# Key Employee: The IRS Term for Highly Compensated Employees

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## 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 either monetarily with benefits, or both. Key employees may also receive special benefits as an incentive both to join the company and to stay with the company.

### Key Takeaways

*   Key employees are often considered crucial to a company's operations.
*   They can be head decision-makers, designers, or any role whereby a large portion of a company's success depends on them.
*   Due to their importance, key employees may enjoy higher compensation, monetary bonuses, and other benefits, such as company cars and stock options.
*   The Internal Revenue Service (IRS) defines a key employee with precise requirements.

## Understanding a Key Employee

The Internal Revenue Service also uses the [term "key employee](https://www.investopedia.com/terms/i/irs.asp)." The IRS uses this term concerning company-sponsored defined contribution retirement plans. It refers:

*   to an employee who owns more than 5% of the business,
*   or has annual compensation greater than a certain amount or is an officer with compensation greater than a certain amount.

## 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](https://www.investopedia.com/terms/c/capital.asp) 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.

For various reasons, the employee 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](https://www.investopedia.com/terms/s/shareholder.asp) and customers.

> **Important**
>
> Other IRS and government rules have different definitions of "key employee" for different purposes.

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 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.

## Special Considerations

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 with 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](https://www.investopedia.com/terms/f/family-and-medical-leave-act.asp) to take unpaid leave from work. Such employees, who may rank among the top 10% of salaried workers at a company, might not be reinstated by the employer under certain circumstances.

## What Are Examples of Key Employees?

Key employee examples are the chief executive officer (CEO), chief operating officer (COO), sales managers, innovators, such as the heads of research and development, and specialists, such as data scientists, quants, or lawyers.

## What Is a Key Man Clause?

A key man clause is a clause often seen in investment funds, such as [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp). It stipulates that the fund cannot make investment decisions or other important decisions without the "key man," which is often the founder of the firm or the head investment manager. This individual is key to the fund's success. Key man clauses are triggered if the key person quits, retires, dies, or is otherwise no longer involved in the fund's decisions. This is to protect investors and other interested parties, such as lenders.

## How Many Employees Does a Company Need to Have a CEO?

There is no requirement for a minimum number of employees for a company to have in order to have a CEO. A company can have a CEO even with one employee. That person could be the founder and operator of the business and would act as the CEO. A company could have two people and have a CEO. A CEO would be the person of any business that guides the company to achieve its vision.

## The Bottom Line

Key employees in a company hold decision-making power or significant ownership and have an outsized impact on the company's success. These individuals are highly compensated, usually through high salaries, excellent benefits, and other positives, such as stock options in order to retain them. Many investors and other interested parties, such as lenders, seek to ensure a key employee remains at the company and can institute clauses if the key employee leaves.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Issue Snapshot - Identifying Highly Compensated Employees in an Initial or Short Plan Year](https://www.irs.gov/retirement-plans/identifying-highly-compensated-employees-in-an-initial-or-short-plan-year)."
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> 2.  Internal Revenue Service. "[2024 Limitations Adjusted as Provided in Section 415(d), etc](https://www.irs.gov/pub/irs-drop/n-23-75.pdf)." Page 2.