Jul 25, 2017
Companies continue to have the need to attract, retain and reward key executives in order to grow and prosper in the future. What has changed in recent years have been the factors that influence the design of the plan that is used to accomplish this objective. These factors include:
- A shift from a focus exclusively on retention to incorporate performance
- The impact of low interest rates in increasing the cost of traditional defined benefit plans
- Increased scrutiny of proxy/990 forms
- Benefit security concerns
The result has been a trend in plan design towards performance based defined contribution Supplemental Executive Retirement Plans (SERPs). A well crafted performance based DC SERP can incorporate the best features of long-term cash incentive plans, synthetic equity plans and traditional nonqualified deferred compensation arrangements.
EBS recently hosted a webinar on the design of contemporary SERPs. The recording of the webinar is available on our website by clicking on this link: SERP Webinar Recording.
A key factor in designing an effective plan is to create a direct link between performance and the contribution to the plan. Plan participants should have significant influence over the performance criteria used to measure achievement. It is often the case that a combination of individual objectives and company profitability (EBIDTA, net income) will be used. Other design considerations include the valuation, granting, vesting and ultimate payment of performance units. Whatever plan design is chosen it is essential that a comprehensive communication strategy is in place to maximize participant understanding.
Performance based DC SERP programs can be an effective tool in a variety of circumstances such as (a) private companies where phantom stock plan structures are not viable due to share valuation concerns (b) ESOP owned S-Corporations where the 100 shareholder limit and valuation concerns may make other alternatives ineffective (c) US operations of foreign owned companies where a focus on local results is important.
Non-profit organizations bring a unique set of challenges when trying to attract, retain and reward value creators to their organizations. Unlike for-profit companies, non-profits cannot offer equity to their key executives. In addition many executive benefit plans for non-profits have to comply with Internal Revenue Code Section 457(f) which limits design flexibility particularly when it comes to the vesting of benefits for participants. A performance based DC SERP design can bring clarity on how benefits are earned as well as some flexibility in when they can be received. Non-profits can also look to life insurance based programs as a way to avoid 457(f) guidelines and have potential cost recovery for the benefits.
Posted by: Don Curristan, Managing Director, EBS-West; email@example.com.