trends in executive benefits
DESCRIPTION
Snapshot of executive benefit trends for businesses.TRANSCRIPT
Trends in Executive BenefitsTrends in Executive Benefits
Lorrie Baldevia
November 12, 2008
Important Disclaimer This material has been prepared by MCM and is designed to provide general information in regard to
the subject matter covered. It should be noted that the information provided is given with the understanding that MCM does not
engage in the practice of law, or give legal, accounting, or tax advice. You are advised to seek counsel in these areas from your appropriate advisors.
Agenda Executive Compensation & Benefits Overview
Executive Compensation Strategy Nonqualified Plans Overview
Trends in Executive Benefit Programs Trends in Cash & Incentive Compensation Trends in Executive Retirement Plans Trends in Equity Programs Trends in Protection Benefits Trends in Executive Perquisites
Sample Client Strategies: Sample Executive Compensation & Benefit Packages
Questions???
Executive Compensation & Executive Compensation & Benefits OverviewBenefits Overview
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Executive Compensation & Benefit OverviewWhat makes up Executive Compensation?
SalarySalary
Annual Incentive/Annual Incentive/BonusBonus
Long TermLong TermIncentivesIncentives
BenefitsBenefits
Executive BenefitsExecutive Benefits
Executive Executive CompensationCompensation
Issues to consider: How the compensation strategy will support the business strategy. Which positions should have each pay component (i.e., salary, annual
incentives, long-term incentives, etc.) How to design each component to link executive pay with business
objectives.
Every compensation package can be designed to: Reward ongoing, day-to-day responsibilities, experience and expertise
with salary. Reward results with variable pay:
Use short-term incentives for short-term results. Use long-term incentives for long-term results.
Align executive interests with shareholder interests.
Executive Compensation StrategyEvaluating Compensation
Nonqualified deferred compensation plan: A plan, agreement, arrangement or promise By an employer to its employee To pay compensation to the employee at some future date
The plan must be: Limited to a group of management or highly compensated
employees Not subject to qualified plan limitations:
Not required to comply with contribution limits or testing requirements of qualified plans
Can be used to correct “reverse discrimination” of qualified plans The promise to pay is unsecured:
Funds may be set aside to meet future payment obligations
Executive Compensation & Benefits OverviewWhat is a nonqualified plan?
Qualified Plans have specific rules in design, administration, and funding Examples: 401k Plans, Defined Benefit Pension Plans Governed by ERISA Constraints on participation and deferral amounts
Non-Qualified Plans provide significant flexibility No limitations on the amounts that can be deferred Provides option for broader benefits to highly compensated employee groups due
to qualified plan restrictions
Key Difference: Qualified Plans are formally funded. Non-Qualified Plans are not formally funded.
The promise to pay is unsecured, although funds may be set aside to meet future payment obligations.
Executive Compensation & Benefits OverviewNon-Qualified vs. Qualified Plans
Attract talented key employees to the organization Retain key value-creators in the corporation for the long term Align interests of the executive, the company, and its shareholders Reward key employees for value creation Tie compensation to performance Provide incentives to obtain or surpass corporate objectives Create a competitive total compensation and benefits package Replace lost benefits due to qualified plan limitations Provide executives with an opportunity to defer current income tax
on compensation Provide executives with wealth building opportunities & financial
planning flexibility
Executive Compensation & Benefit OverviewWhy employers create executive compensation & benefit plans?
