By Boyce F. Lowery, CLU®, ChFC®
The U.S. unemployment rate has been under 5% for 17 consecutive months and has most recently dropped to 4.2% as of September, 2017. In many states that rate is even lower. In Utah for instance, the unemployment rate is at an eye-popping low rate of 3.4%. Most people think that’s a good thing, but it can cause real trouble for business owners. In full employment environments such as this, it’s no longer workers that are competing for jobs; it’s employers that are competing for workers. The more highly skilled the employee, the more they are in demand and the more they are being scouted by your competition.
With a vibrant business environment across many industries, employers are no longer able to post an ad and magically find the talent they need when they need it. Often, finding talent means working with a qualified recruiting firm or a temporary staffing firm, depending on the nature of the position. That makes finding employees both time consuming and expensive. It can cost up to twice the annual salary of a higher level or executive employee just to replace them.1 That makes employee retention vital. Here are five benefit strategies to improve employee retention and to avoid the costs of replacing key employees. One of those strategies stands above the rest. Read more to find out which one.
One of the first things a worker considers when exploring a job change is the salary difference. If your employees are underpaid, it will be easy for other companies to steal them away from you. You need to pay your employees at or above market rates.
Industry benchmarks are an easy way to see how your salaries compare with the competition. However, many of your employees’ skills are marketable across industries, so don’t forget to assess the broader employment market as well. While salary tends to be the starting point, you need to offer a full benefits package that includes more than just an annual salary. Unfortunately, paying your employees more money often will not result in meeting your goal of employee retention. Sadly, if you raise salaries and a given employee still departs for greener pastures at some point thereafter, that employee takes the money you paid trying to retain them while leaving you feeling duped.
Employees expect to earn their salary, but bonuses can be unanticipated and therefore garner more appreciation and develop higher morale. This works best with bonuses that are tied to performance or that are completely unexpected. Regular bonuses, such as a Christmas bonus, fail to motivate and become expected just like a salary.
An effective bonus plan provides financial incentives to employee performance or certain milestones, such as the employee meeting clearly defined goals. The greater the potential bonus, the more attractive it will be to both potential and current employees. When bonuses are tied to company performance, owners don’t have to worry about having the means to pay for any bonuses promised.
Despite the attractiveness of a bonus plan to some employees, they still are not as efficient for the employer as another option. Keep reading.
Phantom stock, or shadow stock, is a program that gives employees many of the benefits of stock ownership without actually giving them any stock. This is a great way to tie incentives directly to company performance. It can be very helpful for organizations which are restricted in their ability to award actual stock shares, such as limited liability corporations, sole proprietors, and S-companies restricted by the 100-owner rule.
Under a phantom stock program, hypothetical stock (synthetic equity) is issued to select employees. It can be reserved just for management or handed out across the board. It can be used selectively as a reward or bonus or tied to other factors, such as seniority. There is a lot of flexibility in how phantom stock is administered, as it has few restrictions or requirements regarding its use. The program can also be changed at senior management’s discretion.
The phantom stock follows the valuation of the company providing the phantom stock program. When owners of stock shares receive dividends, employees with phantom stock receive dividends as well as if their phantom stock was real stock. After a designated amount of time, the cash value of the phantom stock may be distributed to participating employees.
Phantom stock is a deferred compensation plan and, as such, a phantom stock arrangement must meet the requirements laid out by IRS code 409(a). A phantom stock plan should be set up under the guidance of an attorney with all of the important details in writing.
For many successful smaller companies, a phantom stock plan is perhaps not a good fit for various reasons. From an employee retention standpoint for any size company, this plan has the same weakness as the salary and bonus options discussed above. An employee could begin receiving benefits immediately upon conveyance of the phantom stock rights. Still nothing would prevent them from leaving the company at some point having received benefits meant to keep them as long term employees.
“Golden Handcuffs” is a term used to describe a collection of financial incentives designed to keep an employee at a company. There are a number of options from which to choose. Golden handcuffs improve employee retention because there is always a future reward that an employee would have to forfeit if they left the company.
In my world, I frequently work with businesses looking for a way to retain their most vital employees. They want to incentivize those employees to stay with the company for a long period of time, but they don’t want to reward that employee until that timeframe has passed for the reasons covered earlier in this blog by the author.
We often use a Supplemental Executive Retirement Plan (SERP) fully funded by the employer as the tool for a golden handcuffs plan. The plan is funded through the use of a specially designed life insurance contract that is 100% owned by the employer. As such, the cash in the life insurance policy remains on the corporate balance sheet and is fully available to the company if needed for ongoing operations.
The corporate owned life insurance policy is the “sinking fund” in which the employer makes payments to accumulate the funds necessary to meet the obligations of the golden handcuffs agreement. Further, it can serve as “key person” life insurance coverage in the event of the untimely death of the employee.
This arrangement provides the incentive for the employee to stay long term and protects the employer from the costs expended on other options if the employee leaves. That’s a win win.
Google is famous for the benefits that they offer employees, from gourmet cafeterias to free haircuts and massage rooms. Chances are that you aren’t in a position to hire a full-time masseuse, but that doesn’t mean you can’t offer additional benefits. With 60% of people reporting that benefits and perks are a major factoring in deciding whether or not to take a job offer2, they are too important to be overlooked.
The Harvard Business Review did a study asking people which benefits they would consider the most when deciding between a job with high pay and a lower paying job with more benefits. These are the top benefits that people want, ranked in order of importance to employees:
- Better health, dental, and vision insurance
- More flexible hours
- More vacation time
- Work-from-home options
- Unlimited vacation
- Student loan and tuition assistance
- Paid maternity/paternity leave
If you would like to discuss the pros and cons of any of these employee retention strategies with an experienced financial professional, gives us a call at 888-827-0146. Together we can analyze the best way for your company to retain employees without sacrificing profitability.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the owner of Suncrest Advisors, he aims to provide financial security and peace of mind to business owners, executives and professionals, and high net worth individuals across the United States. Along with more than four decades of experience, he is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.