Executive Benefits In The Small To Mid-Sized Business Markets

By Steven R. Craig

The meltdown at Enron has brought mainstream national attention to the issue of executive compensation–not just cash and stock options, but benefits which utilize that glamorous tool of corporate finance, life insurance.

This, piggy-backed on the split-dollar controversies of recent years, has the wind of turmoil swirling around long accepted business uses of life insurance. But change breeds opportunity and it would be a mistake to assume that these proven planning techniques are no longer valid.

The fundamentals behind the use of life insurance in the business arena are as strong today as they have ever been. With a little polish and some new packaging, many of these tools will serve the business market for years to come.

A perquisite, according to the Merriam Webster Dictionary, is defined as a privilege, gain, or profit incidental to regular salary or wages; especially: one expected or promised. These perks, as they are commonly known, have become a critical component of an overall compensation plan.

While the closely held corporate market is vastly larger than the public company market, a number of producers have very successfully developed a clientele among executives of public companies. While the bar to enter this market is high, once achieved the rewards can be phenomenal.

Suddenly, the concept of “corporate governance” has entered dinner table parlance, and generous deferred compensation deals, protected by offshore rabbi trusts and equity split-dollar arrangements, are seen as evil excesses enjoyed by senior execs at public companies. The agents serving this market are busier than ever, not writing new business, but figuring out how to salvage old business and old relationships.

The media and government-proclaimed crisis in corporate governance aside, businesses–large and small, public and private–still have a critical need to attract, retain and reward the employees most responsible for the success of that business.

While the Fortune 1000 companies engage consulting firms to develop executive compensation programs, smaller, closely held businesses dont get the same attention. By their nature, these smaller businesses are unequivocally more dependent on their key employees.

A producer can become an indispensable resource to business owners and CFOs as well as outside financial advisors if he can help them answer some of the following questions:

How can I attract top talent without giving away the store in salary?

How can I retain and reward that talent so they are not lured away by my competitors or tempted to go off on their own?

How can I provide for an orderly succession plan at my retirement or death?

How can I use the business to finance my personal needs and those of my key people?

Discovering Unknown Needs. In the closely held business market, a longtime successful approach was to teach the small business owner how to use the tools that the “big boys” use. Now, we can teach them to use the tools that the big boys are no longer allowed to use.

A producers greatest skill in this market is often his ability to help a client solve problems he or she didnt even know about. While low-end market sales people can sell commodity-type products to solve the obvious problems, the true professionals are looking beneath the surface, poking and probing, never really knowing what they might find.

To discover hidden needs, a producer must learn to ask thought-provoking questions and listen carefully to the answers, here are some examples:

How well does the business run while you are on vacation? Who is responsible during that time? How long has he or she been with you? How hard would it be to replace that person?

Is this person ambitious, entrepreneurial? What prevents him or her from going out on his own? What prevents a competitor from hiring that person away?

How do you make this employee feel like a partner, without giving up equity, while offering him or her an incentive to stay and perform at a high level?

Helping the business owner with these issues will save him money and heartache in the long run. It is easier to understand the depth of these issues if you can see the real problem.

Recently, I was having lunch with a producer who told me about a client of his. This client had expanded his core retail tire business by adding a division that handled the customizing of cars. His biggest customer was a large regional dealership. This new division was extremely well run by a key employee and had become a cash cow for the enterprise. The owner was dedicated to growing and supporting this division and made significant capital investments to support its expansion.

The owner of the large auto dealership was a shrewd businessperson and thought he could maximize profit by doing the work in-house. Capitalizing the venture was no problem. All he needed was someone who knows the intimate details of the business to run it.

He didnt have to look very far. We see this all the time–the customer steals the employee who handles his account.

If the tire storeowner had a compensation plan with “golden handcuffs,” it is possible that the customer would have been unable to lure away the employee and may have abandoned the project. Unfortunately, this successful small business owner learned the cost of losing a key person the hard way.

Retaining key people is more art than science. Quality people dont like changing employment–especially when their good work is appreciated, and they are well paid. When you combine these factors with a financial loss, which is triggered by their leaving, they will find it near impossible to leave.

Retention tools like restricted bonus plans (REBAs) supplemental retirement plans (SERPs) or split dollar–or split dollar under the new rules–become easy answers once the client understands just how devastating the loss of a key person can be.

Fundamental business needs have not changed. As long as businesses require healthy, competent employees to run profitably, there will be a market for executive benefit programs that motivate, reward and retain key people.

Steven R. Craig, CLU, ChFC, MSFS, is affiliated with Flynn Associates in Encino, Calif. You can contact him at scraig@flynnassociates.com.


Reproduced from National Underwriter Edition, June 23, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.