The business was looking for retention plans, and it all started with the 401(k)

We were introduced to a large landscaping company with around 100 employees to assist with implementing a retirement account, so everyone could participate. The impression from the managers was the 401(k) would help retain the employees who were long-standing and valuable to the company. We helped them understand that these types of plans fall into the category of “recruiting” because they are often provided as a tool to attract new talent. Since we manage 401(k) plans, the first step was to get the plan designed and implemented but return to our conversation about how to effectively retain employees.

How the conversation moved away from the 401(k)…

As we worked through the process to design, set up, and enroll people into the 401(k), there were over a dozen people that were identified who could fit into the category of “key employee.” You might be wondering what a “key employee is.” We define a key employee as someone who could impact the profitability and time of the owner if they left voluntarily or involuntarily. This could be by death, disability, disagreement, or even a new job opportunity. This company has many people who have dedicated ten or more years to the overall profitability and culture.

The steps taken to organize and implement retention programs

For us to appropriately design retention programs for key employees, we had several conversations to organize everyone into a list by department, tenure, and income. For the program to work effectively, it had to check the box for four different items.

  • Is the benefit substantial? 
The employee might get excited about receiving a future payout, and we have found that the program works best when the bonus is about 25-30% of their total compensation during the vesting period.
  • How long does the employee have to wait to receive the bonus?
Most retention programs should target at least seven years or longer. There are other options for shorter-term programs, and those would be implemented at larger corporations.
  • Can the business recover the costs if the employee no longer works there?
The bonus is delayed for at least seven years, and, oftentimes, the business is not responsible for having anything set aside to pay the future bonus. The only downside is when the business does not have the cash to make the bonus payments. There are options to begin funding the bonus now while providing ways to address if the employee were to become sick, injured, or pass away.
  • Does the retention bonus solve an emotional problem? 
When speaking with the employee, it’s a good idea to get them thinking about what this money could do for them. A few examples are student loan repayment, college education for their children, or extra funds for retirement. There are many ways to attach the future bonus to something they find important. This will get them thinking twice about leaving when times get tough.

With all these factors in mind, we worked closely with the upper management and owner to design plans catered to these employees. To avoid the possibility of the business not having the funds or if the employees become sick, injured, or passes away, there were specific programs used that would prepare the business.

For to make the future bonuses official, we engaged with a business attorney to draw up compensation agreements that outlined how the plan would work, when the employee would be eligible for payment, and how much that bonus would be in the future.

Something to take away from this conversation

These retention programs can work for almost any type of business that has an employee in addition to the owner. We actively work with businesses to review the risks this can have on the success of their business and the likelihood of them continuing their lifestyle into retirement when they’re ready to exit.

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