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University of Massachusetts Amherst

Family Business Center

How to Compensate Non-Family Executives Without Losing Control

by Shel Horowitz

Charles Epstein has been coming to the Family Business Center and listening for a long time. In fact, he was the person who convinced the University of set up the FBC in the first place.

On May 20, at the Delaney House, Epstein and his partner Raymond Gianantoni came to talk. They presented a number of options for companies that need to develop an attractive compensation package to keep nonfamily executives from jumping ship.

Many of the options involve “golden handcuffs”: programs that virtually force the executive to remain with the company in order to receive substantial financial benefits. After all, if you're an executive, it's a lot harder to walk away if you know there will be $400,000 or so waiting for you after 20 years-but if you leave too early, you have to pony up 10 grand or so out of your own pocket!

Many of the plans use life insurance as a funding vehicle. This has a number of advantages:

  • The employer reduces current taxes while accumulating a nice legitimate deduction
  • In the event of the employee's death, both the company and the employee's family receive a significant non-taxable death benefit
  • These plans are exempt from the nondiscrimination laws that affect so many other employee benefits; the company can individually select the employees who participate
  • The employee gains a major financial benefit at a relatively small cost to the company, but does not gain voting shares
  • And, of course, the employee has a significant incentive to stay with the company.

Depending on the goals of both the company and the executive, the plans can be set up a number of different ways. Popular choices include phantom stock and split-dollar life insurance and SERP (Selective Executive Retirement Plans, though there are many other options as well.

Epstein and Gianantoni often recommend one of these two plans, because they accomplish so many objectives at once. They are available for consultation to any FBC member who'd like to learn more.

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