Page 325 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 311

five years ago. Assume earnings five years ago were $68,500 and starting pay was $32,500; as
shown in Table 6-26, this would translate to an increase in creditable earnings of $314,500.
Assuming a pension formula of 1.4 percent of career earnings, this $314,500 increase in
creditable career earnings means an increase in the annual annuity of $4,403—from $16,030
to $20,433.

Year Actual Adjusted

20 (current) $100,000 $100,000
19 92,500 92,500
18 87,500 87,500
17 79,500 79,500
16 72,500 72,500
15 68,500 68,500
14 65,500 68,500
13 61,000 68,500
12 56,500 68,500
11 53,000 68,500
10 50,500 68,500
9 48,000 68,500
8 45,500 68,500
7 43,500 68,500
6 41,500 68,500
5 39,500 68,500
4 37,500 68,500
3 36,000 68,500
2 34,000 68,500
1 32,500 68,500

Total (actual) $1,145,000
Total (adjusted) $1,459,500

Difference $314,500
Table 6-26. Creditable pension earnings—career vs. career updated

Final-Pay Plans. A final-pay plan is more popular with employees than career-service plans
due to its emphasis on most recent earnings. Even updated career-earnings plans have a
drawback to employees inasmuch as there is no guarantee the company will continue such
actions, and without them the pension will be significantly smaller. However, corporate
financial people typically prefer an updated career-earnings plan to a final-pay plan due to the
current cost impact. However, if it appears that updating is a common, recurring practice, the
accountants may require it to be treated more like a final-pay plan. Under the final-pay plan,
both prior and future years of service will be affected by future earnings; under the updated
career-earnings plan, only future service is affected by future earnings.