Non-Qualified Deferred Comp: The Basics - YouTube

While losing any of your key people in the life of your business is difficult

and can be very detrimental to your business,

it's particularly damaging in the later stages when you're planning your exit.

Your key people,

they know that their key and they know that they have negotiating power and

sometimes they're not too happy when they find out that the business is going to

be sold or transferred.

So we want to do what we can to make sure that we're; A.

Communicating with them in an inappropriate way about what's going on,

and B.,

that we're retaining and rewarding them and preventing them from going out and

hanging their shingle and competing with us, potentially costing us,

the deal that we're planning in our exit or a third party sale that we're

planning.

Any buyer wants to see that the key management team is going to remain intact

after the transition.

So if the business revolves around you or if you have key people that you are

not doing anything to retain,

that can be very potentially very dangerous for a successful exit.

So that's what I want to focus on today.

Hi there. My name is Ashley Micciche.

I'm the CEO of True North Retirement Advisors,

where we specialize in exit planning for business owners.

And today I want to talk about a very important concept in exit planning,

which is deferred compensation plans.

These can be an excellent tool for planning your exit and making sure that you

retain and reward your key people.

In the early days of True North,

within the first couple weeks of launching our firm,

we actually lost one of our key people and it was a devastating blow.

I had some real reservations about how we were going to move forward from there.

But luckily,

we were able to bring somebody else on very quickly who was able to kind of pick

up the pieces of losing that key person.

Well,

let's talk about what is a non-qualified deferred comp or deferred compensation

plan.

And the name is a little bit self evident there.

So non-qualified means that the plan is not subject to the strict rules of

ERISA, which govern plans like 401k's.

So there's a qualified retirement plan,

which is like a 401k or a profit sharing plan and then there's non-qualified,

which is like the non-qualified deferred comp that I'm talking about today.

So the primary difference between the two is that the laws of ERISA do not

govern the non-qualified deferred comp plans,

which makes them very flexible.

And there's a lot of options when it comes to designing the plan,

who you include in the plan, I'll talk a little bit about that in a minute.

And then the other piece of it, so we've got the non-qualified piece of it,

but then we also have the deferred compensation. So what does that mean?

So what all that means is that when you pay your employee,

you can put part of their compensation,

part of their pay into this deferred compensation plan.

It means that they're still getting the money,

but it's been deferred to a later date. So it's very popular.

These plants are used all the time in large companies is particularly for

executives and key people.

Because what it does is you can use the plan to incentivize them.

So let's say, you know,

they get a base salary of x and then they get a bonus of x and if they hit

certain parameters,

maybe they also get money put into their deferred compensation plan of x as

well. And because they're so flexible,

you can design them in a myriad of ways and have certain criteria like money is

only going to be going into the deferred compensation plan if you hit x target.

And the key here is that this is all in writing. So you can't just like, you know,

change your opinion from day to day about what constitutes a qualification of

someone getting employer money going into the plan on their behalf.

But, they are flexible.

How does a non-qualified deferred compensation plan,

how does this play into retaining and rewarding your key people? Well,

if it's designed well,

a non-qualified deferred comp is often the most simple and most effective way to

reward and retain your key people.

I'm recording this video in early May,

2019 and the unemployment numbers just came out from last month.

And what the unemployment numbers are,

is currently the unemployment rate in the United States is 3.6%.

That is the lowest it's been since December of 1969.

So many of you watching don't even remember a time.

That's the same year that we went to the moon. Okay.

That more than half a lifetime ago.

Unemployment rate is very low.

What that means is that if you are out looking for a job,

if you are a key person,

you have a lot of negotiating power. It is the best time,

one of the best times to be looking for a job in the last 50 years because there

are so many unfilled jobs right now and there's a lot of opportunity for skilled

and knowledgeable people to find work.

So we have to retain these people.

It's not like retaining them in a recession where they're less likely to make a

move. There's less opportunities for jobs.

There are abundant opportunities for jobs right now and it is absolutely

critical that we retain those people.

I want to talk about four key components of a non-qualified deferred comp plan

and how that relates back to exit planning.

One of the common things that I see in talking with business owners is that they

don't do enough to put handcuffs on their employees.

And I don't mean handcuffs in a negative way,

but there are certainly things that you can do that places handcuffs on your

employees.

And one of the unique features about the non-qualified deferred comp plan when

it comes to retaining people is that you can use vesting schedule.

Let's say every year you make a contribution to the deferred compensation plan

and you put an x dollars.

But each year, that money is going to vest over, say, you know,

several years. I think it can go up to six years.

I'm not sure it goes longer than that,

but the money vests in that year for a period of several years.

And so in order to get that money that was put in,

say in 2019, they need to stay on board until 2025.

You can also write in things into the plan document that says like when there's

a change of control,

everything vests immediately or you can set it up so that when there's a new

ownership that that's a distributive event.

