What is a 'Key Employee'

A key employee is an employee with a major ownership and/or decision-making role in the business. Key employees are usually highly compensated. They may also receive special benefits as an incentive both to join the company and to stay with the company.

BREAKING DOWN 'Key Employee'

The term key employee is also used by the Internal Revenue Service with regard to company-sponsored defined contribution retirement plans to refer to an employee who owns more than 5 percent of the business, owns more than 1 percent of the business and has annual compensation greater than a certain amount or is an officer with compensation greater than a certain amount. There are other IRS and government rules that have different definitions of "key employee" for different purposes.

How a Key Employee Affects a Business

From an internal perspective, apart from the IRS classification, a key employee may be considered to be 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 by virtue of their 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 work of the employee as vital to the infrastructure and operation of the business, even though that employee may not have a highly-visible role in terms of the public or outside business relations. For instance, the chief scientist on a team developing a novel new product expected to be a mainstay behind the business’s revenue and income could be regarded as a key employee.

Employers may feel the need to address compensation for key employees differently from the majority of the staff beyond providing salary. This can include offering a variety of options for them to save for retirement or presenting them work-life balance benefits to keep them engaged in the business. Conversely, employers might adopt a different stance if a key employee makes use of the Family and Medical Leave Act to take unpaid leave from work. Such employees, who may rank among the top 10 percent of salaried workers at a company, might not be reinstated by the employer under certain circumstances.

RELATED TERMS
  1. Employee Contribution Plan

    An employee contribution plan is an employer-sponsored savings ...
  2. Employee Engagement

    Employee engagement is a human resources concept that describes ...
  3. Exempt Employee

    Exempt Employee refers to a category of employees.
  4. Unit Benefit Formula

    Unit benefit formula is a method of calculating an employer's ...
  5. Unit Benefit Plan

    A unit benefit plan is an employer-sponsored pension plan with ...
  6. Employee Stock Ownership Plan - ...

    An employee stock ownership plan is a qualified defined-contribution ...
Related Articles
  1. Managing Wealth

    5 Low-Cost Perks for Small Business Employees

    Money isn’t the only way to motivate employees. Here are some savvy strategies even the smallest business can use.
  2. Personal Finance

    Top 10 Companies with the Best Parental Leave Benefits (NFLX, ADBE)

    Ikea just announced it will offer its 13,000 salaried and hourly employees in the U.S. up to four months of paid parental leave. Here are the other companies that offer the best benefits around. ...
  3. Managing Wealth

    Three Perks Business Should Give Their Employees

    Firms that treat their employees well have a competitive advantage over their rivals. Here are three important perks to give your employees.
  4. Financial Advisor

    Beware Of Company Stock In Qualified Plans

    While this strategy does have a few advantages, it can also pose some substantial risks to employees.
  5. Financial Advisor

    Why Do Businesses Benefit From Life Insurance on Employees?

    Companies can buy life insurance on their employees and collect the benefit proceeds. Find out why companies want to benefit from the death of their employees.
  6. Managing Wealth

    Raises or Bonuses Better for Small Business Staff?

    Weigh the pros and cons of each and strike the right balance to retain a top-tier staff and a healthy bottom line for your business.
  7. Insurance

    Life Insurance as a Bonus Plan for Key Employees

    A Section 162 plan is a life insurance plan provided by an employer to key employees.
  8. Small Business

    3 Reasons to Develop an Employee Handbook for Your Small Business

    Learn how a small business can benefit from an employee handbook covering labor laws, codes of conduct, leave policies and media relations.
  9. Personal Finance

    8 Reasons Why Valued Employees Quit

    Salaries are important, but retaining top employees requires more than just competitive pay.
  10. Managing Wealth

    5 Ways to Retain Good People in a Family Business

    The kids will become boss, not other employees, so how do you keep the good ones around?
RELATED FAQS
  1. What does a merger or acquisition mean for the target company's employees?

    Learn about the likely impact of a merger-and-acquisition deal on the target company's employees, including their benefits ... Read Answer >>
  2. Can LLCs have employees?

    Discover how limited liability corporations (LLC) can have an unlimited number of employees and the legal steps required ... Read Answer >>
Trading Center