Unless you have capable successors and employees, your closely held business may not
survive. Therefore, strategies to identify, retain and reward key employees are a
must. There are numerous methods for rewarding a key employee's commitment, loyalty
and hard work. The most effective incentives are usually monetary. Generally, they
are offered in the form of nonqualified plans so the incentive can be tailored to a
particular person's situation.
Nonqualified plans are much more flexible than qualified plans concerning benefits,
contributions, and participation requirements. Nonqualified plans also provide the
opportunity to "tie" the employees to the business by incorporating conditions that
cause the forfeiture of benefits if the employee leaves or the business does not
reach certain performance targets. Let's look at some options.
Restricted stock. A restricted stock plan transfers stock to an
employee subject to certain restrictions. Often, the shares are transferred to the
employee at little or no cost, but are subject to forfeiture if the employee fails to
fulfill the terms of the plan. A common restriction requires employees to forfeit
their shares if they terminate employment within a certain number of years.
Incentive stock options (ISOs). ISOs can provide key employees
additional compensation through the opportunity to share in the appreciation of the
company's stock value. ISOs are usually granted to the employee at no cost with an
exercise price at or above the stock's current market price.
A nonqualified stock option (NQSO). An NQSO is an option that
specifically states it is an NQSO or one that does not meet the requirements of an
ISO. Like an ISO, you can use an NQSO to provide key employees additional
compensation through the opportunity to share in the appreciation of the company's
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