What is a Key Employee?
A key employee is an individual with major ownership and/or significant decision-making power within a business. These employees typically receive high compensation, whether through salary, benefits, or both, and often enjoy special incentives aimed at both attracting and retaining their talent in the company.
Understanding Key Employee
The term key employee also holds a specific definition from the Internal Revenue Service (IRS) with respect to company-sponsored defined contribution retirement plans, identifying an individual who:
- Owns more than 5% of the business,
- Owns more than 1% of the business and has annual compensation above a certain threshold,
- Is an officer with compensation surpassing a designated limit.
How a Key Employee Affects a Business
Internally, beyond IRS definitions, key employees are considered integral to a company’s operations. These individuals often play crucial roles in securing business capital, using their networks and performance to drive significant outcomes.
Key Takeaways
- Key employees are pivotal to a company’s operations.
- They often receive enhanced monetary compensation and other benefits.
- Employers may treat key employee compensation differently compared to other staff members.
An exemplary scenario includes an employee whose role is directly tied to the firm’s sales channels. This alignment makes their performance essential to the company’s cash flow. Often, this employee is a leading salesperson, driving substantial revenue streams for the business. They may personify the company’s brand, fostering crucial investment and support from shareholders and customers alike.
For example:
the top-performing salesperson at a company might significantly influence regular revenue, linking their professional performance directly with the company’s financial health. They could serve as the public face representing the brand, vital in maintaining stakeholder confidence.
Another scenario is the chief scientist involved in developing an innovative new product projected to be a cornerstone for the company’s future revenues. Such an individual, crucially impactful yet not necessarily public-facing, demonstrates how key employees can also be indispensable behind the scenes.
Special Considerations
Employers may address key employees’ compensation uniquely compared to the broader staff. Beyond standard salaries, this could encompass retirement savings options or work-life balance benefits designed to ensure their enduring engagement with the business.
Alternatively, employers might adopt a different approach if a key employee leverages the Family and Medical Leave Act (FMLA) to take unpaid leave. High-ranking salaried workers who fall into this employee category might face non-reinstatement under specific conditions.
Related Terms: Highly Compensated Employee, Chief Officer, Top Performer, Family and Medical Leave Act.
