Stock Bonus Plans for Community Banks

nest-egg.jpgCompanies are cutting employee benefits to conserve cash. There is another approach. Banks can sponsor retirement plans which provide deductible employee benefits in the form of stock, not cash, and reward the folks who build value over time.

How Does a Stock Bonus Plan Work?

It is a retirement program that works much like a profit-sharing plan, permitting the sponsoring company to make tax-deductible contributions in cash or stock to participant accounts. The limit is 25 percent of eligible compensation aggregated for all qualified plans.  

So, if a community bank with a payroll of $2 million makes a $50,000 match on the 401(k) plan, the deduction limit for an additional stock bonus contribution would be $50,000 less than 25 percent of $2 million, or $450,000. While most banks would typically contribute a much smaller percentage of compensation, the key is to understand the limits. 

Who Benefits from a Stock Bonus Plan?

In the above example, the bank had 49 employees with seven employees making more than $100,000 annually; these seven received 47 percent of the total compensation.  Since the allocations to participant accounts were made in proportion to pay, the 10 percent of payroll ($200,000) contributed meant that the key group received $94,000 in stock. The non-discriminatory plan meant that the non-highly compensated group received the balance of the shares in the plan.

Curiously, these plans sometimes better suit smaller banks specifically because of the need to reward key players and the ability of some stock bonus designs to skew benefits to them. Large plans with hundreds of participants can spread ownership more broadly.

The bank holding company sponsoring the plan received a tax deduction for the $200,000 non-cash expense and a resulting cash flow improvement (analogous to the tax effect of depreciation). This would not be possible if you contributed cash instead of stock to a retirement plan. The end result is more cash saved on the balance sheet. The table below illustrates this in a hypothetical example.

Three retirement plan options were considered: A) cash contribution; B) no contribution; C) stock contribution.  


What Are Five Must Dos for Stock Bonus Plans? 

  1. Use an independent stock valuation for the share value, if the corporation is closely held or thinly traded.
  2. Coordinate the capitalization and shareholder (dilution) effects with a comprehensive benefit strategy for both the highly and non-highly compensated employees.
  3. Base the cost/benefit analysis on the ongoing plan operating costs, cash savings and the long-term obligation to repurchase shares from former plan participants when they retire. 
  4. Maximize the benefit of employee ownership by communicating the plan clearly to the participants.
  5. Consider using the more versatile Employee Stock Ownership Plan (a sub-class of stock bonus plans), if the intent is for the plan to purchase shares rather than operate as a simple contributory plan. A stock bonus plan cannot purchase stock from shareholders, while an ESOP can; the ESOP can even borrow money to buy the shares; both types of plans hold the majority of their assets in company stock.

What Are Three Things Not to Do?

  1. Implement a stock plan where the organization’s operating profits (<$500K) or numbers of employees (<30) do not warrant the cost.
  2. Convert the 401(k) plan of a closely-held sponsor to any of the forms of stock bonus arrangements and use employee money to purchase shares or otherwise have stock in employee-directed accounts.
  3. Consider stock compensation in troubled banks with problematic “going concern” valuations or questions about viability. 


Successful banks may be tempted to curtail employee benefits in a difficult economic environment, but may in fact be better served in terms of employee motivation and operating results by a restructuring of the benefit program. There are many other rules and variations on the stock bonus theme; a decision should be narrowed to the main pros and cons through a review with skilled designers.