Putting a dollar value on a key employee's economic worth is hard. But it's also necessary when creating your business succession plan. What would happen if the key employee died today? Would it be difficult to replace him or her quickly because of their special talents? How much specialized knowledge does that key person possess?
While there are no particular rules or formulas for putting a dollar value on a human life, there are four key costs to consider and several possible methods to use in valuing that employee's replacement.
1. Contribution to Profits
The top concern for most businesses is how much the employee is worth in terms of company profits. Even if not directly responsible for sales revenues, the employee may maintain a key customer account or be vital to the production or operations process. Assuming it can be determined how much a key employee contributes to profits each year, the employer could take that amount and multiply it by a factor. One possible multiple is the number of years or the measure of time it would take to recruit and train a replacement. Multiplying the time period by the profit level usually gives a fair estimate of how much coverage that employee should have.
2. Current Salary
As an employer, you could also use a multiple of salary. To do this, you determine how much life insurance is needed by multiplying the employee's salary by the number of years it might take a newly hired employee to reach the same skill level. A good rule of thumb is to use 3 to 10 times the employee's salary. You might also want to periodically review and increase the multiple as your employee's value (and salary) increases.
3. Cost of Replacement
There are replacement costs in terms of both time and money—if you recruit the replacement yourself, you're spending valuable time. If you use a recruitment firm, there are hard dollar expenses in the form of recruiting fees. Attracting and hiring an equally qualified replacement may require a higher level of salary and fringe benefits than your employee was receiving. In some cases, it may take more than one person to replace a key employee.
4. Excess Salary
Some key employees receive excess salary. This is the portion of the employee's salary that's above and beyond what would be paid to a non-key employee who performs routine job duties. The excess amount is multiplied by the number of years it would take to recruit and train a replacement. That amount is then often used as the death benefit amount of the new life insurance policy you would buy to cover your key employee.
There's so much more that life insurance can do for your business. Learn how in the video below:
No matter what level of coverage you need for your key employee, the right life insurance policy is just a call or click away.