DEFERRED COMPENSATION: ATTRACTING & RETAINING TOP TALENT TEXAS TOTAL REWARDS SEPTEMBER 2017

Transcription

1 DEFERRED COMPENSATION: ATTRACTING & RETAINING TOP TALENT TEXAS TOTAL REWARDS SEPTEMBER 2017

2 2017: STATE OF DEFERRED COMPENSATION 2

3 THE CURRENT STATE OF COMPENSATION SALARY/ BONUS EQUITY/STOCK OPTIONS NON-QUALIFIED BENEFIT PLANS Sed 401(K) HEALTH, GROUP LIFE & DI, FLEX HOURS/LOCATION 3

4 2017 CURRENT TRENDS INCENTIVIZING PERFORMANCE, NOT JUST AS RETENTION TOOL INCREASED PROXY SCRUTINY LOW INTEREST RATES INCREASING COST OF DEFINED BENEFIT PLANS BENEFIT SECURITY CONCERNS 4

5 RECRUITMENT AND RETENTION 87% ORGANIZATIONS SAY RECRUITING AND RETENTION IS ONE OF THEIR CRITICAL PRIORITIES 2016 Study by Future Workplace and Kronos 5

6 RECRUITMENT AND RETENTION 89% EMPLOYEES ARE ACTIVELY LOOKING OR WOULD CONSIDER BETTER OPPORTUNITIES 2016 Glassdoor US Site Survey 6

7 UPDATED STRATEGIES 66% HR RESPONDENTS THAT ARE UPDATING RETENTION AND ENGAGEMENT STRATEGIES 2015 Study by Deloi?e 7

8 WHY ARE COMPANIES IMPLEMENTING NON-QUALIFIED DEFERRED COMPENSATION? 8

9 2017 SURVEY TOP 3: RECRUIT 83% PROVIDE A COMPETITIVE COMPENSATION PROGRAM 2017 Study by AdvisorNews 9

10 2017 SURVEY TOP 3: RETAIN 63% TO RETAIN EXECUTIVES 2017 Study by AdvisorNews 10

11 2017 SURVEY TOP 3: REWARD 72% ALLOW EXECUTIVES TO ACCUMULATE ASSETS FOR FINANCIAL PLANNING NEEDS 2017 Study by AdvisorNews 11

12 EMPLOYEE ENGAGEMENT JANUARY 13% 26% INCREASE IN ANNUAL COMPANY REVENUE APRIL 36% 0% 5% 10% 15% 20% 25% 30% 35% 40% ORGANIZATIONS WITH FORMAL EMPLOYEE ENGAGEMENT PROGRAM EXPERIENCE 26% INCREASE IN ANNUAL REVENUE VS. THOSE WITHOUT A FORMAL PROGRAM 2015 Study by Aberdeen 12

13 DEPARTMENT OF LABOR TOP HAT STATISTICS 115,687 Nonqualified plans established since ,530 Companies have established a plan since ,902,042 Employees who parfcipated in a plan since Average parfcipants per plan 2572 New plans established in ,403 ParFcipants in 2015 new plans 13

14 2017 SURVEY: FORTUNE 1000 NQDC IMPLEMENTATION 92% OFFER NQDC PLANS 78% OFFERED IN Study by AdvisorNews 14

15 OVERVIEW OF NON-QUALIFIED DEFERRED COMPENSATION 15

16 WHAT IS NON-QUALIFIED DEFERRED COMPENSATION? A promise to pay valued employees a benefit at a later date A plan that helps companies recruit, retain and reward top talent Governed by IRS secfon 409A for corporaeons or 457(f) for not-for-profits Benefit is paid at reerement or other predetermined Fme 16

17 WHO IS ELIGIBLE FOR A NON-QUALIFIED BENEFIT PLAN? Company has maximum discreeon in who they include Designed for key execueves and highly compensated employees 17

18 PARTICIPANT SALARIES 60% EARN 150K OR MORE 40% EARN UNDER 150K 2017 Study by AdvisorNews 18

19 WHAT ARE THE BENEFITS OF A NON-QUALIFIED BENEFIT PLAN? Simple and inexpensive to administer Employer and execueve may contribute Plans are highly flexible Benefits usually paid when execufve in lower tax bracket 19

