By Jim Lineweaver, CFP®, AIF®
Compensation often focuses on the next payroll cycle, while retention looks several years ahead. A higher salary can solve an immediate problem for a key leader, but it may not be enough to keep them through an expansion, an ownership change, or a sale.
To attract and retain employees who have an outsized effect on the business, owners can use financial plans that reward service, results, and long-term value. The best plans fit the company’s cash flow, tax structure, ownership goals, and succession plan. They’re also clear enough for employees to understand and value.
What Financial Strategies Help Attract and Retain Employees?
The most useful benefits to attract and retain employees usually fall into five groups:
- Add benefits beyond standard retirement plan limits through nonqualified deferred compensation, supplemental executive retirement plans, or 401(k) restoration plans.
- Tie rewards to continued service and results with vesting schedules, performance-based compensation, and long-term incentive plans.
- Link pay to company growth through phantom stock, stock appreciation rights, equity-linked compensation, or actual equity.
- Create custom benefits with executive bonus plans, split-dollar life insurance, and supplemental life or disability coverage.
- Improve the broad retirement package through profit sharing, advanced qualified-plan design, and, when suitable, a cash balance plan.
Each tool solves a different problem. The key question is which plan supports the behavior, time frame, and business result the owner wants.
1. Provide Benefits Beyond Standard Retirement Plan Limits
Qualified retirement plans are a sound base, but federal limits can leave larger savings gaps for high earners. In 2026, employee 401(k) deferrals are capped at $24,500. The pay that may be counted for plan contributions is capped at $360,000. Highly paid employees may also face lower plan limits because of nondiscrimination testing.
A nonqualified deferred compensation plan, or NQDC plan, can help fill that gap. It may allow an employee to defer part of their salary or bonus. It may also provide employer credits, or combine both features. A supplemental executive retirement plan, often called a SERP, can promise an added retirement benefit. A 401(k) restoration plan can replace benefits or matching contributions that were reduced by qualified-plan limits.
These plans are often designed for a select group of managers or highly paid employees. That gives the employer more freedom, but it also adds risk. Most NQDC benefits are unsecured promises, so employees are usually exposed to the company’s future ability to pay and to claims from company creditors. Section 409A also governs plan terms, elections, and payment timing. Legal, tax, and plan review should occur before any promise is made.
2. Tie Long-Term Rewards to Continued Employment and Performance
Retention rewards work best when the path is clear. A vesting schedule can reward an employee for staying through a three-year growth plan, a five-year ownership change, or another key event. Vesting may happen all at once or in steps.
Performance-based deferred compensation and long-term incentive plans (LTIPs) may add an additional layer of incentive. The employee must stay and help the company reach stated goals. Measures may include profitable growth, recurring revenue, customer retention, cash flow, or the development of future leaders.
The goals should be clear, measurable, and within the employee’s influence. A plan tied only to revenue may reward growth while ignoring margin or cash needs. Two or three balanced measures can reduce that risk. Plan terms and payment dates should also be set with Section 409A and the company’s expected cash needs in mind.
3. Give Key Employees a Financial Stake in Company Growth
Some employees may feel more invested in the company when their financial reward grows with the value of the business. Owners can create this connection through equity or equity-based compensation.
Phantom stock gives employees units that track the value of the business without giving them actual shares. Stock appreciation rights, or SARs, generally reward employees when the company’s value rises above a set amount. These plans can provide financial upside without adding new owners or giving employees voting rights. Payments are often made in cash, though the tax treatment and payment schedule depend on the plan’s design.
Privately held companies may also use stock options or restricted stock. A stock option gives an employee the right to buy company shares at a set price in the future. The employee may need to stay with the company or meet certain goals before using the option. Restricted stock gives the employee actual shares, but the shares may be subject to a vesting period or other limits.
Stock options and restricted stock can help key employees benefit from the company’s future growth. However, they may also raise questions about taxes, company value, voting rights, distributions, ownership limits, and the employee’s eventual ability to sell the shares.
