Employee Incentive Arrangements for Small Businesses
Motivating employees through stock options, bonuses and profit sharing plans.
What better way to motivate employees than to provide an incentive package?
There are a variety of possible arrangements that can be made, including stock
options, bonuses and profit sharing plans. Smaller businesses that are not yet
seeing significant profits can provide incentives that might include: flexible
schedules, telecommuting or additional vacation days.
The type of incentives you offer will depend largely on:
- The size of your business and number of employees
- The structure of your business
- The profitability of your business
- The level of experience and base salaries of the employees
- The economic climate
Stock option plans. Stock option plans are typically structured so
that an employee must be employed by the company for a certain amount of time
before he is able to exercise the option (often referred to as
"vesting"). For example, a company may offer a stock option of 10,000
shares, vesting equally each year over four years. This means that the employee
can, after one year, exercise options for 2,500 shares at the option price set
forth on the initial date of grant. If the stock has doubled or tripled in the
course of the year, the employee can exercise his or her option to take ownership of
the shares and then sell them for a profit. If, however, the stock has remained
the same or the per share price has dropped, the employee can deicide not to
exercise his or her option at that time.
In recent years, employees have met Stock Option Plans with less enthusiasm
than in the late 1990's. As the stock market took a downturn, the incentive of
receiving options became less of a motivating factor. Nonetheless, since the
stock market has traditionally rebounded over time, Stock Option Plans still
remain a valuable part of a long-term incentive package for employees who are
expected to remain with the company for many years. When the economy is strong,
Stock Option Plans can make employees very wealthy as they share in the success
of the company.
All of the terms, including the time frame, vesting, the exercise price
(typically the market price at which the employee can purchase shares of the
stock) and the total number of shares of the stock to be issued, should all be
clearly detailed in the Stock Option Plan.
Bonuses. A monetary bonus can certainly serve as an incentive.
However, it can also set a standard that can be hard to follow. Once word
spreads that an employee received a monetary bonus, others will anticipate the
same for their good work. Therefore, unless the bonus is part of an Employment
Agreement, you need to establish a policy that details the expectations of an
employee before he or she will be eligible to receive such a bonus.
Any plan to offer monetary bonuses should be made prior to the annual budget
so it can be included as a budget item. Bonuses are typically determined based
on a percentage of the employee's salary in conjunction with his or her
position and/or standing in the company, and the value of the work he or she has
performed.
Besides cash bonuses, other types of incentive bonuses include:
- Gifts
- Extra vacation time
- Extra personal days
The sluggish economy in recent years has caused many companies to become
more creative in their incentive plans. Cash value life insurance, flex
schedules and other forms of non-monetary perks have been used in lieu of more
traditional cash bonuses.
Profit sharing plan. If a company is doing well, sharing profits with
employees serves as a very strong incentive.
Such plans will need to be carefully designed and spelled out. Typically,
the company will set a starting point for determining when profits will be
shared, such as once the company earns profits of at least $250,000 for the
fiscal year. What percentage will be shared and who is eligible to benefit from
the Profit Sharing Plan must also be determined in advance. For example, a
company might decide that 15% of all profits over $250,000 will be distributed
to all senior employees who have been with the company for at least three
years. Each employee will receive an amount based on his or her salary at the
end of the previous calendar year. All of these parameters should be decided
upon with the help of your financial advisor and/or attorney.
Retirement plans. Many companies offer 401(k) plans, which are
retirement plans for long-term employee savings. Employees may contribute up to
a certain amount of their salaries into the retirement plan on a regular basis.
The money is not considered taxable income upon contribution and it is
generally deducted automatically from each paycheck. It is then typically
invested in stocks, bonds or mutual funds. The employee can select from several
choices of investment options. The employer can also contribute money, or in
some cases stock, to the employee's 401(k) plan.
The money invested must remain in a 401(k) plan until the employee reaches
age 59½, at which time he or she can start withdrawing from the plan without
penalties. At this point, however, he or she will pay income taxes. Should an
employee change jobs, the plan can be rolled over into a new 401(k) plan within
a certain time frame. Some plans also allow a participant to take out a loan
against the plan. The loan must then be repaid before the employee takes any
money from the plan in order for the funds to remain tax deferred.
Before setting up such a plan you should review the particulars with your
accountant who will help you abide by the IRS rules and regulations concerning
401k plans. Retirement plans are generally an attractive benefit for employees.
Source: http://www.allbusiness.com