Alternative Compensation Plans: How Paying Employees without Money Pays Off

New Compensation Methods Incentivize Employees and Create Cash Flow Flexibility

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Today’s businesses are seeking creative, new ways to establish or maintain a competitive advantage and secure performance goals, but without the drain on precious cash flow delivered in the traditional forms of bonuses, spot awards, and profit-sharing funds, introducing alternative compensation plans.

Why? For some businesses, it’s a matter of needing more cash for debt commitments and survival. For others, freeing up cash flow can help invest into an expansion, transition, or major technology or equipment upgrade. Whatever the reason, companies are looking for ways to manage and increase cash flow flexibility, without taking a hit to employee salaries and incentives.

“Businesses are conscientious of the negative effects that cutbacks can have on employee morale and retention,” says Danielle McCormick, partner for K·Coe Isom’s HR outsourcing team. “But the reality is, there are often complexities in business projections that force owners to look for areas where ‘something’s got to give.’ This usually comes as a cutback or elimination in order to meet their business goals.”

“Unfortunately, these cuts typically fall on the ‘bonus’ employee compensation and incentive areas first. In the end, these decisions disrupt productivity and impact long-term retention of key employees.”

For these reasons, many companies have started to evaluate the use of incentive compensation – that is, the portion of an employee’s salary that is related to performance, but not necessarily rewarded in money. These alternative compensation incentives provide the value that rewards select employees and maintains high performance levels, without the need for a cash payout.

Ways to ‘Cash in’ on Employee Compensation Tactics

There are a number of alternative compensation options and customizable plans to evaluate for each business, including:

  • Deferred Compensation Tactics – used as an incentive plan; awarded to officers, key managers, key employees
    • Cash-based deferred compensation
    • Phantom stock plans
    • Stock appreciation rights
  • Qualified Retirement Plan Options – motivates and rewards employees; tax deferment tactic
    • Employee Stock Ownership Plan (ESOP)

An advisor can help to assess the advantages and disadvantages, applicability, timing, and tax strategy that will best meet a company’s objectives.

Typically, the first phase begins with a process of discovery and identification of short- and long-term goals.  This provides a pathway to identifying potential compensation programs that might be an effective choice.

In evaluating which tactic is suitable and beneficial for your business, it’s important to undergo financial analysis to ensure the recommended option can be implemented effectively.  There are many underlying advantages and disadvantages to compensation incentives, so each company should assess the effects applicable to their business structure prior to implementation.

These incentives are changing the way HR departments are handling employee compensation structure,” says McCormick.  “There’s a real impact happening here – providing new options to tackle age-old business challenges: rewarding key employees for better retention, optimizing cash flow for greater flexibility, increasing the value of the company through higher performance, and attracting top talent with a competitive advantage.”

To evaluate which non-monetary compensation options would be beneficial for your business, contact K·Coe Isom’s HR services team.  An expert advisor can lead you through the process, provide in-depth financial analysis and assessment, and help with implementation and employee education.

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