20 WHY IMPLEMENT A NON-QUALIFIED BENEFIT PLAN? Recruit, retain and reward key execufves and employees MoFvate execufves job performance Provide a tool to supplement reerement in addifon to qualified plans like 401(k) on a taxfavored basis 20

21 401(K) SHORTFALL? 70% 60% 50% 40% 30% 20% 10% 0% 64.2% 25.7% 13.1% $50,000 Employee $125,000 Employee $245,000 Employee Assumpeons: Employee Age: 40 Salary Scale: 5% CPI: 2.75% Payout: 15 Years Growth Rate: 7.5% Max 401(k) ContribuKon to Age 62 21

22 HOW DOES A NON-QUALIFIED BENEFIT PLAN WORK? IRS EXECUTIVE COMPANY ACCOUNTS RABBI TRUST RETIREMENT 22

23 TYPES OF BENEFIT PLANS 23

24 TYPES OF BENEFIT PLANS RESTRICTED STOCK/STOCK OPTIONS PHANTOM STOCK/SARS RESTRICTED STOCK UNITS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXECUTIVE DEFERRED COMPENSATION PLAN 24

25 EQUITY PLANS 25

26 RESTRICTED STOCK Stock with restricfons for which payment is not usually required. Most of the Fme, it is simply common stock that vests. The holder of restricted stock cannot sell their shares unfl they vest. AddiFonally, a company typically retains the right to repurchase all unvested shares upon terminafon of the holder s employment. They are official company shareholders. KEY CONSIDERATIONS 83b elecfon is complex, employee may have to pay tax on phantom income or shares that never vest 26

27 STOCK OPTIONS Represents the right to buy a company s stock at some future date at a price established now. The future value of high-growth companies can exceed current values by large mounts, meaning a potenfally significant benefit for employee. Upon exercise, the recipient becomes an official shareholder. KEY CONSIDERATION Employee must have cash available to purchase opfons 27

28 PHANTOM EQUITY PLANS 28

29 PHANTOM STOCK PLAN The company gives key execufves/employees the value of the stock plus a benefit based on stock price. This gives them the benefits of stock ownership without dilufng the shareholders. KEY CONSIDERATIONS Ideal for companies that are closely held and don t want to dilute ownership Benefits for employer: Gives employees sense of ownership in the company Benefits for employee: Share of company profitability mofvates individual success Plan has higher value to parfcipant, especially in earlier years 29

30 STOCK APPRECIATION RIGHTS PLAN As in a Phantom Stock Plan, SARs increase in value as the company s stock price rises. Unlike stock opfons, the employee does not have to pay the exercise price, and receives only the amount of increase in price, typically in the form of cash upon exercising or a set date. KEY CONSIDERATIONS Ideal for companies that are closely held and don t want to dilute ownership Benefits for employer: Employee is invested in the performance of the company Benefits for employee: Rewards for performance and stewardship of company resources Lower cost of plan as value of stock is not granted 30

31 PHANTOM STOCK PLAN STOCK PRICE + INCREASE IN VALUE = BENEFIT STOCK APPRECIATION RIGHTS INCREASE IN STOCK VALUE = BENEFIT 31

32 RESTRICTED STOCK UNITS RSUs are a commitment to give the value of a specific number of the company s shares in the future. Payment is not usually required. Certain condifons, such as vesfng, must occur before the holder of RSUs can receive the promised value. Seqlement of RSUs can occur in stock or cash equivalent. If recipient is granted stock, they become an official stockholder. KEY CONSIDERATIONS Avoids complexifes of 83b elecfons, including tax on phantom income Benefits for employer: Highly flexible in granfng, vesfng enhances employee retenfon Benefits for employee: Can be tax-deferred into NQDC plan or be diversified into porrolio of investment funds Employer chooses granfng, employee chooses payout 32

33 50,000 RESTRICTED STOCK UNITS SHARE ALLOCATION 10,000 10,000 15,000 25,000 SHARES SHARES SHARES SHARES EDUCATION HOUSE RETIREMENT RETIREMENT PAYOUT 2019 PAYOUT 2025 RETIREMENT RETIREMENT 6 YEAR DISTRIBUTION CONSERVATIVE LUMP SUM AGGRESSIVE LUMP SUM MODERATE 15 YEAR DISTRIBUTION MODERATE 33

