All business leaders must have an understanding of risk management to run a successful company. Professionals are constantly asked to manage risks associated with capital investments, operational costs, market strategies, and much more. It’s part of the job.
Yet, managing key man risk is often a much trickier prospect. People are more complex and more difficult to predict and replace than anything else in business. Because many companies have at least one or two professionals in their organization who are integral to its existence, mitigating against key man risk is essential. Thankfully, it can be done.
Identify Key Personnel
While there is no hard-and-fast rule for what makes a professional a “key person,” business leaders should still take time to identify employees who are crucial to the company. A key person might be responsible for generating a significant portion of the company’s revenue. Or they might have a set of highly specific skills that are irreplaceable. In general, businesses tend to designate individuals in executive positions — such as CEOs, department managers, or leading sales professionals — as “key persons”.
Because many companies have at least one or two professionals in their organization who are integral to its existence, mitigating against key man risk is essential.
Invest in Key Person Insurance
One of the most straightforward ways for mitigating against the loss of a key person is through key person (or key man) insurance. Key person insurance is a life and disability insurance policy that a business can take out on an indispensable person to protect it from losses incurred as a result of that person’s inability to work. If a key person were to then unexpectedly die, fall ill, or suffer a medical emergency, key person insurance would ensure that the company receives compensation for essential expenses like overhead costs, the redistribution of funds, recruiting, hiring, and training a replacement, and more.
Investing in these types of protections is critical. However, key person insurance should be a component of a larger business continuity and succession plan. Yes, there will be some cash flow coming in from these policies to replace some of the financial loss to the company after the death of a key person, but what happens if that person was the only one that knew how to access certain company data or projects? Who is the best person or team of people to step in and fill their shoes (even if it’s only temporary) to keep the operation moving forward? A larger continuity plan will help answer these questions.
Develop a Business Continuity and Succession Plan
What happens if a key person were to leave unexpectedly for another job? Or what happens if a business partner decides to step down to pursue another venture? These are not easy questions to answer, which is why business leaders should prioritize business continuity and succession planning within their company. Thoughtful, well designed plans in these areas will enable the business to minimize economic and operational impact from the departure of these key personnel.
A simple example would be, if Amy (the President of ABC Company) gave her two week notice today, which one of the other employees can step in quickly to fill her shoes? Then, who will step in to handle the work Amy’s emergency replacement was managing? How quickly and effectively will these people be able to find and access all of the projects Amy and her emergency replacement were working on?
Business continuity planning can help minimize the pain of losing a key person by answering these questions ahead of time. Since this complex process normally includes hiring and training competent replacements for key personnel, forming exit plans that mitigate against possible taxes, and maintaining healthy cash flow throughout, it’s important to be as prepared as possible.
Rethink Your Model
Businesses should obviously strive to hire talented professionals that bring a lot to the table. However, they should also seek to create models that allow them to quickly and efficiently deal with employee turnover. Bolstering internal training courses, process documentation, and structural codification can all insulate a company from the loss of a key team member.
Talented professionals come and go; the best companies have plans for such eventualities. These companies also develop strategies to reduce the probability of key people voluntarily leaving in the first place. This is accomplished through executive compensation strategies. These strategies simultaneously increase the engagement of the key person and create financial incentives that help drive them and the business to grow together.
At Blue Herring, we strive to provide assistance to companies that are looking to safeguard their future through key person insurance, business continuity and succession planning. We understand the intricacies surrounding these procedures, and we can help your company mitigate key man risk and when needed, secure appropriate coverage. Contact us here to get started today.