Key Employees — Compensation Issues

Prepared for: Business OwnersPresented by: Jack Benke

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Workman Securities

Corporation, its employees and representatives are not authorized give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

Key Employees — Compensation IssuesOverview

Key employee retention Compensation strategy Compensation & benefit options Stock-based compensation Nonqualified plans Employment agreements Tips & strategies for acquisitions & initial

public offerings

Key Employee RetentionEmployment Trends

A changing employer/employee relationship (Consultants)

Multiple jobs/careers Less benefit & retirement security

The Importance of Retention Turnover is expensive Profitability & growth Key employees are critical to succession

planning.

Key Employee Retention

Key Employee Needs Accumulation Protection

Compensation Strategy

Developing a Compensation StrategyBuild a team of compensation professionalsDetermine/anticipate business needsTailor plans suited to key employee needsReview your program on a periodic basis

Compensation StrategyCompensationProfessionals

Benefit ConsultantsAccounting firmsLaw firmsInsurance &

investment professionals

Attorney

Accountant

Life Insurance Agent

Compensation and Benefit OptionsSalary & Bonus Plans

Competitive base salaries/raisesBonus programsFixed/variable compensationCurrent/Deferred Compensation

Group Insurance ProgramsDisability Income InsuranceLife InsuranceCarve-Out programs

Compensation and Benefit Options

Qualified Plans The importance of retirement income Defined contribution plans Defined benefit plans Nonqualified plans

Stock-Based CompensationStock Ownership Plans

Value (perceived/real)Sales (corporate/shareholder)Stock awards (restricted stock)DilutionBuy back provisions

Stock Option PlansNonqualified optionsIncentive stock options

Stock-Based CompensationPhantom Stock Plans

Form of Nonqualified Deferred CompensationKey employees allocated “hypothetical shares”Taxation/accounting treatmentFunding options

Stock Appreciation RightsForm of deferred compensationCompensation driven by future appreciationTaxation/accounting treatmentFunding options

Nonqualified Plans

Provide accumulation and/or protection benefit

Supplement group benefit and/or qualified pension plan benefits

Reward and retain key employees Bonus plans Split Dollar plans Deferred Compensation plans

Nonqualified PlansBonus Plans

Employer funds all or part of the cost. Life insurance or other financial vehicles Owned by a key employee

How are Bonus Plans used? Accumulation and/or protection needs Retirement supplement Supplement group life & disability coverage Fund buy-sell plans

Nonqualified Plans

Pros & Cons of Bonus Plans - EmployerPROs

Totally selectiveCurrent tax deductionEasy to set up and terminate

CONsLimited “Golden Handcuff” potentialNo cost recovery potential

Nonqualified PlansPros & Cons of Bonus Plans - EmployeePROs

Employee owns and controls benefitBenefits are portable

CONsBonus not received in cashEmployer premium payments are taxable

income

Nonqualified PlansSplit Dollar Life Insurance

Life insurance plan Splits the benefits of permanent life insurance

between employer and employeeHow Split Dollar Plans are used?

Increase life insurance benefits Supplement group term insurance coverage Fund estate tax or buy-sell needs

Nonqualified PlansPros and Cons of Split Dollar Plans - EmployerPROs

Totally selectiveCash values provide cost recovery optionsEasy to set up and terminate

CONsPremiums are non-deductibleRequires an attorney to draft a Split Dollar

agreement and corporate solution

Nonqualified Plans

Deferred Compensation PlansRetirement incomePre-retirement benefitsSupplemental plansDeferral plans

Nonqualified Plans

Pros & Cons of Deferred Compensation Plans -EmployerPROs

Totally selective“Golden Handcuffs” potentialLife Insurance offers tax-advantaged

opportunities for cost recovery.CONs

Deferred Compensation requires accrual of plan liabilities.

Unfunded or “inadequately funded” plans may create future cash flow problems.

Nonqualified PlansPros & Cons of Deferred Compensation Plans-EmployeePROs

Supplemental retirement income Many Deferred Compensation plans offer significant

pre-retirement death benefits.CONs

Employee is a general creditor of the corporation. Supplemental benefits which are tied to risks of

forfeiture may never be paid if employee terminates early.

Employment AgreementsEmployment Agreements

Key employees Term of years (indefinite) Compensation & benefit provisions Severance benefits Arbitration & assignment Confidential information Non-compete clauses Exclusivity of services

Tips

Acquisition Consult your compensation professionals

before the acquisition. Review and benchmark your entire benefits

program. Consider the needs of your business and its

key employees.

Tips

Initial Public OfferingConsult your compensation professionals

before the initial public offeringReview and benchmark your entire benefits

programConsider the needs of your business and its key

employees