Golden Handcuffs Can Keep Top Employees from Making a Break for Greener Pastures
by Ray Silverstein

You started your business, became a sales achiever, hired some key sales people, and handled off your accounts. Life is good...but is it? What happens to your business if any of your key people leave? Worse yet, what happens if they join a competitor or even take your accounts and compete with you themselves?

I know you are aware of non-compete, nondisclosure and confidentially agreements. These are all defensive tactics, but a good offense keeps the defense off the field. What positive steps can you take to keep your key employees with you?

The answer may be "golden handcuffs." I am sure you've heard the term, but you may not know what it is and how it works. Simply stated, it is a financial reward, but it also has a format that causes a key employee to take a financial loss if he or she chooses to leave the company. If they stay, they gain. If they leave, they have pain!

At business seminars, we often talk about how we can motivate, reward, and tie in key employees. The following suggestions are those that have been implemented by members.

"Golden handcuffs" are custom fitted for each person. They can be very simple or extremely complex. A simple plan for a basic sales people would be to lease a car for them. The lease is in the individual's name and he or she has the financial lease obligation but the company makes the monthly payment. If they leave, the unpaid portion of the lease is their responsibility. This format can also be utilized to further an employee's education.

The next level of complexity is deferred compensation or salary continuation programs. They may consist of Secular trusts, Rabbi Trusts, or a straight forward deferred compensation/disability agreement. This is an agreement between the employee and the company regarding continued compensation of some type upon retirement or other special conditions. These programs may or may not be funded with current dollars, but the company has taken on a financial obligation if the employee fulfills their part of the agreement. If the employee leaves before the agreed time, they forfeit all or part of the benefits.

Some key employees like to feel as if they are an equity participant. They can be given, purchase at a discount, or purchase at market equity stock in the company. Many owners do not like to create minority shareholders. In this case, a phantom stock program can be created. The employee is not an actual owner. The payout to them would occur if a dividend was declared or the company was sold. They would receive proceeds in percentage to their phantom position. Another aspect of a payout would be if they retire at an agreed upon age, and the company was not sold.

This material is a short overview. Because of the technical nature, these programs need to be worked out between the key employee, the company, lawyers, and accountants. Your imagination is the only limiting factor in creating an effective "golden handuff." Remember, you must know what is really considered an incentive by your key employee. Pain of loss can only be created if they choose to give up something that is meaningful and important to them.