What is a key employee?
A key employee has a significant ownership and decision-making role in the business. Key employees are usually highly compensated, either monetarily with benefits or both. Key employees may also receive special benefits as an incentive both to join the company and to stay with the company.
Understanding Key Employee
The Internal Revenue Service also uses the term key employee. The IRS uses this term for company-sponsored defined-contribution retirement plans. It refers:
- to an employee who owns more than 5 percent of the business,
- owns more than 1% of the business,
- Is annual compensation more significant than a certain amount, or is an officer’s compensation more significant than a certain amount?
How a Key Employee Affects a Business
From an internal perspective, apart from the IRS classification, a key employee may be considered an intrinsic part of a company’s operations. Such an employee could be influential in securing capital for the business, which may occur through their connections or work.
For example, the employee may hold a role tied directly to sales channels for the company, intertwining their performance and business activities with the cash flow. The employee might be the top-performing salesperson at the company, driving a significant portion of the regular revenue. The employee, for a variety of reasons, may represent a public face associated with the company’s brand and is thus seen as crucial to maintaining the investment and support of shareholders and customers.
The company may define the employee’s work as vital to the infrastructure and operation of the business, even though that employee may not have a prominent role in public or outside business relations.
For instance, the chief scientist on a team developing a novel product is expected to be a mainstay behind the business, and income could be regarded as a critical employee.
Special Considerations
Employers may need to address compensation for critical employees differently from most staff beyond providing salary. This can include offering various options for them to save for retirement or presenting them with work-life balance benefits to keep them engaged in the business.
Conversely, employers might adopt a different stance if a critical employee uses the Family and Medical Leave Act to take unpaid leave from work. In some cases, the employer might decide not to reinstate these workers, who may be among a company’s top 10% of salaried employees.
Conclusion
- A company’s processes often depend on its key workers.
- Key workers might get extra money and other perks.
- Regarding pay, employers may handle key employees differently than other workers.
