Risk management newsletter: Receive timely and relevant resources
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In any business, a key person is defined as an employee who plays an integral role in the success of the organization. Such an individual typically possesses a highly specific skill set or level of knowledge related to a range of critical business functions—therefore contributing significantly to the organization’s overall stability. According to a recent survey conducted by the National Association of Insurance Commissioners, 71% of small businesses reported that they were dependent on one or two key individuals for ensuring organizational success.1

But what happens when these employees step away from the business or can no longer work for a period of time? Whether the cause for a key person’s absence is temporary (e.g., family-related leave, a vacation, an injury or an illness) or permanent (e.g., death, disability, a new job or retirement), relying heavily on a handful of employees can lead to serious business interruption concerns and financial hardship when they’re not present. Nevertheless, there are steps that organizations can take to prevent such issues from happening while a key person is absent.

It’s crucial for businesses of all sectors and sizes to consider key person concerns when assessing their risks and developing successful continuity plans. Here’s what you need to know about identifying key employees and avoiding the potentially costly consequences that can result when these individuals are away for an extended period or no longer part of your business.

Identifying key employees

The initial step in navigating key person exposures for your business is to identify who these employees are. Key individuals may not necessarily all possess the same professional qualities or hold leadership positions. Rather, these employees could belong to various organizational teams and have differing attributes.

Generally speaking, key individuals can be any of the following types of employees whose contributions are crucial to business functionality:2

  • Corporate executives (e.g., the chief financial officer)
  • Department leaders (e.g., the top salesperson or head of product management)
  • Employees involved in critical project workflows or important production line operations (e.g., engineers, product developers or equipment operators)
  • Employees with unique skills (e.g., maintenance technicians or technology specialists)

To accurately determine the key individuals within your business, be sure to ask yourself these questions:3

  • Who plays a vital role in employee, product or resource management?
  • Who is qualified or experienced enough to perform vital tasks or operations that few or no other employees are capable of doing in their absence?
  • Who possesses extensive knowledge about the business or industry as a whole?
  • Who do other employees frequently go to for guidance when organizational issues arise?
  • Who has a niche skill set that would be particularly difficult to replace?
  • Whose absences in the past (if any) have led to business interruptions or a loss of income?

In essence, identifying the key employees in your organization ultimately comes down to deciding who the business would have a hard time fully functioning or remaining profitable without.

Minimizing key person risks

Once you have determined who the key individuals are within your business, it’s critical to adopt adequate risk management measures aimed at limiting the ramifications that could result from such an employee’s absence (whether temporary or permanent). Consider the following protective measures:

  • Maintain proper documentation. First and foremost, make sure you clearly document who the organization’s key individuals are and what particular elements of their job roles are essential to fulfilling business operations or profitability. This documentation should also outline various ramifications that could occur due to the loss of a key person. By developing this documentation, you will be able to determine how to effectively respond to different key individuals’ absences.
  • Create a cross-training program. The best course of action to prepare for many key individuals’ absences is to train other employees on the individuals’ vital job components. This cross-training is typically conducted by the key individuals themselves, seeing as they are the experts of their particular roles. The goal of this training should not be for the trainees to demonstrate mastery of key individuals’ job components, but simply display an ability to complete the tasks as needed. After all, such expertise only comes with time and experience. Keep in mind that key individuals may initially be hesitant or defensive toward educating other employees on their job elements, as it may raise concerns about their expendability or seem like a waste of their valuable time. To alleviate these worries, be sure to emphasize to key individuals that this training is merely aimed at sustaining the overall viability of the organization in the event that they must step away.
  • Hire a third party. To prepare for the absence of a key individual with a niche, difficult-to-replace skill set (e.g., an IT specialist or a maintenance technician), cross-training another employee may not be a viable option. This is because the qualifications required for such a role may entail specific certifications or competencies that cannot be obtained through a standard training program. In these cases, your business may need to hire a third party (e.g., a specialty contractor) to step in while the key employee is away or during your search for a permanent replacement.
  • Integrate key person risks into your continuity plan. Because key individuals’ temporary or permanent absences can cause serious interruption issues, including such scenarios within your business continuity plan is a must. Specifically, you can use the aforementioned documentation that lists the names and vital roles of your organization’s key individuals to help identify their involvement in standard operating procedures (SOPs). Put simply, SOPs consist of steps that must be taken for your organization to carry out routine operations and remain functional. By cross-referencing your key individuals’ crucial roles with your business’s SOPs, you will be able to better determine which activities and operations must be accounted for during key employees’ absences in order to foster continuity. The solution for each key individual’s absence—whether it be cross-training another employee, hiring a third party or following an alternative protocol—should be clearly explained within your business continuity plan.
  • Consult the professionals. Lastly, it’s important for your organization to work closely with trusted insurance professionals or loss control experts to carefully evaluate your unique key person risks and ensure any concerns are adequately addressed within the scope of your business continuity plan, risk management program and commercial insurance coverage.

No business is immune to the risk of losing a key person. That being said, having a clear understanding of who your organization’s key employees are and implementing robust measures to limit potential losses when these individuals are away is a vital aspect of ensuring business stability. By keeping your organization’s key person risks under control, you can significantly reduce interruption concerns and remain financially secure in the midst of integral employees’ absences—fostering continued, long-term success for your business.