Golden Handcuffs: What Are They?
Golden Handcuffs is a method to help attract, retain, and reward key executives. Companies that design and implement effective golden handcuff plans can accomplish the following important outcomes
- Reduce the risk that top employees leave prematurely or unexpectedly
- Provide a benefit that cannot be matched by competitors or individually
- Create incentives for top job candidates to join your company
- Protect the company against the risk of losing customers, employees, or trade secrets should an employee who has those relationships and information leave
- Thank top employees for their service with the company
A golden handcuff strategy must provide a key employee benefit that a competitor could not easily or even possibly replace. An Executive compensation plan utilizing life insurance with its tax benefits and corporate pricing is the preferred golden handcuff program for both employees and employers. This allows a company to provide permanent life insurance as a select benefit to your top employees. This may only be offered to only key employees. In fact, unlike any other benefits, it does not fall under the ERISA legislation, which protects the interests of employee benefit plan participants and its beneficiaries from discrimination.
What is Often Missed
In estate planning, the importance lies in the fact that when individuals consult an attorney, there is often insufficient attention given to the internal family dynamics that can lead to significant strife and conflict. Too often, documents are drafted without considering sibling rivalries or other family tensions. At Faircare Advisors, our goal is to carefully customize and design plans that anticipate and address potential conflicts, fostering harmony and ensuring a smoother transition for all involved.
Golden Handcuffs: What They Are NOT.
Bonus Plan
The employer is only as good as the last bonus, or the ability to match and exceed a competitive bid for your employee. A Bonus plan is not an effective way of providing true golden handcuffs
Pension or profit-sharing plan
A pension plan or profit-sharing plan must be offered to all employees. It can be more expensive and may give the savings an employee needs to fly away and become a competitor or switch to a competitor, much like bonuses
Equity Interest of Stock Option Plan
As a stock owner one can create some real legal issues for your business adding extra stress as a business owner. It also may be transferred to a spouse or required to be liquidated on an unexpected death. In either case, it is not a good plan for either party unless that employee is with the company until the exit, if there is one. From the employee’s point of view, it does not guarantee a job, it does not guarantee a dividend or distribution. It only guarantees a percentage of the company in the event of a sale.
Many business owners and advisors assume that a golden handcuff plan requires sharing actual ownership interest with the employee who will be included. This is not true and sharing ownership with employees presents significant risks and downsides.
Real Life Example of Golden Handcuffs
Imagine an employer is trying to hire you, and they explain you have two different options: I do not recommend employers lay out that choice to employees or prospects.
- Salary of $150,000
- Salary of $145,000 with a benefit that if you die while you are employed, your named beneficiary will receive 15 years of continued salary.
Most employees with family members will clearly see a valued benefit that would be (and will be) hard to obtain themselves especially if there are health problems.
Employers should design compensation proposals for the key executive employees they need to attract or retain with the strategic goals to have the “Golden handcuff” effect.
Plans may be designed to provides a specific amount of retirement income or equity – based valuations to determine benefits triggered by sale, retirement date or death are available.
The Best Solution for True Golden Handcuffs:
If your company is truly looking to attract, retain, and reward your best employees you must offer the following qualities in your golden handcuff plans:
Conclusion:
One of the biggest threats your business faces is the possibility that your top employees will move to a competitor. Not only does this result in a loss for your organization, but it results in a gain for your competition. It is essential that you put in place the proper arrangements that will ensure your key employees stay where they belong. Whether you’re looking for control, flexibility, simplicity, or deductibility in a benefit design, using life insurance may provide the added incentives to keep your key executives with your organization, and keep your organization at the top.
