Page 355 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 341

compensation. However, to avoid taxes, the program must be nondiscriminatory in nature
and not simply used by executives. Because this method of flexible compensation is a
cost-effective device, allowing the company to provide individuals with additional benefit
coverage without incurring increased cost, not surprisingly it has become a very popular
feature of the employee benefit program.

SUMMARY AND CONCLUSIONS

Employee benefits are pay for membership, not pay for performance except to the extent
they are directly related to those elements of pay that are performance related (e.g., salary
and incentives). The value to the recipient may either be current or deferred, and may be in
the form of cash, stock, or other tangible goods to offset certain expenditures or provide addi-
tional income. Additional savings can be attained through group rather than individual rates
and/or preferred tax treatment. The cost to the employee for employee benefits takes the
form of payroll deductions, noncovered expenses, and/or additional income taxes. When the
employee pays a portion of the cost of the program through a payroll deduction, the plan is
said to be contributory; when the company requires no payroll deduction for coverage, the
plan is said to be noncontributory.
Expenses incurred fall into four categories: (1) noncovered expenses (these are expenses
outside the scope of the plan, such as cosmetic surgery in many medical plans), (2) the
deductible (the amount the employee must pay before the plan will pay anything), (3) coin-
surance (the plan will pay a specified percentage of covered expenses but the employee must
pay the rest), and (4) full reimbursement.
Additional income tax liabilities result from a direct compensation expense (e.g., a non-
qualified, cash profit-sharing payout), an imputed income benefit (e.g., free insurance beyond
$50,000), or a tax penalty (e.g., early withdrawals from an IRA). Under such conditions, the
individual must want the benefit and be willing to pay up front, because the tax must be paid
from other income rather than from the benefit itself (unless the benefit was paid in cash or
something easily convertible to stock).
Normally, the company can take a tax deduction on a compensation expense at the time
it becomes taxable as income to the recipient. Qualified pension and profit-sharing plans
are exceptions to this basic principle. Here the company takes a deduction in advance
of the time the recipient pays tax. The after-tax effectiveness for each benefit plan can be
calculated (using Table 4-24 in Chapter 4) by dividing executive after-tax value by company
after-tax cost.
The extent of an individual’s participation in the all-employee benefit package is normally
based on longevity with the company and level of salary. It is rarely related to performance.
Therefore, while it is a part of executive compensation, it is merely an extension of what is in
effect essentially at all salary levels. Nonetheless, to the extent enhanced by perquisites (i.e.,
executive benefits), several programs, especially medical and retirement, can be very attractive.
A company can treat an executive in one of three ways:
• Eligible for only the same benefits as all other employees, including statutory
restrictions.
• Eligible for only the same benefits as all other employees but without statutory
restrictions.
• Eligible for benefits in addition to those available to all employees.