What Is a Key Employee?
Let me explain what a key employee is: it's an employee who holds a major ownership stake or plays a critical decision-making role in the business. These individuals are typically highly compensated, whether through salary, benefits, or a combination of both. You might see them receiving special incentives to join and remain with the company.
Key Takeaways
Key employees are often seen as essential to a company's day-to-day operations. They could be top decision-makers, designers, or in any position where the business's success heavily relies on their contributions. Because of their value, they tend to get better pay, bonuses, and perks like company cars or stock options. Remember, the IRS has its own precise definition for key employees.
Understanding a Key Employee
The IRS also defines 'key employee' in the context of company-sponsored defined contribution retirement plans. This applies to someone who owns more than 5% of the business, earns annual compensation above a set threshold, or is an officer with pay exceeding a certain amount.
How a Key Employee Affects a Business
From an internal viewpoint, beyond the IRS rules, a key employee is integral to the company's operations. They might help secure funding through their networks or expertise. For instance, if they're tied to sales, their performance directly influences cash flow—think of a top salesperson driving major revenue. They could even be the public face of the brand, vital for keeping shareholders and customers on board.
It's important to note that other IRS and government rules define 'key employee' differently depending on the context.
Even if not publicly visible, their work might be crucial to the business's core, like a chief scientist developing a key product that sustains revenue.
Special Considerations
You should know that employers often handle compensation for key employees differently, offering retirement savings options or work-life balance perks to keep them committed. On the flip side, if a key employee—say, one in the top 10% of salaried staff—takes unpaid leave under the Family and Medical Leave Act, the employer might not reinstate them in some cases.
What Are Examples of Key Employees?
Examples include the chief executive officer (CEO), chief operating officer (COO), sales managers, innovators like heads of research and development, and specialists such as data scientists, quants, or lawyers.
What Is a Key Man Clause?
A key man clause appears in investment funds, like hedge funds, stating that the fund can't make investment or key decisions without the 'key man'—often the founder or lead manager. This person is central to the fund's success, and the clause activates if they leave, retire, die, or step away, protecting investors and parties like lenders.
How Many Employees Does a Company Need to Have a CEO?
There's no minimum employee count required for a company to have a CEO. Even a one-person operation can have the founder as CEO. With two people, one could serve as CEO to guide the business toward its vision.
The Bottom Line
In summary, key employees wield decision-making power or major ownership, profoundly affecting the company's success. They're compensated generously with high salaries, benefits, and incentives like stock options to retain them. Investors and lenders often insist on clauses to ensure these individuals stay, safeguarding their interests if departure occurs.
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