Page 352 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

338 The Complete Guide to Executive Compensation

In addition to the attractiveness of such supplements to the executive, they can also be very
important to the company to (1) attract a highly qualified, midcareer executive from another
company, (2) establish a consistent approach for top people and thereby avoid a number of indi-
vidual special plans, and (3) terminate an executive no longer meeting performance expectations.
In return for these special supplements, some companies require a “noncompete” agree-
ment with the executive to ensure that he or she does not hire on with a competitor and work
against the company. Similarly, such benefits would not apply to a person who, although
eligible, resigned to accept other employment (even if outside industry).
SERP Swap

This is the exchange by the executive of all or a portion of nonqualified supplemental exec-
utive retirement plan (SERP) benefits for a split-dollar insurance policy with the company
paying all or a portion of the premium. In essence, the executive gives up payments that
would otherwise be made during his or her lifetime in exchange for more favorable estate and
income taxes at time of death. This assumes payments are for a prescribed period of time.
These arrangements must be carefully designed in light of accounting and tax requirements,
which, due to their complexity and changing nature, are not discussed here.
Retirement Summary

As shown in Table 6-37, executives are highly interested in pension plans that meet the follow-
ing requisites: they recognize at least all of annual pay (salary and short-term incentives) near
retirement; and they use a liberal formula, without serious limitations, to go beyond social secu-
rity benefits. Thus, while qualified plans may meet the annual-pay requirement, because of
statutory limitations, executives need nonqualified supplemental executive retirement plans to
adequately receive benefits above social security. SERPs will be of more importance for com-
panies that freeze their defined-benefit plans, meaning pension benefits will not increase with
pay and years on the job. Additionally, some payouts may be eligible for long-term capital gains
after ordinary income has been recognized.
For those changing companies midcareer, it is best to begin with an employer who has a
generous defined-contribution plan and end with one having a strong defined-benefit plan.
The latter will use final years of pay in the formula, whereas the former provides a long
period of compound growth (assuming the plan value was rolled over into some type of IRA).
The reverse is also true. Starting a career with a strong defined-benefit plan means calculat-
ing benefits using the lower earnings values of early years; later, the power of compound
growth to enhance the defined-contribution plan will be mitigated by a shorter time period.
As a rule of thumb, it would take about 10 times one’s final pay to generate an annuity equal
to two-thirds annual pay for life, assuming retirement at about age 65.
The reporting of pension plans for proxy-named executives was described in Chapter 4
beginning with Table 4-31.
Flexible Benefits
What Are They? Sometimes called “cafeteria-style” benefits, flexible-benefit plans are when a
group of employee benefit plans are packaged together and the employee has a choice in the
extent of participation. Such choices are typically available under stand-along plans as well, so
what sets flexible-benefit plans apart? The difference is that some benefit plans can be financed