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Golden Handcuffs to Keep Employees

Golden Handcuffs to Keep Employees?

Golden Handcuffs to Keep EmployeesGolden handcuffs are benefits provided by an employer to discourage an employee from leaving the company to take another job. Golden handcuffs have a bad connotation; it’s implied that they unhappily tie an employee to a job. But golden handcuffs may be a good strategy during this period of the Great Resignation and can be done in such a way that benefits both the employee and the company.

Develop a strategy that benefits both the employee and the company.

Intangibles

Golden handcuffs traditionally are viewed as monetary. But in today’s environment, intangibles can be a form of non-monetary compensation. Technically, they aren’t handcuffs because there are no strings attached to the intangibles. But they may be viewed as benefits which employees can’t/won’t live without. Employees surveyed often say they want these intangibles, which include:

  • Recognition. A thank you (public or private), a promotion, or other means of recognition likely is appreciated. Recognition should be done by managers and encouraged by peers. According to survey by Bonusly, 65% of those polled believe they’d be likely to stay at a job with an unappreciative manager if their coworkers and peers still recognized their work.
  • Favored work arrangements. This may be remote work for some or all of the time or flexible scheduling.
  • Mentoring and career development. This is a valued benefit, especially by younger workers. This is especially true when the company pays some or all of the cost of an employee’s training or education; it’s a retention inducement.

Salary and benefits

With today’s current rate of inflation, wages and benefits need to keep pace so employees’ compensation packages don’t fall behind. For many small businesses operating on tight margins, this is easier said than done. It may require raising prices on goods or services to afford pay increases. It may also mean that owners forego pay or distributions to themselves in order to afford increases for their staff. But done via golden handcuffs in the form of a bonus under a nonqualified deferred compensation arrangement that employees can only earn by staying with the company help both the employees and the company. The employees receive the added comp after a set period (e.g., 2 years) and the company retains them, at least for this period.

Note to employers: Withholding and FICA taxes aren’t straightforward. Because there’s no initial payout to employees, there’s no income on the deferred comp and no income tax withholding. But FICA is due on the later of when the services are provided or there’s no substantial risk of forfeiture even though the funds haven’t been paid out. The IRS has an audit technique guide on Nonqualifed Deferred Compensation for its examiners explaining how this works that you may find helpful.

Ownership interests

Even better than a thank you or an added paycheck is giving an ownership interest in the company to employees. Again, this can be arranged as a golden handcuff with vesting of that interest over a period of time. For example, stock appreciation rights may vest in installments over 3 to 4 years.

The type of interest granted depends on the company’s structure:

  • Corporations: Stock options, stock appreciation rights (SARs), and full value awards (e.g., restricted stock, restricted stock units (RSUs), and performance stock units).
  • Partnerships and limited liability companies: Profits interests.

As with deferred compensation, special payroll tax rules apply to equity-based incentives to employees and it can be complicated. For example, eligible corporations may issue stock to employees with a special deferral arrangement called a Sec. 83(i) election. Eligible corporations for this purpose are privately-held corporations that have a written plan under which not less than 80% of employees are granted stock options or RSUs. Qualified employees (i.e., those who are not excluded because they are at least 1% owners, highly compensated, CEO or CFO, or related to any of these) may elect to defer the inclusion of income otherwise taxable on the transfer of stock pursuant to the exercise of a stock option or settlement of a restricted stock unit for up to 5 years if a timely election is made and certain other events don’t intervene. Income tax withholding on the qualified stock subject a Sec. 83(i) election occurs at the end of the deferral period, but the employer must hold income tax in escrow during this deferral period and can’t deduct this compensation until it’s included in the employee’s gross income.

Final thought

In today’s tight job market, golden handcuffs may be a matter of all of the above, or at least as much as you can do.

French Enlightenment author Voltaire said "Appreciation is a wonderful thing: It makes what is excellent in others belong to us as well.”

If done right, it can help to retain valued workers, especially if there are some golden handcuffs in the mix.