With constant turn-over and the threat of key employees leaving the business, it is difficult for the business owner to create a stable work environment. Especially for small businesses, deemed to have 500 or less employees, the uncertainty adds stress to the business making strategizing for the company’s future very difficult. Key employees who significantly contribute to the company’s revenue are essential to the ongoing success of a small business and, to retain key employees, small business owners may need to implement unique financial solutions. Creating special key employee bonus plans and supplemental retirement plans makes it difficult for competitors to lure away key employees. These financial strategies also make it less likely that key employees will strike out on their own using the skills and experiences gained from their current employer to compete against it.
Many small business owners struggle to retain key employees, especially those with the ability to drive revenue. Small businesses target competitors to recruit proven talent away for higher compensation. The medical and legal professions frequently face key employees departing to join a competitor’s practice or to open their own solo practitioner’s office. In the medical profession, an unprecedented number of nurses and doctors are looking to leave their current jobs. A recent industry survey conducted by the Mayo Clinic reported one in five physicians are planning to leave their current practice within the next two years.
Finding unique ways for small businesses to retain key employees often requires a creative and collaborative approach. Working with the company’s attorney and CPA, a well-informed financial professional can offer the business owner an affordable and compelling incentive plan for the key employee to stay. Bringing clarity to all involved, the company can strategize about its future knowing the key revenue contributors will remain engaged in the business. The end result is a plan that spells out the obligations of the business owner and the key employee and establishes the financial professional as a trusted business advisor.
Key employee bonus and incentive plans can be very flexible. Because they are funded with non-qualified money, and not subject to ERISA guidelines, the small business owner can offer an individual key employee specific terms focused to meet their particular needs. If the business owner has more than one key employee, they do not have to offer the same bonus or incentive structure to both key employees. Rather the business owner can craft each plan with unique features tailored for the individual key employee.
Take the example of a medical clinic trying to attract and keep medical professionals. Competing against large medical conglomerates with bigger budgets and more benefits is difficult for a smaller medical provider. One strategy is to offer the key employee a plan that sets aside a percentage of cash equal to the revenue they bring to the company into a life insurance policy that will pay out to the key employee if they stay for a certain number of years, for example 10-15 years. The life insurance policy and plan can be structured to provide the key employee’s family with death benefit protection in case of an unexpected early death. The company can also keep a portion of the death benefit in case of death of the key employee which the small business owner can use to recruit a new replacement, or to replace some of the lost revenue related to the key employee’s passing. When structuring the plan, the terms can state that if the key employee leaves before a vesting period of 10-15 years, for example, then the company retains the value of the life insurance policy, and the cash value account can be immediately used to recruit a replacement. This structure offers a clear incentive for the key employee to stay while at the same time creating a plan to protect the small business from loss.
Another plan can be structured to attract newly graduated medical professionals with a plan to assist paying off their education debt. According to 2022 data, approximately 73 percent of medical school graduates have education debt, including premedical and medical school debt, averaging roughly $250,990 per graduate. Incentive and bonus plans using life insurance to help new graduates repay education debt can be a successful strategy to attract and retain key employees.
These solutions are not specific to the medical profession and can be used in any industry. The key is knowing how to engage the small business owner in a meaningful discovery conversation to learn of their challenges and goals. Spending time to understand the owner’s specific situation before offering any solutions will garner trust and a willingness to explore solutions. For these situations, fact finders are just the beginning, and often more than one conversation is needed to fully understand the business owner’s perspective. As the financial professional, the next step is to ask questions and dive deeper into the current circumstances and future goals for the company and its owner. There can be more than one solution depending upon the priorities of the business owner. If new to life insurance and the benefits a properly structured policy may offer, it is important to learn which features best support the plan obligations before making any recommendations. It is also necessary to be able to partner with the business owner’s attorney and CPA to collectively explain to the business owner the plans structure and how the life insurance policy supports the benefits being provided to the owner and key employee. And finally, choosing the right life insurance contract and properly funding the contract to meet the business owner’s needs is critical to the plan’s success.
For small business owner’s in any industry or profession, the ability to attract and retain key employees is essential. Using non-qualified incentive and bonus plans funded through life insurance, a small business owner can find new and unique ways to compete in the marketplace for talent.
- Sinsky MD, Christine, Brown PhD, Roger, Stillman MD JD, Martin, Linzer MD, Mark. Covid-Related Stress and Work Intentions in a Sample of US Health Care Workers, Dec 08, 2021 https://www.mcpiqojournal.org/article/S2542-4548(21)00126-0/fulltext.
- Hanson, Melanie. “Average Medical School Debt” educationData.org, November 22, 2022, https://educationaldata.org/average-medical-school-debt.