What are the latest trends in executive benefits? - Hay … are the latest trends in executive benefits? Executive benefits survey results ... The plan is not qualified under the Internal

What are the latest trends in executive benefits?Executive benefits survey results

DECEMBER 6, 2011 MALINDA RILEY and KURT FICHTHORN

2© 2011 Hay Group. All rights reserved

Executive benefits landscape

The executive benefits landscape has changed over

the past several years for several reasons:

Struggling national and global economies

Declining share prices

Expanded proxy disclosures

Intense public focus on executive benefits


Executive benefits challenge

How can organizations best attract and retain

executives in this environment?

Organizations, both not for profit and for profit, must focus

on the level and composition of executive benefit

programs.

Organizations must also balance market-competitive

considerations with shareholder and/or public interests.


Survey objective

Survey objective: obtain current data on the

prevalence of practice regarding executive retirement,

deferred compensation and perquisites for employers

of all sizes and across a broad group of industries

317 respondents from 8 industry classifications

Revenues ranging from <$50M to >$20B


Survey participants by industry

Industrial, 27%

Services, 22%

Health Care7%

Consumer Goods, 16%

Financial, 19%

2011 Executive Benefit SurveySurvey Partipants by Industry

317 total participants


Survey participants by revenue

<$50 Million, 16%

$50M - $99M, 4%

$100M - 249M, 11%

$250M - $499M, 10%

$500M - $999M, 9%

$1 Billion - $2.49B, 17%

$2.50 B - $5B, 11%

$5B - $9.9B, 7%

$10B -$19.9B, 5%

$20B or greater, 8%

2011 Executive Benefit SurveySurvey Partipants by Revenue

317 total participants


Executive retirement

Definitions

Executive Retirement Plan Definitions

Nonqualified Retirement Plan

Supplemental executive retirement plans (SERP), such as top-hat plans or excess plans, which provide certain employees with additional retirement benefits. These plans may be free-standing plans that cover several executives or they may be part of individual executive employment contracts.

Nonqualified Defined Benefit Plan

Retirement plan that provides a fixed benefit at retirement based on a formula or target income percentage. The plan is not qualified under the Internal Revenue Code (IRC) and is usually in addition to a qualified defined benefit plan. This type of plan is designed to supplement defined benefit pensions and/or restore benefits in pension plans that are limited by ERISA.

Nonqualified Defined Contribution Plan

Retirement plan in which employers make fixed contributions toward retirement. The plan is not qualified under the IRC and is typically in addition to qualified defined contribution plans (401(k), 403(b), etc.) This type of plan is designed to supplement defined contribution plans and/or restore benefits that are limited by ERISA.



In aggregate, nearly half of the participating organizations provide some

type of nonqualified retirement plan, either defined benefit or defined

contribution

59%

50% 47% 45%

32%

20%

0%

10%

20%

30%

40%

50%

60%

70%

Industrial Consumer Goods

Health Care Financial Tax Exempt Services

Pe

rce

nt

Industry

Executive Retirement Plan Prevalence by Industry



The market is evenly split between defined benefit and defined

contribution programs; however, new programs are typically defined

contribution

Executive Retirement Offered President &

CEO

Executive

and Senior

VPs

VPs Division

Heads

Based on

Compensation

Nonqualified Retirement Plan 49% 66% 57% 42% 17% 32%

Defined Benefit 32% 74% 69% 49% 26% 35%

Defined Contribution 31% 73% 72% 60% 37% 39%



Organizations most often use nonqualified retirement programs to make

up for IRS limits:

Executive Retirement

Plan

Objective

President

& CEO

Executive and

Senior VPs VPs

Division

Heads

Based on

Compensation

Make up for IRS Limits 74% 77% 71% 55% 32% 38%

Bring retirement income to a target

level 33% 87% 71% 44% 23% 15%

Include deferred compensation 32% 90% 80% 72% 38% 30%

Provide "golden handcuffs" to retain

executives 32% 82% 80% 45% 22% 16%

Recruit mid-career executives 26% 73% 78% 59% 32% 24%

Improve early retirement benefits 12% 79% 74% 47% 26% 26%

Include bonuses not covered in

qualified plans 12% 79% 63% 42% 16% 21%

Provide benefits for executives with

insufficient service 8% 75% 67% 42% 17% 17%

Provide retirement benefits to

executives with no qualifed plan 8% 77% 85% 31% 8% 8%

Maintain benefits from executive's

prior employer 6% 78% 67% 33% 22% 33%

"Keep whole" executive transferring

from subsidiaries or other countries 3% 75% 75% 50% 50% 25%



Base and short-term Incentives are most typically included in the

definition of compensation in nonqualified retirement plans.

