required to deposit plan participants' deferrals into
their accounts as soon as administratively feasible but in no event later than
15 days after the end-of-month of the deferral. Failure to do so has resulted in
criminal prosecutions against employers.
For assistance in determining the right type of retirement plan for your
company, please call or email me at cindym@bobermarkey.com. BMF&C
Grow Your Leadership Skills
To Grow Your Business
By James E. Merklin,
CPA, CFE, Partner
 If
you own a business, then you are a leader. But this doesn't
necessarily make you a good leader; in fact, the entrepreneurial
roadside is littered with the corpses of companies that were led
by poor or inadequate leaders.
Leadership is what ultimately determines success or failure for most
companies—perhaps even more than the technical and industry knowledge required
to run a business. Given this, it's wise to invest some time and energy into
growing your business leadership skills. Here are a few suggestions:
Conduct a personal leadership assessment. There are many different
characteristics of leadership—vision, motivation, communication, management,
organization—nobody possesses all of them. So start by determining which
leadership qualities you have and which ones you don't. This can be hard to
discern on your own, so ask others who will give you honest feedback (perhaps
via a 360 degree survey).
The results will give you a good idea of the leadership areas you need to
work on. But don't strive to be perfect in every area—there is a threshold at
which point you'll receive diminishing returns for the time and effort you put
into improving skills that don't come naturally for you. It's better to
concentrate on improving areas you're naturally strong in, and surrounding
yourself with other people (employees, professional advisors, close business
associates) who are strong in areas where you may be weaker.
Identify your "highest value contribution." Of all the things that you could
be doing as the leader of your organization, what are the two or three things
that would be the most valuable contributions to your company's success? For
most business owners, they are things that revolve around long-term business
vision and strategy and keeping employees motivated and excited about doing
their jobs. The answer may be revealed in your personal leadership assessment.
Learn to delegate everything else. Every task you perform that doesn't
contribute the highest value to your company is essentially a distraction from
what you should be doing. Letting go of responsibility is one of the hardest
things for most business owners to do, but it's the only way to leverage your
limited time and energy for the greatest good—and help your employees grow and
stay motivated at the same time.
Set your company's strategic direction. Without clear direction from the top,
your company will be like a rudderless ship—blown whichever way the latest
fads and trends push it. It's up to you, together with your management team, to
determine and set the strategic course and communicate this clearly to all
employees and stakeholders.
Inspire your followers. This task cannot be delegated. Only you can provide
the kind of genuine inspiration that will motivate your employees to identify
their own highest value contributions to the company's success and pursue them
with vigor and determination.
This goes beyond just assigning tasks. You must tap into the passions and
desires your employees have to better both themselves and your company. The
extent to which they will do this is largely dependent upon the degree to which
they have embraced your strategic goals and vision.
Celebrate achievements and success. Sometimes, business leaders tend to focus
more on mistakes made and opportunities missed than on progress and success.
Adopt a "glass half-full" perspective wherever possible. Recognize and reward
team and individual achievements publicly—survey after survey has revealed
that public recognition of success is one of the biggest factors in job
satisfaction and employee retention.
Meet and talk regularly with other leaders. You should have a network of
other business leaders, both within and outside your own industry, with whom you
can share ideas, challenges, struggles, successes and other things leaders
grapple with. Try to find a mentor you can meet with regularly; this doesn't
have to be an older or more seasoned leader, but can be a peer—you can
challenge each other to grow as leaders and business owners.
One final thought: Most businesses will grow only to a size that can be
supported by their leadership. So in all likelihood, your company's growth
actually hinges on your own personal leadership growth. If I can be of
assistance to you in development of your leadership skills, please don't
hesitate to call or email at
jimm@bobermarkey.com. BMF&C
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In this feature of InfoLetter, each quarter we provide a profile of
one of our professionals who is available to work with our clients and
friends.
Leif E. Erickson, CPA, Master's of
Taxation
Tax Manager |
Leif graduated summa cum laude from Malone College with a Bachelor of Arts in
accounting and business administration in 2001 where he was an academic
All-American. In 2003, he graduated from The University of Akron with a Master's
of Taxation degree. While at the University, he was a member of the Beta Gamma
Sigma Honor Society.
Leif has more than seven years of public accounting experience in the area of
taxation, including corporate and individual tax planning, FAS 109 calculations,
LIFO studies, Section 199, R&D studies and cost segregation studies. Leif is
particularly adept at researching complex issues and helping clients find the
best possible solutions to their problems.
Leif is a member of the American Institute of Certified Public Accountants
and the Ohio Society of Certified Public Accountants.
"At Bober, Markey, Fedorovich & Company, we realize that client service as
well as staff development is the key to success. And I am extremely proud to be
a part of a Firm that values its employees as much as its clients. BMF&C has
grown and evolved along with the accounting profession, while remaining
committed to the Firm's core principles of quality, value and integrity." BMF&C
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