Page 245 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 231

compensation coverage in cases of heart attack (on the grounds that work stress contributed
to the attack), a more aggressive approach would be to sue the company under the cumula-
tive trauma principle, making a heart attack, stroke, or similar deteriorating malady an injury
caused by the psychological stress brought about by the intense pressures of the job.
However, executives are typically more concerned with disability benefits than workers’ com-
pensation. Disability plans are short term or long term, depending on the length of absence.
Normally, the short-term plan will cover the first-6 (sometimes 12) months of absence at full
salary (possibly including annual incentive). While paid sick leave is a variation of short-term
disability pay, it differs in that at the end of the year, any unused sick leave is paid in cash.
Disability pay is expressed in the maximum number of days or weeks that absence for
medical reasons will be paid. Sick leave is usually described in the number of days permitted
each year. The difference is that disability pay is given only if absent; unused sick leave at
year-end is typically paid in cash. Long-term disability (LTD) benefits begin when short-
term benefits expire. Unlike short-term benefits, they are typically integrated with social
security. In other words, LTD benefits are added to social security payments to reach a
specific pay target such as two-thirds of pay. In addition, other statutory benefits and other
plans in which the employer pays all or a portion of the expense may offset them. However,
LTD benefit amounts are not usually affected by additional insurance benefits purchased
independently by the employee. Normally, LTD benefits run for two years if the individual
is unable to return to the same job he or she previously held. After that, payments are
contingent upon ability to work in any field of suitable employment.
Since a significant portion of plan benefits are after tax and gross pay is pretax, plan
benefits rarely exceed about two-thirds of gross pay. In addition, a number of expenses asso-
ciated with work (e.g., transportation) are suspended, further reducing the needed income-
replacement level. From the company’s viewpoint, benefits should not be so high they
discourage a return to work.
Typically, broad-based LTD benefit plans discriminate against higher-paid employees in
two ways: (1) incentive pay is often excluded as a definition of pay, so the formula becomes
two-thirds of salary rather than two-thirds of earnings, and (2) there is a maximum monthly
benefit (e.g., $3,500). Thus, as shown in Table 6-4, the percentage of pay replaced progres-
sively decreases at upper income levels. However for executives it is not uncommon to
supplement short- and long-term disability payments by (1) increasing or completely remov-
ing the dollar maximum on benefits and/or (2) increasing the time period of benefits (both
for partial or full pay). Some companies choose to allow the executive to take out separate
LTD coverage and then reimburse the individual at the end of the year. If the company pays
the premium, the proceeds are tax-able to the executive; if the executive pays the premium
costs, the proceeds are tax free. The all-employee disability may be of low importance to
the executive because of the restrictions cited; however, a generous supplement is of high
importance to the executive as it potentially protects against income loss.

Paid Time Off Bank

Rather than have separate schedules for personal days, vacation, and sick leave days, compa-
nies can set up a formula combining all of these, permitting employee choice on how to use
the days. It may even be desirable to include the designated paid holidays in this category.
The total number of days results in a paid time off “bank” that the employee may draw on
during the year, typically with advance notice. Unused days at the end of the year would