Compensation Arrangements Based on the Lifecycle of Your Business
May 16, 2023
At a glance
- The main takeaway: There are several factors that drive employee satisfaction; however, compensation continues to be the primary focus for attracting and retaining employees.
- Impact on your business: Evaluating the various options for compensating employees can be complicated by unclear employee “wants” and regulations associated with certain arrangements.
- Next steps: Aprio’s compensation and retirement benefits timeline can help you start the evaluation process and be on your way to creating compensation packages to attract and retain top talent.
Schedule a consultation with an Aprio Tax advisor Today.
The full story:
Even in the best of times, organizations struggle to design and implement compensation arrangements (defined as pay and retirement benefits for our purposes) that attract and retain top talent in our challenging job market. While employee satisfaction is driven by several new factors, compensation remains the primary driver for attracting, retaining and rewarding employees. There are many “tools” available to employers to assist with achieving these goals, and each provides different benefits and corresponding costs. They can also have vastly different regulatory requirements that impact their effectiveness and practicality given the growth stage of the organization.
A compensation and retirement benefits timeline can assist employers in understanding the available arrangements and the general feasibility based on their growth stage. Below are general descriptions of the four compensation categories:
- Bonus Arrangements
Bonus plans are designed primarily to provide immediate rewards to employees. Employees love cash rewards. These arrangements are the easiest to administer with full employer discretion as to “who gets how much.” Although, they tend to be the least effective in retaining employees while also providing limited retirement benefits depending on the employee’s personal spending habits.
- Broad Based Retirement Plans
These are your typical employer sponsored retirement plans. The most common being the 401(k) plan, where the employee and the employer contribute to the employee’s retirement account. However, there are also lesser-known plans that can be very effective, including enhanced 401(k) plans, pension plans and simplified employee pension plans (SEPs), all of which have a unique place in the compensation framework.These plans provide opportunities for current year tax deductible contributions but come with an additional regulatory and administrative burden. They are very attractive to employees because both employee and employer contributions can be tax deferred. In the overall compensation structure, qualified retirement plans generally provide the least amount of flexibility when trying to target benefits to specific employees.
- Deferred Compensation Arrangements
These arrangements are non-qualified plans, meaning that “contributions” do not receive a current year’s tax deduction and are not subject to the rigid regulatory framework typical with broad based retirement plans. They are really nothing more than a promise to pay employee compensation in the future and can be a great tool for employee retention. However, these arrangements provide benefits to only a select group of upper management and can be designed to provide different benefit amounts to different employees. While non-qualified plans can escape the regulations associated with qualified plans, they are often subject to the complicated rules of IRC 409A. The 409A rules can be very confusing for employers and vendors alike and any missteps could subject the employee to harsh tax penalties.
- Stock Compensation Arrangements
These compensation arrangements are tied to the value of the company’s stock and usually have characteristics of some of the arrangements detailed above. Stock options, stock purchase plans and synthetic equity arrangements are common structures used to tie compensation to the value of a company’s stock. In some instances, employees are compensated with the actual company stock. These arrangements can have complex tax and accounting considerations and are often poorly understood by the employees.
The bottom line
The analysis associated with evaluating the various options for compensating employees can be daunting and complicated by unclear employee “wants,” available investment products and an overall lack of understanding of the regulations associated with the various arrangements.
Aprio’s compensation and retirement benefits timeline is designed as a starting point for employers to begin the evaluation process. Schedule a complimentary consultation with an Aprio Tax advisor to discuss the costs and benefits associated with compensation arrangements for your employees.
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About the Author
Mark Flanagan has more than 30 years serving for profit and nonprofit organizations of all sizes and industry types. His specialties include retirement arrangement consulting, compensation and benefits tax compliance, and benefit plan audit technical support. His expertise and guidance allow employers and individuals to defer taxable income from the highest corporate and individual rates to lower rates sometime in the future.