Have you lost a key employee in your business in the last year?
We’re willing to bet that answer is yes.
And because people are the backbone of your business, that loss can hurt your business in more ways than you realize.
Here at Consolidated Planning, our experience when it comes to supporting businesses seeks to address everything that goes into one’s livelihood…people included.
We know that the loss of key employees can derail your business plans. In what follows, we’ll help you understand what employee retention is, what strategies are effective in attracting and retaining employees as well as what ARE NOT effective. From here you can begin implementing strategies for growth and sustainability that work for your business goals.
What Is Employee Retention and Why Does It Matter?
Employee retention is defined as the ability of an organization to retain its employees and ensure growth and sustainability. And because time is money – hiring new employees is actually more costly than retaining your current employees. Studies have shown that it costs a business 1 to 5 times the salary of a lost employee.
This is especially true of your key employees.
The key employees in your business are those that have a disproportionate impact on your company’s bottom line. Losing these employees for any reason, especially to your competitor would have a huge, negative impact. Not to mention the sting you will feel because it’s personal to any business owner when their valued employee resigns.
Think of that one person in your business with longevity. Ok, great, you have a name in your mind. This person is likely dependable, efficient at their job, and has a stellar rapport with your clients. Now imagine that you have to replace them and train someone on their 10+ years of knowledge and experience.
Woah.
And as good of a business owner as you may be, there is no way you know the true value (or the tasks) of what they do for your business each and every day.
So, how can you work to retain and reward your key employees and grow your business? Fortune 500 companies have used retention strategies to retain and recruit key employees for decades. They are available to the largest of companies, and available to the smallest of companies.
Tried and true.
Top 2 Requirements Your Retention Strategy Needs To Include
#1 Vesting Periods
A vesting period is a period of time in which an employee must work for an employer to receive some kind of benefit. Vesting periods make it easier for the business to fund at higher levels, resulting in higher bonuses, especially if non-competes are in place.
With a typical vesting period, the key employee receives their deferred benefit somewhere around the time of a personal objective or event such as retirement or sending kids to college. This range is adjusted depending on the age of an employee, whether they are closer to retirement, and other factors. In fact, what you do for vesting for one key employee may be very different from another.
The vesting timeframe should not be too far into the future that it’s not attainable for the key employee, but it should be far enough out to provide the business owner with a high level of retention.
And that’s the purpose of a deferred benefit – to guarantee a certain level of employee retention.
#2 Significant Bonuses Over Time
Resignations tend to uptick right after bonuses are paid out. So while bonuses are essential in retaining your key employees, they need to be substantial bonuses that are paid over time.
Of course, there are requirements for the employee to actually receive this bonus, including remaining with the company, continuing to perform, and hitting goals aligned with the firm’s success.. But with such a substantial bonus, your key employee is likely to feel truly valued, rewarded, and financially recognized.
These options might sound great to you but how attainable is this for business owners?
How Paying These Retention Plans Is Attainable For The Business Owner
Now, we know you might be wondering, “how will I pay for these retention plans?
Yes, you will have to spend money to make money essentially but with the right strategy, it’s far more attainable than you realize.
What’s important here is to put the money aside – you earmark the money as you go, so when the vesting period comes up it’s already sitting in your bank account as a cash asset in your books.
Alternatively, you could just cash flow the bonus once it’s payable in the future but that is not recommended. Business profits may be off at just the wrong time when a retention bonus is payable, so it’s safer to accrue dollars corporately based on the vesting period and expected bonus amount.
Keep in mind that retention plans are legal agreements and certain rules should be followed. Working with advisors that are familiar with The Employee Retirement Income Security Act (ERISA) and Department Of Labor (DOL) guidelines isn’t something any business wants to do.
The funds you’re setting aside each year to retain your key employee is both a benefit to:
- The business owner: the contributions are significantly less than hiring someone to replace them, and
- The employee: Few other companies will offer these. Make them feel valued, aligned with your company’s long-term goals, and retained.
These unique retention tools are not often seen by employees or employers BUT are highly valued, making these strategies might make your key employees “recruiter proof.”
What A Good Retention Plan Is vs. What It Isn’t
Your retention plan should be designed as a long-term tool, designed to keep your key employee from willfully leaving the company during a set period of time. With the right cash flow in your business you can offer everything a good retention plan is made up of.
The challenge of keeping employees has never been more difficult than it is today. Business owners are competing with LinkedIn and remote technology, just to name a few.
Therefore a good retention plan must:
- Be an economic benefit
- Deferred to the future
- Recapture costs
- Solve a problem or challenge
- Be exclusive
- Recognize key employees as key employees
- Reward planning vs. retention planning
A good retention plan actually starts with your recruiting phase – attracting the RIGHT people to your business. Skill set aside, there is also a lot to be said for a good culture fit when it comes to your employees.
But, we all know culture alone is not enough. At the end of the day, your key employees want to be recognized and paid their value.
So, what is NOT a good retention plan?
A good retention plan is NOT:
- Cash Bonus
- 401(k) Match
- Health Insurance
- Disability Insurance
- Fringe Benefits
Don’t get us wrong, these are great benefits and provide a lot of value but they do not provide retention power beyond a maximum of 12 months.
Start Retaining Your Key Employees
If you wake up every morning worried about losing your best employees, it’s time to put those thoughts to rest with a strong retention plan.
Now maybe you are excited about the idea of worrying less and retaining your employees but have thoughts in the back of your mind like, “What if my key employee does leave?” “What if it’s not enough money to keep them?”
While a very rare occurrence with retention strategies like these, there is no harm and no foul to you. The money is still there, the funds are still yours. You can actually put a new hire into an existing plan, making your plan a strong recruiting tool.
For a custom retention strategy for your business goals, talk with our retention planning professionals at Consolidated Planning.
Exp. 10/2025 2023-164062
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of Mike Thompson and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
