Page 332 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

318 The Complete Guide to Executive Compensation

error with values might reveal that 2 percent 2 percent might equate to the 90th percentile,
1.75 percent 1.5 percent would approximate the 75th percentile, and 1.5 percent 1.25
percent would come closest to the 50th percentile.

Final Year’s Pay
$
90th percentile
75th percentile
50th percentile
Current plan

$30,000 $50,000 $100,000 $500,000
Figure 6-4. Competitive pension position (50th to 90th percentile)

Besides testing hypothetical examples, one can input actual data for key executives, thus
being able to answer specific as well as general questions about the plan’s competitiveness.
Such an approach would also allow calculating the normal form required by ERISA (i.e., joint
and survivor annuity with 50 percent of the benefit continuing to the spouse after the retiree’s
death), since the spouse’s age could be entered into the calculations.
It should be noted that this joint and survivor form could also be included as a preretire-
ment benefit. In other words, when the executive dies while actively employed but eligible for
retirement, the surviving spouse will be given a benefit equal to the 50 percent survivor benefit
if the employee had retired the day before his or her death. While this is a logical benefit to
include in the basic plan, it should certainly be considered for executives if not adopted broadly.
A number of plans will pay a pension after a specified number of years (e.g., 10); how-
ever, this is not optimal to the executive. Rather, the company should ensure adequate long-
term disability benefits and continue the employee in the pension plan (thereby accruing plan
credits). Thus, when LTD benefits end at age 65 or some other age, the individual will have
a reasonable pension.

Defined-Contribution Plans

In addition to, or in lieu of, defined-benefit plans, the company may have a defined-contribu-
tion plan. As the name suggests, the amount of the contribution, not the benefit, is prescribed