10 key things to know about key employees

Advisors sometimes ask me what defines a “key employee.” Now that Charlie Sheen quotes are passé, it’s not enough to respond that a key employee is one who is “winning.” We need to offer more meat to the definition.  To me, a key employee is defined by:

  • Contributions to sales or profit. Is the employee instrumental in generating the inflow that keeps the business running?  The employee may have no direct reports, but may be the perennial sales leader. 
  • Contribution to the management, efficiency or unique value proposition of the company (internal value). Every company has its own unique value system, and some sort of internal measure usually indicates how important an employee is to fulfilling those sets of values. Often the manager behind the scene is unknown to outside audiences but key the internal success of the company. 
  • Contribution to the reputation or branding of the company (external value). Most companies have outside stakeholders, and here the question is which employees are seen by the public as key to maintaining the company’s reputation with the world outside the business. 
  • Provides value to the company for obtaining capital or credit lines. Especially in these economic times when cash is king and capital is scarce, a key employee is often the person who is the most likely to keep credit and capital accessible to the company. Whether it’s because of the employee’s positive sales record or the employee’s connections to the banking industry, one who can create or protect capital is key.   
  • Income. Although an imperfect measure, income tends to define how key an employee is perceived to be by the company.  The higher the income, the more likely the employee is to be defined as “key.” Sometimes outside indicators can help in making this classification.  For example, the Internal Revenue Service (IRS) currently defines a highly compensated employee as one who earns $115,000 or more per year. 

The point of defining a key employee is to then help an employer assess what is needed to keep that employee happy and productive. Recent research provides some interesting findings about key employees and their perceptions about retirement and financial matters.

This research, which focused on high-income employees of small to mid-sized companies, found that when it comes to retirement planning, key employee planning needs are not identical to those of other employees.  For example, three of four key employees are more likely to be aware of the amount of money they’ll need for a comfortable retirement; that’s opposed to fewer than half of other employees who are similarly aware.

In addition, more than half of key employees – 58 percent – are significantly more likely to believe they are saving enough for retirement compared with only 26 percent of all other workers. This leads to a conclusion that, comparatively, key employees know better than other employees what they’ll need for retirement. 

Here are 10 points about key employees, each point supported by research: 

  1. Key employees consider a specific set of economic indicators to determine if the United States is on the road to economic recovery.
  2. Quality-of-life worries make them toss and turn.
  3. They want to save more money for retirement.
  4. They’re not counting on Social Security.
  5. They’re significantly more likely than other employees to be saving for retirement, so they need a variety of ways to save.
  6. They know what they’ll need for retirement.
  7. Retain top talent with employer-based benefits.
  8. Tax-advantaged savings are critical.
  9. They’re open to guidance from financial professionals.
  10. They believe their dreams will come true.

So, what do these points tell advisors in terms of benefit planning for key employees?  Here are some ideas for approaching this market: 

Talk to employers about evaluating their benefits for key employees.

Key employees are looking for tax-advantaged retirement savings benefits.

Employers can consider nonqualified solutions that address this concern and help retain and attract top talent for the organization.

Talk to key employees about their retirement sources. Key employees value their employer-sponsored retirement plans. In fact, 89 percent of them report participating in such a plan. Determine if key employees are willing and able to contribute the IRS annual maximums to their defined contribution plans.

Determine key employees’ retirement gaps. Long-term retirement programs, in and above qualified plan programs, can help retain these individuals both now and in the future. As income increases, the percentage of income replaced at retirement decreases. The resulting gap represents the amount of retirement income key employees must fund using other accumulation sources.

Address key employee concerns regarding financial professionals and about the financial strength of the companies presented. Chances are market volatility has taken its toll on the key employee’s investments and the timing of retirement plans.  Employers and key employees alike are open to new ideas and new solutions, but tangible assurances are needed to generate action. 

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that the author is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.


*JD is an educational degree and the holder does not provide legal services on behalf of the companies of the Principal Financial Group.


About the Author
Steve Parrish

Steve Parrish

Steve Parrish, JD, CLU, ChFC, is a national advanced solutions director with the Principal Financial Group in Des Moines, Iowa. With more than 30 years’ experience as an attorney and financial planner, Parrish frequently addresses the challenges of business owners and executives nationwide. 


Advertisement. Closing in 15 seconds.