The successful businessman, Andrew Carnegie, stated, “Take away my factories, my plants; take away my railroads, my ships, my transportation; take away my money; strip me of all of these, but leave me my men and in two or three years, I will have them all again.”
Carnegie understood that in order to be successful, a business had to have successful employees. A successful leader does not do every job; instead, he or she delegates some responsibility for the success of the business to others.
If a key employee is unable to continue to work, many businesses find that because of the skill and experience of this key employee, the success of the business may falter. This leads to several questions a business owner must address when it comes to key employees.
- Are there key employees who make a substantial contribution to the success of the business?
- What would the financial impact be on the business if a key employee terminates employment or is unable to perform his duties?
- Has a key employee ever gone over to a competitor?
- Has a key employee ever become a competitor?
- What benefits, on a selective basis, are offered to key employees? Do competitors offer the same benefits or more appealing benefits?
- As the owner of the business, are business dollars being used to satisfy personal financial security needs?
Facts About Key Employees
While every employee is important for a business to run smoothly and grow, key employees are frequently the glue that hold a business together. If a key employee suddenly terminated employment, the result could be a reduction in profits, increased competition, replacement costs, and a loss of confidence among customers and creditors. A business owner should not rely on others to assist in achieving their personal financial security.
Executive benefit planning is aimed at assisting business owners in identifying key employees and rewarding them with selective executive benefits. This will help to retain their services, and to help a business owner determine the most effective use of company dollars to provide for their personal financial security needs.
Rewarding and Retaining Key Employees
The most valuable business asset is often not the equipment, buildings, or inventory, but they key employees who contribute significantly to the success of the business. If executive benefit planning is not in place, it may not be possible to adequately retain key employees. When these employees make a significant contribution to the success of the business, a business can suffer great losses if a key employee no longer contributes to the growth of the business.
In the event a key employee terminates employment; the results can be harmful to a business:
- A reduction in profits may be realized.
- An increase in competition can cut into market share resulting in decreased profits.
- The additional cost of recruiting, hiring, and training a suitable replacement.
- Loss of confidence with customers, creditors, and other key employees.
Rewarding Key Employees
Before handing out selected benefits to key employees, a business owner should:
- Identify the employees who make a substantial contribution to the success of the business.
- Determine the value of the key employees to the business.
- Determine the replacement cost to the business of replacing a key employee.
- Establish the impact on the business if a key employee started a competing business or became employed by a competitor.
- Identify the types of benefits the competition offers to their key employees.
- Pinpoint the highest priority financial security needs to the key people in the business.
- Look at current benefit plans to determine if they meet the expectations of the key employees.
Satisfying Personal Financial Security Needs
As a business owner, one of the key concerns is using business dollars effectively in order to satisfy personal financial security needs. For most business owners, much of their time and energy is devoted to building and maintaining a profitable business that produces a stream of income that allows for a particular lifestyle and family needs.
As an independent business owner, depending on others to assist in achieving personal financial security goals is a recipe for disaster. Instead, focus on how the business can be used to satisfy any personal financial security needs, such as:
- Protecting personal income in the event of death or disability.
- Providing funds to pay the mortgage on the family’s home in the event of death or disability.
- Meeting the needs of educational goals for children.
- Meeting investment goals.
- Planning for an adequate retirement income.
- Providing ample estate liquidity.
Some questions that should be considered when the objective is to use business dollars to satisfy personal financial security needs are:
- Is there adequate income to maintain the family’s lifestyle in the event of your death?
- In the event of your death, would your family be able to afford to remain in the family home?
- Have you started a college savings plan for your children?
- What concerns do you have pertaining to your children’s education?
- Is there a savings investment plan in place? If so, are you satisfied with the performance of this savings investment plan?
- Is retirement in your future? Is there a plan in place for your retirement?
- Is there sufficient liquidity in the estate to satisfy estate settlement costs and estate taxes?
- How much of the value of the estate is represented by the business? Are you aware of this amount?
- Are there personal life and disability income insurance premiums in place that legally can be paid by the business?
- Are you taking full advantage of the business to meet any personal financial security goals?
With the complexity of using the business income to set up and pay for personal financial security for you and your family, consult with a qualified financial planner. There are numerous avenues a business owner can take to protect the business and provide financial security for themselves and their families.