Executive Benefits Series — Reward & Retain Your Best People (Part 6)
Not every business needs an Executive Bonus Plan.
And not every key employee is the right candidate for one.
After looking at how these plans work, how an employer may encourage retention, and how the benefit may create long-term value for an employee, one question remains:
Is an Executive Bonus Plan the right strategy for the problem you’re trying to solve?
The answer starts with the business and the employee, not the product.
Who Are You Trying to Help?
Start with the employee.
Is this someone whose contribution matters significantly to the success of the business?
Would replacing that person be difficult, expensive, or disruptive?
Is this someone you genuinely want to reward and give another reason to remain with the company?
If there isn’t a compelling employee need, there may not be a compelling reason to create a special benefit.
What Are You Trying to Accomplish?
Once you’ve identified the employee, the next question is why you’re considering the benefit.
An employer may want to reward an important employee, encourage long-term retention, provide a benefit beyond ordinary compensation, help provide life insurance protection, or help an employee build a benefit that may have value later in life.
Those are different objectives, and they don’t necessarily lead to the same solution.
The objective should come first.
What Can the Business Reasonably Commit?
The next question isn’t how much premium should go into a life insurance policy.
It’s simpler:
What can the business reasonably commit to this employee?
An Executive Bonus Plan should make sense for the employer as well as the employee. The amount and duration of the benefit should reflect the employer’s objectives, budget, and ability to maintain the commitment.
A benefit designed to create long-term value should begin with a commitment the business can reasonably support.
How Much Control Does the Employer Need?
Employee ownership is one of the distinguishing characteristics of an Executive Bonus Plan.
But some employers also want the benefit to encourage an employee to remain with the business.
As discussed in How a Restrictive Endorsement Agreement Works, an employer may use a Restrictive Endorsement Agreement to place conditions on certain policy rights while the employee continues to own the policy.
Whether that type of arrangement is appropriate depends on what the employer is trying to accomplish.
If retention is an important objective, some form of restriction may be worth considering. If it isn’t, a different structure may make more sense.
Will the Employee Actually Value the Benefit?
A benefit isn’t particularly effective as a reward or retention strategy if the employee doesn’t value it.
For some employees, life insurance protection, potential cash value accumulation, and the possibility of supplemental retirement income may make an Executive Bonus Plan particularly meaningful.
As we explored in Turning Today’s Bonus Into Tomorrow’s Retirement Income, a properly designed policy may continue creating value long after the original bonus has been paid, subject to policy performance and proper management.
Other employees may value something entirely different.
Understanding the employee matters just as much as understanding the strategy.
The Right Plan Starts With a Conversation
Only after answering these questions does it make sense to talk about structure.
Who are you trying to reward or retain?
What are you trying to accomplish?
What can the business reasonably commit?
How important is retention?
And will the employee value what you’re offering?
Structure follows objectives. Products follow structure.
If you have an employee you want to reward or retain, that’s the place to start. Tell me about the employee and what you’re trying to accomplish, and we can determine whether an Executive Bonus Plan, or another approach, makes sense.
Explore the Executive Benefits Series
- The Employee You Can’t Afford to Lose (Part 1)
- A Bonus That Builds an Asset (Part 2)
- How an Executive Bonus Plan Works (Part 3)
- How a Restrictive Endorsement Agreement Works (Part 4)
- Turning Today’s Bonus Into Tomorrow’s Retirement Income (Part 5)
- Is an Executive Bonus Plan Right for Your Business? (Part 6)
Kurtz Lytle is the founder of IUL.Solutions, an independent insurance and retirement income practice based in Nashville, TN. All recommendations are made only after a full suitability review in accordance with each state’s insurance regulations. IUL.Solutions does not provide tax, legal, or investment advice. NPN #8993693.