Executive Benefit Considerations

Fundamental Concern

Company compensation-related needs, individual executive needs and tax laws are prompting companies to focus on special executive compensation and benefits.

Issues

The concerns about executive benefits are caused by:

• High personal income tax rates -
  High income taxpayers are drastically affected by the combination of high individual rates, the surtax, the phase out of the personal exemption, and the additional tax generated by the removal of the cap on the Medicare hospital insurance payroll. Coupled with changes in the Alternative Minimum Tax (AMT) and the loss of other previously deductible items, many individuals who do not consider themselves to be "wealthy" now find themselves in a new class of "tax impoverished" citizens;
• Legislative restrictions and limitations placed on qualified plans -
  Federal tax laws have implications for highly compensated individuals in both the accumulation and distribution phases of retirement. For example, the 401(k) plan, which became so popular in the 1980's, has limited use as a retirement savings vehicle for a highly compensated executive. The restrictions on the maximum amount that may be contributed means that a smaller percentage of an executive’s income may be contributed as the income increases. Accordingly, if the executive has to rely on his or her 401(k) plan for retirement income, the executive may not have enough money to live without decreasing lifestyle expenses;
• Specific accounting requirements promulgated by the Financial Accounting Standards Board (FASB) through Statements (FAS) 87, 106, 112, and 132; and,
• The special need to attract, retain and reward key management and technical talent.

Executive Benefit Objectives

A comprehensive executive benefit program can be designed to provide selected executives with:

• A continuing level of replacement income for the executive beyond active employment with which to reasonably maintain his or her family’s established standard of living after his or her retirement, disability or death. A 2004 study published by Georgia State University indicated that executives earning more than $250,000 had to earn over 85% of their pre-retirement income after they retired in order to preserve their after-tax level of spendable income. Retirement income would come from a combination of sources, including Social Security, qualified retirement programs, personal savings and non-qualified supplemental employer provided retirement programs;
• Programs to facilitate the executive’s ability to accumulate capital through a combination of company sponsored deferred compensation, personal pre-tax savings and investment programs, as well as through company provided performance related short-term and/or long-term incentive programs;
• Sufficient executive liquidity to settle his or her family’s cash needs upon his or her death, including paying off mortgage balances and other debt, and providing adequate cash resources to meet the executive’s estate settlement costs, including federal and state income and estate taxes, final medical expenses, etc.

Each of these objectives can be tied to “golden handcuff” requirements to encourage the executive to remain faithful to the company, and can provide for a “golden parachute” to financially protect the executive in the event of a change of control.

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