Trends in Executive Benefits

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

9

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?

9

Trends in Executive Benefit ProgramsTrends in Executive Benefit Programs

Trends in Executive Benefit ProgramsBenefit Focus

Cash IncentivesCash Incentives

RetirementRetirement

EquityEquityProtectionProtection

PerquisitesPerquisites

9

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


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


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


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


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

9

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


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


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


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


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

9

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


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


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


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


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

9

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


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


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


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


May require additional administration if multiple executives are insured

EXECUTIVE Tax free benefits will require some employee costs


Plan Type: Executive Long Term Care


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


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


9

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


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


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

9

Questions ????Questions ????

Contact Us!

Lorrie Baldevia, VP

Toll Free: (800) 347-2303

Email: [email protected]

Trends in Executive Benefits

Business

Transcript of Trends in Executive Benefits