In the fast paced working environment today, where “human” assets are recognised as key to the success of many businesses, many companies are finding it tough to attract and keep their valuable “human” assets. Many companies are caught in a dilemma – taking pains to groom an inexperienced employee into a polished “gem”, waiting to be poached by competitors with a deeper pocket! How can companies retain the services of these valuable human assets for as long as possible?
Human assets can be broadly classified into employees and business owners. For employees, there are many ways to retain their services in the company. Some commonly adopted retention strategies are increment in salary, additional year-end bonus, better welfare, employee share option schemes, comprehensive medical benefits etc. Another effective but commonly over-looked retention strategy is providing a contractual retirement programme for employees. Some of the advantages of funding an employee deferred compensation planning are as follows:
- Retention of key employee’s service till retirement;
- Building of employees’ loyalty to the company by letting them know that the company cares about their retirement and for their family;
- Funding solution ensures minimum impact to the company’s cash flow and profitability at point of employee’s retirement; and
- Funding solution gives assurance to employees that the company has the ability to pay for their retirement gratuity, regardless of the company’s profitability at time of retirement.
For the case of a business owner “human” asset, the deferred compensation planning ensures that the retiring business owner gets his well-deserved retirement gratuity. This is extremely critical if the owners of the company are not related to each other, e.g. public listed companies or private limited companies with “non-related” shareholders. For example, in a recent case involving a home-grown company, F&N; a retiring ex-Chairman, who is director cum shareholder, did not get his “promised” retirement gratuity, because he was not able to secure the 70% shareholder’s approval vote required. The situation would have been different if a deferred compensation planning had been implemented while he was still the active chairman of the company.
Many businesses ploughed back their profits for the company’s expansion, but few make provision to plan for retirement gratuity for a retiring business partner. Even employees get a planned retirement in some companies; thus, it is only fair that companies should have in place a contractual retirement programme for all the directors of the company as well.
The benefits of arranging a deferred compensation planning for all directors are:
- It ensures that the retiring director will get some form of retirement gratuity for their many years of services with the company;
- It ensures that the retiring director gets his fair share of the accumulated profits that have been reinvested in the company; and
- Funds are available within the company to pay the contractual compensation.
With a deferred compensation plan put in place, it is a win-win situation for the company and the employee. For the company, the employee will be committed to work. For the employee, he is assured of a deferred compensation upon a certain number of years or retirement.
Income tax treatment
The company has the option to decide on the deductibility of the premium and taxability of the proceeds. If the owner of the policy is the employee, the premium is deductible against the profit of the company and the insurance proceed received by the employee will not be taxable on the company. However, the premium is taxable on the employee as benefit in kind and the insurance proceed will not be taxable on the employee.
If the company is the owner of the policy, then the premium paid will not be deductible against the profit of the company. The insurance proceed received by the company may not be taxable on the company.
I hope you have found this enriching and my advice can help you attract and retain the best talent in your business!
Sincerely yours,
Stephen
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