Elements of Pay Included

Base Salary 92%

Annual Incentives 75%

Long-term Incentives 18%

Deferred Compensation 41%



Other elements of nonqualified retirement plans

include the following:

Funding – 52% of respondents informally fund their nonqualified

retirement programs

Rabbi trust is the most prevalent in the general market

Vesting – Only 16% have immediate vesting, while 40% have service

based cliff vesting, 20% have age based cliff vesting and 17% have

graded vesting

Some organizations base the benefit on personal performance,

ranging from 8% to 14% depending on executive level


Deferred compensation

Deferred compensation arrangements are prevalent in the market (53%)

Two thirds of organizations do NOT match deferrals, while the remaining one third does:

Most prevalent match is the same formula as 401(k) plan (35%)

The definition of compensation under deferred compensation programs is as follows:

Type of compensation Included

Base salary 89%

Annual Incentive 79%

Long-term Incentive (cash or stock) 34%

Restricted Stock 7%



Provisions regarding payment triggers and options do not vary

significantly based on industry:

A lump sum payment option is the most prevalent (94%), with fixed annual installments

the second most prevalent (62%)

Payment trigger All

Separation of service 90%

Change in control 48%

Death 84%

Disability 70%

Hardship 43%

Specified period of time 45%



Funding of deferred compensation programs is

slightly higher than funding for nonqualified

retirement programs

54% of all surveyed organizations informally fund their deferred

compensation programs

69% of those that fund their NQDC use a Rabbi Trust

30% use Life Insurance as a funding method

Participation in NQDC programs is as follows:

The average participation rate among all surveyed organizations is

39%


Perquisites

Perquisites continue to be part of a executive compensation packages;

however, the level and mix demonstrates the impact of regulation and

public scrutiny

Executive Perquisites Offered President &

CEO

Executive and

Senior VPs VPs Division Heads

Based on

Compensation

Cellular Phones 79% 94% 87% 83% 67% 9%

Exec Severance Pay Practice 51% 87% 80% 58% 29% 8%

Employment Contracts 48% 19% 55% 23% 13% 8%

Exec Physical Exams 43% 96% 85% 55% 20% 4%

Golden Parachutes 42% 92% 83% 31% 13% 7%

Exec Parking 39% 95% 83% 56% 27% 1%

Exec Group Life Insurance 37% 88% 80% 57% 22% 10%

Exec LTD 37% 84% 80% 60% 26% 22%

Car Allowance 36% 78% 71% 56% 34% 4%

Average Car Allowance Amount $11,988 $10,921 $10,376 $11,187 $7,667

Personal Financial Counseling/Tax Prep 31% 95% 82% 40% 19% 6%

Company Cars 30% 93% 57% 38% 24% 4%


Perquisites

Perquisites continue to be part of executive

compensation packages; however, the level and mix

demonstrates the impact of regulation and public

scrutiny

Only 18% of organizations gross up any perquisites

provided, with car allowance the most commonly grossed

up benefit


Executive benefits in the future

Organizations, regardless of industry, are not planning

to make changes to current executive benefit

programs

Organizations who may make changes are either planning

to install or reorganize executive benefits

Changes Planned? Executive

Retirement

Deferred

Compensation

Perquisites

Yes 6% 13% 10%

No 94% 87% 90%


Executive benefits survey - observations

What do these survey results tell us about the current

and future state of executive benefits? Executive benefit packages have not been altered significantly as a result of the

economic recession

Organizations continue to offer a suite of benefits to executives to attract and retain

their key talent

However, proxy disclosure requirements as well as public scrutiny have caused

organizations to ask the question: Is this benefit critical to the execution of the

executive’s job duties?

Increasingly, if the answer is “No” then the benefit is eliminated

Organizations will continue to offer deferred compensation programs in order to be

competitive, although the reduced participation in these programs may be an indication

of uncertainty regarding future tax rates.


Questions?

Malinda Riley

312.228.1822

[email protected]

Kurt Fichthorn

215.861.2569

[email protected]

Documents

What are the latest trends in executive benefits? - Hay … are the latest trends in executive benefits? Executive benefits survey results ... The plan is not qualified under the Internal