So it incentivizes them to stay on because when there is new ownership change,

then they're going to be able to get paid out of the plan and they don't have to

retire in order to get their money out of the plan.

And you can have vesting schedules for every single year.

So I have a vesting schedule for this year and then I make a contribution to the

plan next year and then there's a new six year vesting schedule for that.

And if the contributions are significant,

you know,

these can add up over time to several hundred thousand dollars that an employee

would forfeit,

potentially or could potentially forfeit a significant portion of if they were

to leave.

The other

key component of a non-qualified deferred comp plan that have already mentioned

briefly is that a needs to be in writing. This is very important.

It should go without saying, but when it's in writing,

it establishes what all the criteria and the plan design is. You know,

what the vesting schedule is, what the criteria is for receiving a contribution,

etc. So it's important and a good well designed non-qualified deferred comp plan

should be in writing.

One of the more popular ways that employers will use the non-qualified deferred

comp plan is to incentivize employees with a certain set of criteria.

So you might only reward a contribution for an employee in a non-qualified

deferred comp plan for a given year,

if certain metrics or certain benchmarks are hit.

Now these can be, they're usually tied to growth.

So if you need the business to value to be worth more,

if you through higher revenues, higher profitability,

if you're not quite where you know the business is not quite where it needs to

be yet,

we can use the non-qualified deferred comp plan to align the employee's interest

with that of you as the owner. In an ideal world, we would do that.

So there you can be creative with this.

You'll want to talk to your advisor or your attorney,

whoever is helping you set up and design this non-qualified deferred comp plan,

have discussions with them about what the criteria is to receive a contribution.

Because again, because it's a non qualified plan,

you can set up a certain set of criteria.

People don't get a contribution just because they're breathing and they show up

for work.

You can set it up so that they only receive money in the plan for a given year

if certain benchmarks are hit.

So one thing that I did it mention earlier that is very important to discuss

what it comes to forfeiture,

is you can actually mandate that an employee,

if they violate their employment agreement - they leave and they take vendors,

customers, other employees, they go out and compete with you.

So if they sign a non-compete, confidentiality,

if you have all these stipulations in their employment agreement that prevents

them from taking all of your customers or taking your vendors or your employees

and setting up shop down the street and they violate that,

every dollar of their non-qualified deferred comp plan can be gone.

They could forfeit it all if they violate the provisions in their employment

agreement.

So it's very important that you stipulate that and you communicate that with

your employees so they don't get ideas.

So that's one of the things that can go South is that you have a key person that

leaves, they take your employees,

they take your customers maybe a year prior to when you exit and totally destroy

your business and destroy the valuation and destroy your chances of leaving

successfully. Now you're staring down at, you know,

maybe 10 more years of working to recover what happened.

We want to avoid that at all costs and incentivizing an employee to stay and not

leave and compete with you through a non-qualified deferred comp plan is a very

powerful tool to be able to reward your employees,

but also incentivize them to have their interests aligned with yours.

How do we take action on this? Well,

the first step in setting up a non-qualified deferred comp plan,

is to really sit down and evaluate who your key people are.

Who in your organization, if they left tomorrow, if they went out, you know,

who are the people who have the key relationships with your customers or your

clients?

Who are the people that are so deep in the operational side of your business or

in the sales and marketing, whatever department they're in,

who are the people that if they left tomorrow that you would be devastated?

It would be very damaging for your business.

It would be very distracting because not only would you have to replace them,

but you'd have to replace everything that they have up in here that's critical

to the operations or the growth of your business.

So we really want to identify the key people.

And in a non-qualified deferred comp plan, you don't have to include everybody.

So you could have a non-qualified,

you might have a hundred people that work for you and you may have only one key

person. And that's fine.

You can set up a non-qualified deferred comp plan for that one person,

or you can set it up, you know,

depending on the size and how many key people you have,

it doesn't matter the size of your organization.

And it also can attract new people in the future too. So you know,

if you're bringing on somebody for a critical position and key management role

and you want to incentivize them to work for your company versus another

company,

you know you can talk about the nonqualified deferred comp plan and how that's

part of the deal too.

So it's a way to also not only just keep the people we have but attract new

people that we're going to need down the road.

If you have questions about a non-qualified deferred comp plan,

you can set up a free strategy call and it's 15 minutes.

We'll talk about what your organization looks like,

how to go about setting up and thinking about what you should do in the initial

stages in terms of plan design and is this a good fit for your business.

There's a link below this video where you can set up a free strategy call with

me and we can talk about your business and whether or not a non-qualified

deferred comp plan might be a good fit for you.

So thank you so much for watching. My name's Ashley Micciche,

and here on our YouTube channel,

we put out exit planning videos twice a month here.

And so I hope you'll subscribe and then come back next time.

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