Page 306 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

292 The Complete Guide to Executive Compensation

$
Coverage

Need

Years
Figure 6-1. Insurance coverage vs. need by age

Design Considerations

Pay Multiple. One way companies can minimize the type of disparity created by pay
multiples is by adjusting the pay multiple used to determine the amount of life insurance
based on age: the highest multiple for younger employees and the lowest multiple for older
employees. The example in Table 6-17 begins with a multiple of 5 for employees under age
25 and then decreases uniformly each year to a final value of 0.1 at age 74 (with perhaps a
minimum of $5,000 of insurance). Such a plan would have to be reviewed carefully in light
of the Age Discrimination in Employment Act.
An additional advantage to this type of program is that it reduces the amount of imputed
income, as described earlier, in the later years when the tables are very high. Conversely, a dis-
advantage is that it might reduce protection faster than the executives’ need and, therefore, force
them to supplement this protection with additional coverage. It is also important to remember
when analyzing insurance needs versus coverage that company programs are by definition only
in effect during the period of employment. Thus, very attractive insurance protection at one
employer may not be available at the next, and the executive must plan accordingly.

Definition of Pay for Insurance Purposes. While both basic and supplementary plans
were traditionally based only on salary for determining the amount of coverage, it is now
rather common to use salary plus short-term incentives in determining an amount of insur-
ance protection. This is logical where a bonus is significant and a rather stable percentage
of salary; however, where the bonus can swing dramatically, it may not be attractive to the
executive because he or she fluctuates between an overinsured and an underinsured position.
In such situations, applying higher multiples to salary can accomplish the same degree of
desired protection. To illustrate: company A allows one, two, or three times salary-plus-
bonus while company B permits enrollment for one, two, three, or four times salary. Shown
in Table 6-18 are salary and bonus figures for an executive and the amount of insurance
protection under the two company plans.
Recognizing that protection needs depend on age of children (and their degree of finan-
cial dependency), monetary needs of spouse, and liquidity requirements for estate taxes,