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 stock value.

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