Keeping Star Performers - Could It Be a Temporary Solution?
In an innovative move to attract and retain top talent, Microsoft has announced a 10-year retention bonus for one of their key employees. The retention bonus plan, designed to incentivise an employee to stay until a specific event, such as the retirement, disability, or death of the owner, is a strategic approach that is increasingly being adopted by businesses.
The retention bonus arrangement for the Microsoft employee, Elsey Smart, is for $250,000 if she stays with the company for 10 years and continues her outstanding performance. This bonus amount is funded using a whole life policy, a common method for implementing retention bonus solutions.
The employer, Tom Barbar, purchases a whole life insurance policy for Elsey, with the policy owned by the business and insuring Elsey. This arrangement ensures that the bonus amount is available when needed, while also providing a potential tax advantage.
In pass-through entities, death proceeds and premium payments may impact an owner's basis. However, the business owner (Tom) cannot deduct life insurance premiums. On the other hand, insurance proceeds are received income-tax-free by the business.
Reporting to the IRS concerning these policies must be completed using IRS Form 892. The details of the retention bonus arrangement, including the amount and the stay period, are typically negotiated between the owner and employee, and can be designed to provide a reward that is within reach for the executive.
According to a recent Small Business & Entrepreneurship Council Small Business Check-Up Survey, 67% of small-business owners rate the current economic climate as positive. The survey also found that 76% of small-business owners are confident about their financial prospects for this year, while 22% are not. Interestingly, 39% of small-business owners expect better economic conditions in six months, 33% expect worse, and 25% anticipate no change.
It's clear that retention bonus arrangements, when used effectively, can be a powerful tool for businesses to attract and retain top talent. As economic conditions continue to evolve, it will be interesting to see how more businesses adopt such strategies to stay competitive.
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