b'YOUR TOOLKIT FOR BUILDING EXCELLENCEStock-Based Plans: Risks & Rewards Prior to awarding stock (deferred or outright), an owner needs to ask one critical question: Am I attempting to develop a plan to reward, retain, and recruit key personnel, or am I looking for new business partners? Awarding stock to the wrong person and/or for the wrong reason can be cause for litigation. Shareholders, even minority ones, have substantial rights and privileges associated with ownership, such as access to company financials or major company decisions (including selling, reorganization, expanding, and company-funded, with no option for salary deferral.capital expenditures). They can even challenge a At retirement (or stated age), the key employeemajority owners compensation package, if perceived receives supplemental income paid out of cash flowto be excessive.from the company. With SERPs, in the event of theOn the other hand, if your key managers are your key employees premature death, company owned lifechosen successors, then stock-based incentive plans insurance is often received to recover the cost of thecan go a long way toward helping to finance a stock plan and/or to provide a lump sum benefit to the keytransfer. As a side note, under cash-based plans, employees named beneficiary. As with previous planowners often offer immediate vesting of deferred designs, benefits become taxable to the employee/ balances if used to purchase stock.beneficiary upon receipt and tax deductible to theEither way, incentive/retention plans are particularly company when paid.useful in helping to finance an internal ownership Restricted Executive Bonus Arrangement transition, especially since the most common Under a Restricted Executive Bonus Arrangementchallenge internal transitions face is a lack of available (REBA), the company deposits annual bonuses intocapital to finance the deal. a cash-oriented life insurance policy for the benefitCONCLUSIONof the key employee and his/her dependents. Tax- Developing incentive/retention plans for your key deferred cash value accumulation provides keypersonnel is something that every owner should employees a source of tax-free income, in addition toexplore. Even for those who have explored or perhaps tax-free survivor benefits, in the event of a prematureeven implemented one, periodic review of plan design death. The key employee owns the policy and namesand results is prudent. A companys future, an owners a personal beneficiary but has restricted access to thefinancial independence, and his or her personal legacy cash values until the terms of the plan have been met,all depend upon it. which encourages employee retention.DYANNE ROSS-HANSON is President and Founder Since the employee owns the policy, bonusesof Exit Planning Strategies, LLC in Oakdale, MN. EPS are considered taxable income in the year paid.is a financial-based consulting firm focused on helping Correspondingly, the company enjoys an immediatecompany owners develop intentional ownership/exit tax deduction when the bonuses are paid. Theplans for their businesses.company can choose to gross up the bonus (makingCopyright2016 by the Construction Financial it fully deductible) in an effort to offset the employeesManagement Association (CFMA). All rights reserved. income tax obligation.This article first appeared in CFMA Building Profits (a The REBA is the simplest nonqualified plan design ofmember-only benefit) and is reprinted with permission.all; it does not require separate financial accounting, valuation, and/or third-party administration. As such, it also does not adversely impact bonding or banking covenantswhich are important to many contractors.FRAME BUILDER - MAY2023 / 11'