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Trends in Executive Benefit ProgramsTrends in Executive Benefit Programs
Trends in Executive Benefit ProgramsBenefit Focus
Cash IncentivesCash Incentives
RetirementRetirement
EquityEquityProtectionProtection
PerquisitesPerquisites
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Trend #1: Trend #1:
Cash & Incentive Compensation
Plan Types Available: Executive Cash Plans
Cash Bonus Plans Executive Choice Plans
Long Term Incentive Plans Nonqualified Plans Plan design can allow for deferred income with tax-
deferred earnings and growth
Trend #1: Cash & Incentive Compensation
Plan Description: Executive Cash Plans Plan Design #1: Cash Bonus Plans
Designated cash bonus promised to executive Specified delivery date – typically short term
Signing bonus Annual bonus Minimum guarantee
Can be based on performance or service achievements Plan Design #2: Executive Choice Plans
Allocated cash amount to executive To be used as individually desired in choice of benefit options
Plans usually offer menu of benefit choice options Must use or lose Cannot convert to cash
Trend #1: Cash & Incentive Compensation
Plan Description: Long Term Incentive Plan Contractual Agreement to provide deferred benefits for the
executive Type of nonqualified deferred compensation plan
May be designed to provide increased benefit based upon performance
Typically an incentive paid over longer term 1 – 3 years: Short term incentive 3 years of more: Long term incentive
May be as long as retirement Flexibility in payout design
Lump sum or installment payments In-service or retirement
Trend #1: Cash & Incentive Compensation
Plan Type: Executive Cash Plans
Advantages: EMPLOYER
Easy to establish Deducted as compensation expense Provides incentives that retain executives
EXECUTIVE Provides supplemental income Creates increased benefit options Provides benefit choices that are meaningful to the individual
Disadvantages: EMPLOYER
Must be paid no later than 2 ½ months after calendar year in which earned 100% vested to the executive Little value as a retention tool
EXECUTIVE May put in higher tax bracket If designed as a benefit choice, may lose benefits not used in a given calendar year Benefit choice plans cannot be converted to cash
Trend #1: Cash & Incentive CompensationAdvantages & Disadvantages
Plan Type: Long Term Incentive Plan
Advantages: EMPLOYER
Employers can select participants Performance metrics can be aligned with company objectives Employers have “handcuffs” to retain key employees
EXECUTIVE Supplemental income Savings accumulation vehicle Tax deferred earnings & growth Distributions pre-elected
Disadvantages: EMPLOYER
Tax deduction delayed until benefits are paid out
EXECUTIVE Cash payout for performance is not immediate Risk of forfeiture Payments are taxable to employee when received
Trend #1: Cash & Incentive CompensationAdvantages & Disadvantages
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Trend #2: Trend #2:
Retirement
Plan Types Available: Non-qualified Deferred Compensation Plans
Elective Deferral Design: Executive Deferred Compensation Plan 401(k) Mirror Plan
Excess Benefit Design: Supplemental Executive Retirement Plans (“SERP”)
Hybrid Plan Design: Voluntary Deferral + Defined Contribution SERP
Executive Bonus Plans Restricted Executive Bonus
Trend #2: Retirement
Plan Description: Non-Qualified Deferred Compensation Plan Contractual Agreement to provide deferred benefits for the executive Plan allows voluntary compensation deferral opportunities for executive
Salary Bonus Other forms of compensation
Plan can allow employer contributions with vesting Match Discretionary contributions Scheduled contributions Target retirement benefit
Contributions and earnings grow tax-deferred Can provide investment options for executive deferral accounts
Payout options elected at time of deferral Designated event or payout date Elected payout form
Trend #2: Retirement
Plan Description: Executive Bonus Plan Contractual Agreement to provide supplemental life insurance to
executive Design also provides retirement income source to executive
Combination retirement & protection benefit Life insurance policy has both death benefit and cash value components
Plan designed to retain key employees by providing employer contributions to an insurance contract Both employer and employee make annual premium contributions Premium allocation to employee typically limited to cost of life insurance
protection only Plan design creates golden handcuff as employer controls policy Cash value in policy can provide source of retirement income to
