- Do you have key employees who are telling you they want a piece of the action – an ownership interest in the dealership?
- Do you have key employees whom you want to retain in the dealership over the long term?
- Do you have highly compensated employees who are getting killed income tax-wise and want to know what you can do to help?
- Are you looking for ways to create greater incentives for your key employees?
If you answered yes to any of the above questions, then you should consider utilizing some type of non-qualified deferred compensation plan(s) in your dealership. The Fortune 500 companies have been using NQDC plans for years to attract and retain their key employees and so should you.
In every dealership there are usually 1-3 key employees who make the difference in your bottomline. Therefore think of your key people while you imagine the following conversation regarding your setting up a non-qualified deferred compensation plan.
“I’ve decided to set up a program just for you which will allow you to get a percentage of the profits of the dealership. Looking at our numbers this should result in an account of $500,000-1,000,000 for you. The key is for you to stay and continue to make this dealership profitable.”
Do you think this person is going to be motivated? To watch the bottomline like you do? What if this could be done without you giving up your stock?
The answer to these questions is that this program is called a Phantom Stock Plan. So how does it work? Let’s look at an example.
Sample Phantom Stock Plan
- GM is 45 years old
- Dealer has decided to allow the GM to earn 25% of the dealership (25 units of phantom stock) over the next 10 years
- GM can earn 1 unit for each $100,000 of profit (before bonuses to the dealer or related parties) above a benchmark of $500,000 (this is the amount that the dealer has determined must be made before the GM can share in the profit)
- A formula is determined to value the phantom stock units – in this case book value adjusted for LIFO after-tax plus one times the last 5-year average earnings of the dealership.
- Retirement age 65
- Key issue: The dealer wants the GM to stay until retirement. Therefore we use a rolling vesting schedule which means that if the GM leaves early he will forfeit a large percentage of the phantom stock which he has earned. It will take the GM 20 years to vest 100% in his Phantom Stock Plan.
Calculation of Phantom Stock Value (hypothetical numbers used for example purposes)
Value of Stock Vested Vested Phantom
Year By Formula Units Stock Account
2004 2,240,000 4.45 100,000
2009 2,475,000 12.45 308,000
2019 3,850,000 20.00 770,000
The best news – a Phantom Stock Plan has tremendous flexibility – you are essentially limited only by your creativity.
Do you want your GM to get his phantom stock account sooner?
-Design the plan so he will.
Do you want your GM to only receive a percentage of the profits after the dealership earns $1,000,000 of profits?
-Design the plan that way.
Do you want your GM to be able to earn more than 25% of the dealership profits? -Design the plan to give him that incentive.
Phantom Stock Plans are only one example of Non-Qualified Deferred Compensation Plans. Unlike Qualified Plans such as 401(k) plans or profit-sharing plans, NQDC plans allow for the following:
- You can pick and choose the participants within a minimum of guidelines
- NQDC plans avoid most, if not all, of the burdensome ERISA requirements for employee benefit plans
- No dollar limits on benefits
- Complete flexibility on design and vesting of plan
- Allows in most states for non-compete clauses which if violated would result in complete loss of benefits.
There are some important rules which must be followed but they are in keeping with the objectives of retaining key employees. Non-qualified deferred compensation plans have been utilized for years by Fortune 500 companies, as well as private family owned corporations such as auto dealerships, so the rules have tracks for you to run on.
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