Paying your TOP Producers to Keep them Excited to Produce and Earn more
Presented by Patty DeDominic
Thanks to Payscale.com and Investopedia.com for some of these photos, and this data.
Why would you want to cut someone’s base pay?
Maybe to give them the incentive plan of a lifetime? There are many ways to incent your top people and it’s important to understand compensation strategies to maximize your business value. This is important to your people, your reputation as an employer and your profits in the future. You can make a huge impact on the value of your business to its customers too when your comp plans are aligned with business goals. Develop a strategy to retain top talent, to reward higher producers and get more referrals from happy employees who are motivated to help the company achieve its goals.
• Different strokes for different people. Why it pays to be generous. A good compensation strategy will help you achieve your business goals faster and attract and keep the best people.
Studies show that over 54% of Small Businesses offer variable incentive plans in addition to hourly and salaried paychecks. Over 83% of major corporations offer these types of incentives to senior managers and exempt personnel.
Find payrates for employers and jobs: Salary.com, Glassdoor.com Payscale.com
• Variable Bonus Plan https://www.payscale.com/content/whitepaper/variable-pay-playbook.pdf
• Performance based
• Commission only or Draw Against Commission, refundable or non-refundable
• Innovations in Compensation with Retention & Reward/motivation as the goal
o https://www.investopedia.com/terms/s/sar.asp Stock Appreciation Rights &
o Phantom stock and ESOPs
o https://www.investopedia.com/terms/p/phantomstock.asp
• Performance Reviews and the relationship with Comp
Stock Appreciation Right (SAR)
What Are Stock Appreciation Rights?
A stock appreciation right (SAR) is a form of bonus compensation given to employees that is equal to the appreciation of company stock over an established time period. Similar to employee stock options (ESO), SARs are beneficial to the employee when company stock prices rise; the difference with SARs is that employees do not have to pay the exercise price, but receive the sum of the increase in stock or cash.
The primary benefit that comes with stock appreciation rights is the fact that the employee can receive proceeds from stock price increases without being required to buy anything outright.
Understanding Stock Appreciation Rights
Stock appreciation rights offer the right to the cash equivalent of value increases of a certain number of stocks over a predetermined time period. This type of bonus is almost always paid in cash; however, the company may pay the employee bonus in shares. In most cases, SARs can be exercised after they vest; when SARs vest, it simply means that they become available to exercise. SARs are generally issued in conjunction with stock options in order to assist in funding the purchase of options or to pay off taxes due at the time the SARs are exercised; these are referred to as "tandem SARs."
Like several other forms of stock compensation, SARs are transferable and are often subject to clawback provisions (conditions under which the company may take back some or all of the income received by employees under the plan, such as if the employee goes to work for a competitor within a certain time period or the company becomes insolvent). SARS are also frequently awarded according to a vesting schedule that is tied to performance goals set by the company.
SARs are taxed the same way as non-qualified stock options (NSOs). There are no tax consequences of any kind on either the grant date or when they are vested. Participants, however, must recognize ordinary income on the spread at time of exercise, and most employers will withhold supplemental federal income tax of 22% (or 37% for the very wealthy) along with state and local taxes, Social Security and Medicare. Many employers will also withhold these taxes in the form of shares. For example, an employer may only give a certain number of shares and withhold the remainder to cover the total payroll tax. As with NSOs, the amount of income that is recognized upon exercise then becomes the participant's cost basis for tax computation when the shares are sold.
KEY TAKEAWAYS
• Stock appreciation rights (SARs) are a form of compensation, often received as a bonus, that awards the cash value equivalent to the change in a company's stock over some vesting period.
• Unlike stock options or stock bonuses, SARs are most often paid in the form of cash and do not require the employee to own any asset or contract.
• SARs are beneficial to employers since they do not have to issue additional shares as compensation, which would dilute share price and earnings.
Advantages and Disadvantages
SARs have many advantages, the greatest of these being flexibility. SARs may be created in a variety of different designs that work for each individual. This, however, comes with numerous choices and decisions that must be made, including which employees receive bonuses and the value of those bonuses, liquidity issues, eligibility and vesting rules.