executive Insurance contract has tax-favored accumulation and income-tax-free
proceeds to executive’s beneficiary
Trend #2: Retirement
Plan Type: Nonqualified Deferred Compensation Plans
Advantages:EMPLOYER
Employer can select participants Broad flexibility in plan design Useful employee attraction tool ER contributions serve to reward and retain
EXECUTIVE Supplemental retirement income Tax deferred earnings & growth Vehicle for employer contributions Distribution options
Disadvantages:EMPLOYER
Tax deduction is delayed until benefits are received IRS rules must be strictly followed to avoid penalties
EXECUTIVE Payments are taxable to employee when received No rollover to qualified plan Risk of forfeiture Amounts deferred cannot be taken out ahead of selected payment date except under limited circumstances
Trend #2: RetirementAdvantages & Disadvantages
Plan Type: Executive Bonus Plans
Advantages: EMPLOYER
Easy to establish Employer can select participants Premium payments deducted as compensation expense Golden handcuffs
EXECUTIVE Supplemental life insurance protection above group policy Lower out-of-pocket cost than if obtained individually Tax-deferred earnings Insurance cash value can be accessed to supplement income
Disadvantages: EMPLOYER
Plan may require medical underwriting for executives which can limit participation Requires contributions from employee for death benefit protection (can be grossed up)
EXECUTIVE Bonus to pay premium may put employee in higher tax bracket Benefit may be perceived by employee as imperfect due to paying taxes now but having restricted use of the asset
Trend #2: RetirementAdvantages & Disadvantages
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Trend #3: Trend #3:
Equity
Plan Types Available: Stock Based Plans
Stock Grants Stock Options Restricted Stock Stock Appreciation Rights (“SAR”) Incentive Stock Options (“ISO”)
Phantom Stock Option Plan Nonqualified Plan with “Phantom Stock”
Trend #3: Equity
Plan Description: Stock Based Plans Type of nonqualified deferred compensation plan with an equity based
design Contractual agreement to provide equity to executive
Actual equity results in shareholder dilution Award design flexibility
Initial grant + share growth Share growth from date of grant to date of award only
Equity awarded to executive based upon pre-determined criteria ROA Stock appreciation Other corporate &/or individual goals & objectives
Design features have changed significantly since implementation of IRC 409A rules Discounts Deferral of income Stock valuations & re-valuations
Trend #3: Equity
Plan Description: Phantom Stock Plan Type of nonqualified deferred compensation plan with an equity-based
design Provides phantom shares to executives with valued based on actual
company stock appreciation Contractual Agreement to provide deferred benefits to the executive
based upon increase in equity value Phantom equity provides upside potential without share dilution
Equity awarded to executive based upon pre-determined criteria ROA Stock appreciation Other corporate &/or individual goals & objectives
Design features have changed significantly since implementation of IRC 409A rules Discounts Deferral of income Stock valuations & re-valuations
Trend #3: Equity
Plan Type: Stock Based Plans
Advantages: EMPLOYER
Employer can select participants Aligns executive and shareholder interests Units granted only upon specific performance metric
EXECUTIVE Tax deferred earnings & growth Units grow in value based on corporate valuations Executives become shareholders in company Executives paid for value creation
Disadvantages: EMPLOYER
Dilutes share value Company must undergo annual corporation valuation More expensive to administer than other plan options Strict compliance requirements
EXECUTIVE Payments are taxable to employee when received Risk of forfeiture Usually have non-competes and other restrictions to obtain benefit
Trend #3: EquityAdvantages & Disadvantages
Plan Type: Phantom Stock Plan
Advantages: EMPLOYER
Employer can select participants Aligns executive and shareholder interests No shareholder dilution Units granted upon specific performance metric
EXECUTIVE Tax deferred earnings & growth Units grow in value based on corporate valuations Executives paid for value they create
Disadvantages: EMPLOYER
Company must undergo annual corporation valuation More expensive to administer than other plan options Strict compliance requirements
