Page 320 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

306 The Complete Guide to Executive Compensation

This becomes attractive when the lump sum is greater than the amount needed to buy an
annuity equal to that available under the company plan. The degree of interest is even greater
if the executive’s good health lengthens the odds of reaching or exceeding normal life
expectancy.

Eligibility
A retirement plan may require a minimum age (but not higher than 21) and/or years of
service (not more than one or two) before becoming eligible. Once eligible, prior service is
typically credited to defined-benefit plans. The reason for a minimum service is to minimize
administrative record keeping for those leaving the company after only a year of employment.
On the other side of the age issue, there are three retirement ages: normal, early, and late.
Retirement age is more significant with a defined-benefit than with defined-contribution
plans, as will be shown.
While the company may identify a normal retirement age (such as 65), it cannot legally
force a person to retire at that or any other age without going counter to age discrimination
laws. However, there are bona fide executive exceptions, as were described earlier. It is help-
ful to recognize that there are really three types of employees: those who really want to work
past normal retirement, those who might want to work beyond that age, and those who are
going to retire at age 65 or sooner. The company either wants the employee to stay, or it is
happy to see the individual leave. These combinations are shown in Table 6-24.

Company Position
The Individual’s
Position Individual Should Stay Individual Should Leave

Wants to stay A B
May want to stay C D

Wants to leave E F

Table 6-24. Company and executive positions on the retirement matrix

Situations A and F are simple because the two sides agree. In situation B, the company
must ensure that performance appraisals have been carefully documented in order that the
individual may exit gracefully at, if not before, age 65. The performance records help to ward
off age discrimination suits where ADEA executive exemptions are not in effect. If severance
of employment is appropriate before age 65, it will be necessary to ensure an adequate
severance package, such as discussed earlier.
In situation C, the company would like to convince the individual to stay. Here it is impor-
tant that the intrinsic as well as extrinsic rewards to the individual are carefully laid out
and described. Conversely, in situation D, the company needs to ensure that a carefully
thought-out package for the executive is ready and supplemented with extensive preretirement
counseling, thus providing the basis for the executive to voluntarily retire.
Situation E is tough because the executive wants to leave but the company wants the per-
son to stay, probably a reflection of poor management development and succession planning.
The best that can be hoped for is a very short extension of the delay in leaving (e.g., one year).