Executive Compensation Plan Overview
The most important element of a successful business is its people; more specifically, its key people.
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"Take away my factories, my plants; take away my railroads, my transportation; take away my money; strip me of all these, but leave me my people and in two or three years I will have them all again."
A key person is an owner or employee of a business who makes substantial contributions to the profits of the business. The key person may be a sole proprietor, a partner, shareholder or an employee of a sole proprietorship, partnership or corporation.
For key person insurance purposes, the insured owner or employee may be thought of as a valuable asset that is insured by the business, in the same manner that a business would insure its buildings against physical damage. The most effective method of offsetting the loss of a key person by death or disability is to arrange for the payment of cash to the business at the time of death or disability.
The following are the advantages of a cash indemnity:
Cash - will allow you to carry on the business. Cash obtained without use of credit, and without utilizing a businesss working capital, is the only known remedy for the problems a business faces resulting from the sudden death or disability of a key person.
Cash - will alleviate customers concerns about the future viability of the business and its operations, despite the loss of the key person.
Cash - will cover any potential losses during a re-adjustment period. There may be a substantial drop in earnings following the death or disability of a key person until a successor has been found and gains experience, thus stabilizing the business.
Cash - will attract a new person. Cash will permit the business to go into the open market with an attractive offer to the qualified person it needs to take the place of the deceased or disabled key person.
Cash - will protect credit. Cash will bolster the credit of a business by guaranteeing payment of all obligations. It will eliminate the potential risk of financial ruin to a business whose physical assets are few and whose credit depends upon the reputation and ability of a key person.
Cash - will protect the guarantors of the businesss loans. Guarantors of loans to the business may be obligated to pay if the bank or lending institution calls in the loans.
Cash - will retire mortgages and other obligations. Cash can be used to retire debts and obligations, thus increasing the working capital of the business and allowing for the business to expand, diversify or renovate.
Cash - will guaranty the continuance of dividends. Profits are often reduced upon the death, retirement or disability of a key person. Cash will make it possible for a private corporation to continue its regular dividends scheduled to its shareholders. Further dividends could be paid out tax free to the estate up to the amount in the CDA.
Cash - may prevent a takeover. Cash can strengthen the financial stability of a business and prevent a forced sale of the business to outside interests.
Business owners recognize the value of key people in their organizations. These individuals have one thing in common they make a significant contribution to the operation and profitability of their company.
Keeping and motivating key employees takes more than just salary. Since these individuals usually fall into higher tax brackets, an increase in salary is not always as beneficial to the employee as other benefits.
Keeping key employees takes executive compensation plans and packages full of motivational benefits, including:
Salary continuation plans;
Supplemental retirement pensions;
Retirement compensation arrangements;
Group benefit packages;
Split dollar coverage life insurance; and,
Personal financial planning.
What better way to motivate key people, than to tie their compensation to the profitability of the business? Both sides benefit from this; top employees earn compensation advantages and businesses retain their most valuable resource, as well as receiving valuable tax deductions.