EXECUTIVE Payments are taxable to employee when received Risk of forfeiture Usually have non-competes and other restrictions to obtain benefit
Trend #3: EquityAdvantages & Disadvantages
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Trend #4: Trend #4:
Protection
Plan Types Available: Executive Life Insurance
Executive Bonus Plans Split Dollar Plans Key Man Coverage
Executive Disability LTD
Executive Long Term Care LTC
Trend #4: Protection
Plan Description: Executive Life Insurance
Provides life insurance benefit to executives May also have a retirement income component
Benefits can be for executive’s heirs and/or the corporation Executive Disability
Provides disability insurance benefit to executives Company can modify existing plan or can implement individual plans
If plan already in place, additional executive plan increases benefits provided under standard plan
Executive Long Term Care Provides source of funds to cover costs associated with care of an executive
who can no longer perform activities of daily living (ADL) Protection of assets against liabilities associated with long term care costs Plan designs vary widely
Reimbursement programs Pre-established periodic benefit In-facility vs. at-home care
Trend #4: Protection
Plan Type: Executive Life Insurance
Advantages: EMPLOYER
Provides tax free proceeds to protect assets of corporation at death of key employee Provides tax free benefits to executive’s heirs Valuable recruiting & retention tool
EXECUTIVE Company pays premiums, executive cost is minimal Benefits are income tax-free Death proceeds provide salary continuation to heirs
Disadvantages: EMPLOYER
Premiums primarily borne by employer Premium costs will differ based on executive health Premium payments must be allocated to employee as income
EXECUTIVE Benefit can be designed to end upon executive termination Eligibility for executives may depend on medical underwriting Taxable income attributed to premium paid by employer
Trend #4: ProtectionAdvantages & Disadvantages
Plan Type: Executive Disability
Advantages: EMPLOYER
Easy to establishCan be provided to a select groupCost increases are low/moderate
EXECUTIVE Company pays premiums, executive cost is minimal Disability benefits can be tax free
Disadvantages: EMPLOYER
May require additional administration if multiple executives are insured
EXECUTIVE Tax free benefits will require some employee costs
Trend #4: ProtectionAdvantages & Disadvantages
Plan Type: Executive Long Term Care
Advantages: EMPLOYER
Easy to establish Can be provided to a select group Premiums are stable Valuable attraction & retention tool
EXECUTIVE No medical underwriting LTC benefits can be tax free Becoming highly desirable benefit as baby boomers age
Disadvantages: EMPLOYER
Benefits must be clearly explained to executives
EXECUTIVE Premiums paid by the corporation are taxable to executive Benefits may not be utilized during working years
Trend #4: ProtectionAdvantages & Disadvantages
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Trend #5: Trend #5:
Executive Perquisites
Plan Types Available: Cash-based programs:
Signing bonus Annual incentive / Guarantees Executive Loans (for stock, life insurance, taxes, home purchase, etc.) / Loan forgiveness Tuition reminbursement for advanced education &/or college tuition for children Tax gross-ups for taxable benefits Paid sabbatical leave
Services: Financial / Tax / Estate planning services Access to investment brokerage services Legal planning services
Protection programs: Supplemental executive medical insurance Golden parachute provisions Termination/Severance provisions
Other: First-class air travel Expanded insurance program for family members Health / Golf / Professional club membership Use of company plane Company car
Trend #5: Executive Perquisites
Plan Type: Perquisites
Advantages: EMPLOYER
Easy to establish Can be provided to select group Can be customized to individual executive Costs are relatively small
EXECUTIVE Allows executive to feel a part of a select group Provides benefits that can be enjoyed by family members as well Allows executive to stay focused on the job
Disadvantages: EMPLOYER
Once established, difficult to eliminate Can create a culture of “haves and have nots”
EXECUTIVE May be income imputed to value of benefit for which taxes will be due Typically not all offerings provided to all executives
Trend #5: Executive PerquisitesAdvantages & Disadvantages
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Questions ????Questions ????
Contact Us!
Lorrie Baldevia, VP
Toll Free: (800) 347-2303
Email: [email protected]