REWARDS AND RETENTION: Keeping your best employees on for the long haul

Jack West

Sport or business background with medal award.Many business owners train and mentor employees only to have them leave in two or three years. If you’ve experienced the loss of a promising employee then you know the costs related to turnover are high, and getting higher as jobs become more specialized.

You probably offer the usual employment benefits, perhaps even a retirement plan, but even that may not be enough to retain top talent. Younger workers, in particular, don’t want to wait until retirement for a bonus—they often think in shorter terms. You may want to reward certain key employees and let them know how special and important they really are to your operation. What you’re looking for is a shorter-term benefit that can work well at retaining key employees.


When considering shorter-term benefits, there are a number of questions you first need to answer in relation to your existing talent pool and your offerings:

• Who keeps the business running smoothly when I am here? When I am not here?

• Do I want them to stay until their retirement? Or until my retirement?

• What is keeping them here: Job satisfaction? Financial security? A relationship with me or other employees?

• Will they stay because of their current benefits? If not, what will it take to keep them?

• Is there a way, without raising their salaries now, to give them an incentive to stay?

• Can I offer an additional benefit only to specific employees without offering it to all my employees?

Spoiler alert: the answer to the last two questions above is ‘yes.’


An employee-specific bonus plan is one way to give key employees a reason to stay. Essentially a carefully thought-out promise to pay a selected key employee specified bonus amounts at specified times for continuing employment with you, it rewards loyalty and provides incentive to stay.

While these plans can be structured and scheduled any number of ways, a typical sample schedule of an offering, called an Employee Private Bonus Plan, may include: a $5,000 bonus after five years, $7,500 after 10 years, and $10,000 after 15 years of employment.

This type of bonus works for both the employer and the employee, as the bonus is tax-deductible to the business, and the employee doesn’t have to wait until retirement to reap the rewards of longevity—an especially important factor for younger employees just starting their careers. Plus, you can design the plan as you desire to get maximum retention value. This type of agreement states that if your employee is not employed with you at the time of a scheduled bonus, no payment is made.


One of the easiest ways to finance a bonus plan of this nature is with a universal life insurance contract. While the value of life insurance to keep a business operating in the event of the death of an owner or key employee is obvious, many business owners aren’t aware of how it can also be used to fund a bonus program.

Here are a few things to understand about this approach:

• When using life insurance as a funding vehicle, the business is the owner, payer, and beneficiary of the policy.

• Cash values are owned and controlled by the business, are shown as an asset on the books, and generally grow tax-deferred.

• Insurance premiums are not tax-deductible to the business; however, the bonus is tax-deductible when paid to the employee once the employee has fulfilled the required number of years.

• The life insurance proceeds can be used to hire and train a replacement, and to replenish lost profits during the transition period.

A common variation includes offering a percentage of the death benefit to the employee’s beneficiary through a written Endorsement Split-Dollar agreement. This approach provides needed personal, tax-free death-benefit coverage to your key employees for pennies on the dollar. For this tax-free death benefit, a small-term insurance cost is reported on your employee’s W-2 each year.


You may invest countless hours and dollars training and mentoring young employees. Your talented employees will be more likely to stay if you challenge them with responsibility and offer opportunities that may not be available from competing employers. A scheduled bonus plan may help you get the best return for your investment in their future.

This article is for general information only and should not be considered legal, tax, or financial advice for your particular facts and circumstances. Consult with independent professional advisors for advice unique to you and your business.


West_Jack_102503Jack E. West is a national account executive with Federated Insurance, PDCA’s exclusively recommended insurance provider for association members. Operating in 47 states, Federated’s representatives are familiar with the insurance needs of painting contractors. To meet with a representative to discuss your current policy and coverage options, call 800-533-0472 or visit


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