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.