Actual equity may make sense when the goal is shared ownership, a management buyout, family succession, or preparing future leaders to take on a larger role. However, issuing real shares can affect control of the business, the value of existing shares, and the rights of current owners.
Before choosing phantom stock, SARs, stock options, restricted stock, or direct equity, the owner should decide whether the goal is to provide financial rewards, create true ownership, or both. The company’s legal structure, growth plans, ownership goals, and future sale plans should all help guide the decision.
Attracting and retaining key employees is only one part of building a successful business.
4. Create Customized Benefits for Select Key People
Not every key employee is most concerned about retirement or business value. Some may care more about family protection, disability income, or flexible future funds.
An executive bonus plan provides a selected employee with extra compensation that may fund a chosen benefit, often life insurance. A split-dollar life insurance agreement divides certain policy costs and benefits between the business and the employee. Supplemental life and disability coverage can also fill gaps left by the company’s group plan.
These strategies need careful design. Policy ownership, access to cash value, repayment rights, taxes, underwriting, and an early departure can all change the result. The benefit should be reviewed as part of the employee’s full compensation package rather than as a stand-alone component.
5. Strengthen the Broader Retirement Package
Targeted executive benefits can be useful, but owners should first review the plan offered to the full workforce. A strong, qualified plan can anchor broader employee engagement and retention strategies while helping workers build a steady savings habit.
A profit-sharing plan lets the employer decide whether to contribute each year. The plan then uses a formula to divide the contribution among participants. A more advanced 401(k) design may improve results for owners and key employees while still meeting coverage and nondiscrimination rules.
A cash balance plan is a type of defined benefit plan. It shows each participant a hypothetical account based on contributions and interest credits. It may support larger employer contributions than a defined contribution plan, but it also requires actuarial work, steady funding, and higher administration costs. For a stable, profitable business, that trade-off may be worth a closer look.
How Should a Business Choose the Right Retention Strategy?
Key employee retention is strongest when the plan is tied to a clear business need. Before selecting a tool, the owner and advisory team should answer five questions:
- Which employees are truly vital to revenue, relationships, operations, or succession?
- What result should the benefit encourage, and over what period?
- How much variation in cash flow can the business support?
- Does the owner want to share economic value, voting control, or neither?
- How will the plan fit with taxes, retirement benefits, insurance, estate planning, and the future transfer of the business?
The best design is often a package rather than one large promise. A broad retirement plan may serve the full staff, while a targeted long-term plan addresses a small group of leaders. Employees also need a clear account of the benefit’s value, vesting rules, and treatment when employment ends.
Build a Retention Strategy That Fits the Business
Executive compensation, deferred compensation, retention incentives, succession planning, tax strategy, and employee benefits can all affect a business’s long-term value and the financial future of its owners. The right mix of strategies can help strengthen the company, reward key people, and support the owner’s personal wealth goals. For more on how these pieces can work together, learn more about our wealth-building strategies for business owners.
Which employee retention strategy is right for your business?
Deferred compensation, executive benefits, and other financial incentives can help attract and retain key employees, but the right approach should fit your business, your people, and your long-term goals. Talk to an advisor to explore which strategies may make sense for your company.
Frequently Asked Questions About How Business Owners Can Attract and Retain Employees
Certain non-qualified and executive benefit plans may cover a select group of management or highly compensated employees. Tax rules, ERISA requirements, employment law, and plan documents still matter, so the eligible group should be chosen with help from legal and tax professionals.
Often, no. In a typical phantom stock plan, actual shares are not issued to the employee. However, some plans may settle awards in stock rather than cash. The written agreement controls the final result.
The employee may depend on the employer’s future ability to pay. In many plans, the benefit remains part of the employer’s general assets and may be open to creditor claims. A Section 409A failure can also lead to current income recognition, an additional 20% federal income tax, and interest-based penalties for the employee.
The business may use a deferred bonus, long-term incentive plan, phantom stock, SARs, executive bonus plan, or added retirement benefit. The right choice depends on the employee’s goals, the owner’s need for control, and the company’s ability to fund future payments.
Source: IRS.gov
