How should corporations prepare for leadership and financial contingencies?

 Your company's leading edge is tied to the skills of key people-innovators, managers, relationship builders. Their loss can be difficult to quantify because so many components of the business will be affected. It is more than replacing a job function-consider the loss of . . .

  • Sales revenues, market share, and client goodwill
  • Proprietary knowledge and systems
  • Production capacity and cash flow
  • Credit standing with lending sources and suppliers
  • Time and money to recruit and develop replacements
And what would losing the Number One key person-the owner-mean? You may have buy-sell agreements in place, but have they lost their effectiveness because circumstances or assumptions changed while no one was keeping track?
 
Questions CEOs and CFOs should ask to mitigate the company's risks.
 
1. How do we define the added-value we offer our customers? Which employees control it? What are the risks to the company in losing them? 
2. What is our ideal competitive position? What key people are we depending on to get us there and keep us there?What are the risks of losing them?
3. How has our corporate philosophy evolved? Who defines it? How important is that person to the company's success? What would losing him or her mean? 
4. If key shareholders were unexpectedly gone, who would control the company? Could buying out inactive shareholders drain our earnings or impede our growth?
5. Does the buy-sell plan take into consideration . . .
  • The survivors' cost basis?
  • Creditors' rights?
  • Ratio of ownership desired after buy-out?
  • Tax brackets of owners and corporation?
  • Number of shareholders, differences in ages and stockholdings?
  • Certainty of performance or unreasonable accumulation of surplus?
  • Constructive ownership?
  • Corporate AMT?
  • Policy maintenance and stockholders' right to acquire policies?
  • Rights to excess funds and contingencies for insufficient proceeds?

How should corporations combat erosion of executive benefits?

Ask CEOs what their most valuable asset is, and the majority will answer, my people, the team of management and creative experts that drive innovation and profitability. Ask any of those people what their biggest financial concern is, and the majority will answer, my family's long term financial security.
Both responses lead directly to the potential of executive benefits plans to . . .
  • Position companies to more effectively compete for executive and technical talent and align their commitment to long term corporate goals.
  • Position highly compensated employees to maximize tax-deferred wealth accumulation strategies and align their future with the corporate mission.
While nearly every large public company has installed such plans over the years, most privately held businesses compensate key people with only salary, bonus, and perks. The problem in the large corporations is that layers of executive benefits plans have left them with an under-valued and impossible-to-administrate mess. The problem for private companies-compensation drains critical cash flow and forces key people to be less concerned about the corporate bottom line than the personal one.
 

Questions CEOs and CFOs should ask to maximize their management strength.

1. If you do not have an executive benefits plan, what is your competitive position within your hiring market? Within your industry? What has been your turnover record for highly compensated employees? What is the real cost of that loss?
2. What is the company philosophy and track record for rewarding loyalty, longevity, and productivity? How do you align your executives' personal financial goals to corporate financial goals?
3. How do the limitations of qualified pension plans affect the members of your management team? What opportunities to increase their tax-deferred investments would they use if you offered?
4. If you have an executive benefits plan, how well-utilized and well-appreciated is it? Is it effectively securitized? Is it effectively financed? Is it in DOL compliance?
5. What kind of flexibility was built into the plan? Did that create tracking and reporting headaches? Has it been administered to your company's standards?