In planning for business succession the dominant issue is people. Who will own the company? Who might want to buy it, and at what price? Who will manage it? If you plan to pass the shop to your son or daughter, for example, will the other managers stay with you or will they seek greener pastures?
In the competition for the leaders of tomorrow, special tools are needed. Sure, all employees benefit from good working conditions, fair compensation, group benefits and 401k plans, but how do you recruit and/or keep the key players that you will need in the years ahead?
These players all aspire to greater responsibility, power and standard of living. That also makes them attractive to your competitor, who is concerned about the future of his own business. Besides a decent income, once your manager has spent his annual Christmas bonus, what ties him to your future?
Traditional pensions and profit sharing plans are expensive and apply the same benefit formula to everyone, family, managers, and hourly employees alike. Whether or not you have such a plan, there may be a far more effective way to attract and retain key people.
Enter the "Nonqualified Pension," so-called because of its tax treatment. Unlike a Qualified plan, like your 401k, pension, or profit sharing plan, which allows you to deduct your contributions when they are made and is subject to complex federal regulations, the deduction under a NQ Plan comes when you actually pay the benefits to the executive. While your Qualified plan must cover everyone the same, a NQ is totally flexible. The Department of Labor, in fact, only allows you to do it for select top managers or key employees.
A NQ plan is simply an unsecured exchange of promises. If your manager promises to stay, you promise to pay. You sign a mutually binding contract spelling out the terms of your arrangement, and it can be changed if both parties agree.
There are two general types of NQ arrangements:
The Supplemental Executive Retirement Plan, or SERP, is paid for entirely by you, the employer. It is a future benefit over and above any retirement plan. For example, in exchange for his promise to stay with your company until retirement you promise to pay him an additional retirement benefit, say, $20,000 for 10 years. You can also promise him that the benefit will be paid even if he becomes disabled and unable to make it to 65, or to his family if he should die before then. If he leaves you to join your competitor, he leaves $200,000 on the table! That’s a lot of money.
The other basic type of NQ is the Deferred Compensation Plan, whereby he agrees to defer a portion of income into the future, sort of a one person 401k plan. If he is highly paid, this permits him to delay the taxation of that money until he or his family actually receives it, perhaps in a lower tax bracket. This plan can be an excellent incentive for recruiting purposes.
A few other points:
The Department of Labor allows NQ plans for only top management and other highly-compensated employees. To cover your rank and file would subject you to the regulations of ERISA.
For the shop owner who wants his business to outlast him and wants to attract the kind of people who share his goal, NQ plans are proving a very effective tool.
(Editor’s Note: We are currently developing a succession planning manual that will be available through INSIGHT. Any shop owner interested in participating in a "beta" version of this guide should call Charlie Baker at (800) 860-2744.)
John J. Dunlavey provides services to owners of collision repair facilities and their jobbers. He can be reached through the INSIGHT web site at: www.collision-insight.com or call (800)860-2744.
Reprinted from the October 1997 Issue of Collision Repair Industry INSIGHT.
© 1997 Collision Repair Industry INSIGHT. All Rights Reserved
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