Employers like SARs because the accounting rules for them are now much more favorable than in the past; they receive fixed accounting treatment instead of variable and are treated in much the same manner as conventional stock option plans. But SARs require the issuance of fewer company shares and, therefore, dilute the share price less than conventional stock plans. And like all other forms of equity compensation, SARs can also serve to motivate and retain employees.
Phantom Stock Plan
What Is a Phantom Stock Plan?
A phantom stock plan is an employee benefit plan that gives selected employees (senior management) many of the benefits of stock ownership without actually giving them any company stock. This is sometimes referred to as shadow stock.
Rather than getting physical stock, the employee receives pretend stock. Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits.
How Phantom Stock Plans Work
There are two main types of phantom stock plans. "Appreciation only" plans do not include the value of the actual underlying shares themselves and may only pay out the value of any increase in the company stock price over a certain period of time that begins on the date the plan is granted. "Full value" plans pay both the value of the underlying stock as well as any appreciation. Both types of plans resemble traditional non-qualified plans in many respects, as they can be discriminatory in nature and are also typically subject to a substantial risk of forfeiture that ends when the benefit is actually paid to the employee, at which time the employee recognizes income for the amount paid and the employer can take a deduction.
Phantom stock may be hypothetical, however, it still can pay out dividends and it experiences price changes just like its real counterpart. After a period of time, the cash value of the phantom stock is distributed to the participating employees.
Phantom stock, also known as synthetic equity, has no inherent requirements or restrictions regarding its use, allowing the organization to use it however it chooses. Phantom stock can also be changed at the leadership's discretion.
Phantom stock qualifies as a deferred compensation plan. A phantom stock program must meet the requirements set forth by Internal Revenue Service (IRS) code 409(a). The plan must be properly vetted by an attorney, with all of the pertinent details specified in writing.
KEY TAKEAWAYS
• A phantom stock plan, or 'shadow stock' is a form of compensation offered to upper management that confers the benefits of owning company stock without the actual ownership or transfer of any shares.
• By simulating stock ownership, equity does not become diluted for other shareholders.
• Large cash payments to employees, however, must be taxed as ordinary income rather than capital gains to the recipient and may disrupt the firm's cash flow in some cases.
Stock Appreciation Rights vs. Phantom Stock
SARs are similar in some ways to so-called phantom stock. The major difference is that phantom stocks are typically reflective of stock splits and dividends. Phantom stock is a promise that an employee will receive a bonus equivalent to either the value of the company’s shares or the amount that the stock prices increase over a given period of time. The bonus an employee receives is taxed as ordinary income based on the time that it is received.
Because phantom stock is not tax-qualified, it does not have to follow the same rules that employee stock ownership plans (ESOPs) and 401(k) plans must follow.
Example of Stock Appreciation Rights
As an example, consider an employee is given 200 SARs at their end-of year review as a performance bonus which mature after a period of two years. The stock of the company then proceeds to increase by $35 a share over that two-year period. This results in the employee receiving $7,000 (200 SARs x $35 = $7,000) in additional compensation.
Employee Stock Ownership Plan (ESOP)
What Is an Employee Stock Ownership Plan (ESOP)?
An employee stock ownership plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company. ESOPs give the sponsoring company, the selling shareholder, and participants receive various tax benefits, making them qualified plans. Companies often use ESOPs as a corporate-finance strategy and to align the interests of their employees with those of their shareholders.
KEY TAKEAWAYS
• An employee stock ownership plan gives workers ownership interest in the company.
• ESOP is usually formed to allow employees the opportunity to buy stock in a closely held company to facilitate succession planning.
• ESOPs encourage employees to do what's best for shareholders since the employees themselves are shareholders and provide companies with tax benefits thus incentivizing owners to offer them to employees.
• Companies typically tie distributions from the plan to vesting.
Need more help? patty@dedominic.com
Patty DeDominic is a business coach to businesses exceeding $10 million in annual sales. Named CEO of the Year by the Los Angeles Business Journal, she also received a Lifetime Achievement Award from two United States Presidents and built, grew, then sold a 600-employee firm that is now part of a billion-dollar staffing leader.
dedominic.com or text me at 805 453 7490 to see if we can help you find more than a few hundred thousand hidden in your business. We did with 4 new clients this quarter. My goal is to help clients net one million more before year-end!