Businesses across industries — both small and large — want to recruit and retain top executives who are instrumental in growing the company.

With Business Owner Life-stage Design (BOLD), you empower business owners to create competitive compensation packages.

An executive compensation strategy that employs life insurance can reward and incent key employees by maximizing a business owner’s dollars. And offer even more options for businesses, compared to cash bonuses.

To determine the right strategy, ask business owners whether a death benefit or retirement income is more important to them.

Use the BOLD executive compensation questionnaire

Death benefit protection — how it works

The main purpose and advantage for using permanent, cash value life insurance is the death benefit. Some executive compensation strategies provide the death benefit to the executive, some to the employer, and others share the death benefit between the two parties.

Death benefit solely for the executive’s beneficiaries

In these situations, the death benefit is not needed by the employer. Overall, the death benefit is part of the benefit provided by the company, in addition to potential supplemental retirement income from the policy’s cash value.

Death benefit solely for the employer

In key person strategies, the company protects itself should the executive die. Upon a key person’s death, the death benefit can help cover lost sales, lower earnings or added costs for hiring and training a replacement.

In situations where the employer retention strategy calls for only supplemental employee retirement income, an employer may wish to recover the costs of its program through the policy death benefit.

Death benefit shared between employer and key employee’s beneficiaries

In split-dollar arrangements and some salary continuation strategies, the two parties may “split” or share the death benefit. The death benefit provides cost recovery for the employer, as well as additional incentive for the executive to remain with the company.

Death benefit recipient executive compensation strategies

Solely for executive's beneficiaries

• Executive bonus
• Golden executive bonus arrangement (GEBA)
• Golden executive match (GEM)
• Salary continuation

Solely for employer

• Key person insurance
• Supplemental executive retirement plan (SERP) — retirement income only for employee

Shared death benefit

• Endorsement (key person plus)

Shared death benefit with salary continuation

• Nonqualified deferred compensation (NQDC)
• Bonus/salary deferral
• SERP
• Protection SERP
• Employer match

Retirement income

The decision regarding retirement income requires the business owner to balance the timing of a potential tax deduction, versus the tax ramifications of the key employee receiving the income. Quite simply, the business owner will receive a tax deduction when the benefit is paid, and the executive will be taxed on the benefit at that time.

Who pays

In most cases, the business will fund the arrangement, since it wishes to reward and retain the executive.

In a pure salary deferral NQDC strategy, the executive defers a bonus or a portion of salary into retirement, at which point the executive may be in a lower tax bracket. In other strategies, the employer may also want to match a percentage of the executive’s deferral.

When discussing who will fund the strategy, keep in mind:

• Employee contributions are typically after-tax dollars (except NQDC salary deferral and employer match)
• Business dollars have cost recovery potential with NQDC and split-dollar strategies

Retention

“Golden handcuffs” are incentives an employer can offer key people to encourage their loyalty to the company. They contain stipulations spelling out benchmarks or timetables that must be achieved in order to gain access to the benefit.

Depending on the industry, the economy and current job market, golden handcuffs may not be necessary. Often, an executive bonus may be enough to keep them. However, it’s important to periodically review the strategies and their effectiveness.

Without golden handcuffs

• Executive bonus arrangements
• NQDC — Salary deferral
   

With golden handcuffs

Executive bonus

• GEBA
• GEM (Only on employer’s contribution)

Split-dollar

• Endorsement
• Non-equity collateral assignment
• Loan regime

NQDC

• Employer match (only on employer’s contribution)
• SERP
• Protection SERP

Salary continuation

Cost recovery

Depending on how important this is for the business owner, explore options for cost recovery and determine which strategies best suit their needs.

Strategies with business cost recovery

• Split-dollar
• Endorsement
• Non-equity collateral assignment
• Loan regime

NQDC

• Employee deferral-Employer match
• SERP
• Protection SERP