Build long term relationships with your employees

by Tim Foster

"Survival of the fittest" best describes the competitive marketplace in which today’s business attempts to not merely survive, but thrive. A business owner must identify and solve issues regarding the competition for customers and clients on a daily basis. As a business owner, are you overlooking the competition for one of your top resources – your own employees?

Today’s workers have a mindset that is much different from those of previous generations. Simply put, they expect more from their employers--especially when it comes to compensation and work culture. Employers who want to find and keep qualified, motivated, top-performing employees need to re-evaluate the compensation packages they are offering in order to accomplish this goal. Salary is obviously important, but it is far from the end of the analysis. Rather, it takes more thought, effort and ingenuity to create both the total and tax friendly compensation packages that deliver on the proverbial "carrot."

The Basics
The starting point of the compensation discussion should be base pay. This is the fixed portion for salaried employees or wages earned by hourly workers. In addition to base pay, one way to create a competitive advantage and attract workers is to include a compensation program that offers regularly scheduled step increases for employees who stay with the company. Another strategy is to offer increased pay or bonuses for defined achievement. Bonuses allow firms to recognize performance without increasing fixed costs. This type of compensation can be tied to company goals and can be used as a tool for motivating employees who demonstrate specific and desirable behaviors such as working overtime, and making significant contributions to team efforts.

Compensation Add-ons
Benefit packages add value to the total compensation plan. Some of the most common and desirable benefits include medical and dental insurance, sick/personal leave, paid holidays and paid vacations. In addition, some companies are offering optical/vision insurance, life insurance, 401(k) plans, deferred compensation plans, pensions, profit sharing, expense reimbursement, tuition reimbursement and access to health club memberships.

To many employees, benefit packages are as important as the jobs themselves. While some of these benefits mean out-of-pocket expenses to companies, some do not. In either case, the expense often makes the difference in a company’s ability to recruit and retain the best qualified employees and producers.

Investing in the Future
401(k) plans are one of the most popular options companies can offer to their employees. These plans enable employees to build up a tax-deferred retirement account. Some companies offer an amount of matching funds relative to the individual’s contributions. There is a maximum amount that can be contributed by the employee. Because a 401(k) is a taxed-deferred plan for retirement, there are steep penalties for withdrawing funds early. So with the offering, it’s important to provide an overview of the pros and cons of certain benefits to employees so they can make informed decisions.

An area of benefit commonly overlooked by business owners, especially for themselves, is deferred compensation planning. If your business is producing more income required to maintain your current or desired lifestyle, you are paying too much tax. Monies paid in tax by the business or individual business owner are gone forever. Some would applaud you on your patriotic effort to redistribute the wealth, but certainly better options exist – a nonqualified deferred compensation plan represents one of those opportunities.

Qualified and Nonqualified Plans
There are two types of deferred compensation plans: qualified and nonqualified plans. A qualified retirement plan offers every employee the opportunity to save for retirement. Examples of qualified plans are 401(k) plans, pension plans and profit sharing plans. For a company to qualify for a tax break, the plan must be non-discriminatory and offered to every employee. Employees are not immediately taxed on the contributions made to their retirement account and employers get to deduct their contributions to such plans. These plans are eligible for favorable tax treatment under the Internal Revenue Code and benefit both employees and the employer.

Qualified retirement plans, however, do not always provide the flexibility and options that best suit employees and employers. What if you want a separate plan that can be offered only to certain employees? A nonqualified plan allows for the deferment of income to a select group of key employees. The plan doesn’t have to be made available to every worker, nor is this type of benefit subject to the same reporting and regulatory requirements as qualified plans.

A nonqualified plan may allow for the deferral of salary, bonuses or supplemental compensation. In some cases, the individual can elect whether to defer compensation or to receive it currently. This is similar to a salary reduction or cash deferred arrangement under a qualified plan. On the other hand, the agreement can provide for compensation that is payable only on the occurrence of future events.

Deferring payment may be attractive because individuals can delay compensation to the future where their tax burden may be lower. In fact, some deferred compensation arrangements may allow the employer a current deduction while deferring income recognition to the employee until the date that the income is received. Another reason an employee may opt for this type of benefit is to defer payment of current income until after the planned retirement. Deferred compensation can supplement an employees’ 401(k) cash or other arrangements. And, other individuals may want to put off compensation to provide for future expenses such as college tuition for their children.

Tax Codes and Regulations
In a competitive environment, a cafeteria approach, where employees can pick the types of benefits most attractive to them is highly desirable. Depending on the compensation plan choices made, there can be tax advantages to both employers and employees. For this reason, knowing the rules and regulations of the tax codes is critical.

Necessary Rewards
In the employee-employer relationship, nothing means more to the employee than compensation. While recognition is appreciated, satisfaction is most often based on the quality/quantity of the workers’ services in exchange for the compensation received. Simply put, the greater the value of the employee, the more benefit they expect to receive.

In order to grow their companies, business owners need to develop creative ways to offer competitive compensation plans for their employees. If they don’t, current employees are likely to feel unappreciated and therefore more vulnerable and susceptible to offers from other competing businesses. Potential employees will choose the business that offers more attractive compensation plans.