Compensation is the most important benefit an executive can receive. It’s tempting to focus exclusively on compensation. “Money talks” after all, and executives will often depart your firm in search of a higher paycheck. But executives also expect a robust medical and retirement savings plan. If your firm is skimping on those benefit pillars, you won’t attract talent, and the talent you do have won’t stay very long.
Providing above-average benefits will put a competitor’s offer in perspective, but there is more to it than that. Installing a vesting period-based benefit can create so-called “golden handcuffs”, creating a powerful disincentive for a key employee to walk away.
It is important to note that all five of these plan designs are non-qualified which means the employer can choose which executives to compensate.
The biggest risk to an executive’s income is an illness or accident that keeps them out of work for an extended period of time. Standard Group Long Term Disability (GLTD) plans discriminate against the highly compensated by capping monthly benefits, limiting features, having weaker definitions and often excluding performance-based pay into coverage calculations.
An employer has the flexibility to pay for all, some, or none of this benefit. Supplemental Individual Disability Plans can be offered at discounted pricing, guaranteed or simplified issue, and are highly customizable to each executive. Offering supplemental disability plans can be the difference when retaining a key executive.
Non-Qualified Deferred Compensation Plan (NQDC)
NQDC plans are very popular within publicly traded large corporations, as well as nonprofit organizations, and are often the primary retirement fund for highly compensated executives. The basic design allows executives to defer a larger portion of their compensation compared to Qualified Plans (i.e., 401k) and will defer taxes until the enhanced benefits are paid.
An employer can contribute on behalf of the executive to reward and enhance these benefits. All deferred compensation arrangements are unfunded, meaning the funds are subject to the claims of the employer’s general creditors. These plans are highly technical and must comply with specific IRS codes to avoid tax liability.
A typical vesting period improves retention by paying the benefit over time spent with the company. Companies interested in NQDC should work with an experienced firm in designing and managing these plans.
Leveraged Executive Bonus Plan
Instead of giving a cash bonus to an executive, consider giving them a bonus that pays the premium on a cash value based life insurance product that the executive will own and control from day one.
The benefits of the life insurance include:
- Death benefit protection for executive’s family and,
- Access to cash value tax-free.
The firm has the ability, with a written agreement, to apply leverage to retain the executive by loaning an extra bonus to cover the executive’s tax liability for the bonus premium. If the executive breaks the terms of the written agreement, they must pay back the loan to the employer. Conversely, the employer can forgive the loan at any time. This gives you maximum leverage over the benefit to improve retention.
Split Dollar Plan
The split-dollar arrangement helps your key executive create a large financial legacy for their family while allowing the employer to recover the full cost of the plan, or more. In contrast to the bonus plan above, a split-dollar plan is a life insurance policy that is owned and controlled by the employer. The insured is the executive and the beneficiaries are the executive’s family and the employer.
Typically, these plans are designed to pay back the employer all the premiums, or the cash value of the policy, while the executive’s family receives the difference in cash value. This provides a powerful incentive for an executive to continue working at the firm.
Executive Medical Reimbursement Plan
An executive medical expense reimbursement plan is designed to carve out a select class of employees and provide fully insured tax-advantaged reimbursements on a wide range of covered benefits. The covered benefits include typical expenses not covered by major medical insurance, as well as dental, vision, psychiatric care, infertility treatments, medical transportation, medical equipment and more.
These reimbursement plans can be tailored to each individual employee and their family.
These are just some of the most popular plan designs and are typically customizable to your specific situation. When selecting benefits, remember the objective is to attract and retain key executives while giving the firm leverage based on the vesting and commitment to fund into the future.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual.
With over 20 years of experience in the insurance and financial industry, Noel brings unique insight in designing various life, health, disability and retirement plans.