34 DEFERRED COMP/ LONG-TERM INCENTIVE PLANS 34

35 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The company agrees to provide supplemental refrement income to the execufve and his family if predetermined eligibility and vesfng condifons are met by the execufve. KEY CONSIDERATIONS Serves as golden handcuffs to keep execufve at company Benefit for employer: Retains key employees Benefit for employee: Provides for refrement beyond 401(k), etc Typically vests on a 3-5 year rolling basis 35

36 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Example of how a supplemental execufve refrement plan worked for one of our clients: Future Value of Salary Percent of Salary Benefit Amount Benefit Length Total Benefit ParFcipant 1 $675,000 35% $225, years $3,375,000 ParFcipant 2 $400,000 30% $120, years $1,800,000 ParFcipant 3 $225,000 30% $67, years $675,000 36

37 EXECUTIVE DEFERRED COMPENSATION PLAN An agreement between the execufve and company to defer a porfon of annual income unfl a specific date in the future ogen 5-10 years or unfl refrement. Income taxes are deferred unfl the money is paid, and employers ogen invest the money and credit interest to the plan. KEY CONSIDERATIONS Allows execufve to defer income unfl in lower tax bracket Benefit for employer: Provides value to employee without high cost Benefit for employee: Tax savings and opportunity to earn interest on pretax money 37

38 THE PLAN VS. OUTSIDE INVESTMENT Outside Investment This Plan $600,000 $500,000 $400,000 $366,000 $496,000 $300,000 $200,000 $100,000 $60,000 $100,000 $180,000 $218,000 $0 How much is leg to invest ager taxes? How much accumulates by age 65 ager tax? What is the total ager-tax refrement payment? 38

39 TYPES OF DEFERRALS 93% 32% 5% 24% 28% LONG- TERM BONUS RESTRICTED STOCK UNITS SALARY/ ANNUAL BONUS COMMISSION SHORT- TERM BONUS 2017 Study by Newport Group 39

40 EXECUTIVE DEFERRED COMPENSATION PLAN Example of how an execufve deferred compensafon plan worked for one of our clients: Amount Deferred (pre-tax) Years Deferred Interest Credited Reerement Payout ParFcipant 1 $250, % $3,500,000 ParFcipant 2 $100, % $2,500,000 ParFcipant 3 $50, % $2,000,000 40

41 NON-QUALIFIED BENEFIT PLAN IRS EXECUTIVE COMPANY ACCOUNTS RABBI TRUST RETIREMENT 41

42 RABBI TRUST A Rabbi Trust is used to secure deferred compensafon and provide protecfon to execufves in the event of: CHANGE OF CONTROL CHANGE OF HEART CHANGE IN FINANCIAL POSITION (EXCLUDING BANKRUPTCY) DEFERRED COMPENSATION Assets can only CAN be SOLVE used to ALL pay FOUR benefits Assets subject to employer s creditors Excess assets can be returned to employer 42

43 INFORMAL FUNDING OPTIONS: CASH FLOWS AND MUTUAL FUNDS CASH FLOWS Benefit plans can be funded out of the cash flows of the company PROS Beneficial for companies that do not wish to fund plans Ideal for companies with low liquidity CONS Creates earnings and cash flow issues and pressure when benefits are paid out to parfcipant MUTUAL FUNDS Funds equal to plan liability are invested in mutual funds PROS Plan funds are set aside Normally uses fixed income investment strategy Highly liquid CONS Tax inefficient 43

44 INFORMAL FUNDING OPTIONS: CORPORATE OWNED LIFE INSURANCE A life insurance contract owned by an employer, insuring one or more highly compensated employees. Most companies use COLI to earn a compeeeve aper-tax yield compared to other investments. PROS Tax efficient for shareholders Allows for self-complefon of funding upon parfcipant s death Used by companies with liquidity Favorable impact on company balance sheet CONS Cost of insurance expense Requires corporate commitment to funding for first 7 years MUTUAL FUNDS Funds equal to plan liability are invested in mutual funds 75% of Fortune 1000 companies use Corporate Owned Life Insurance 44

45 C CORP: INFORMALLY FUNDED PLAN COST (OVER LIFETIME OF PLAN) ASSUMPTIONS: ANNUAL EMPLOYEE CONTRIBUTION: ANNUAL EMPLOYER CONTRIBUTION: YEARS DEFERRED: INTEREST CREDITED: BENEFIT PAYMENT: BENEFIT PAYMENTS: TOTAL BENEFIT: $100,000 $10, YEARS 5.45% $436, $4,361,150 45

46 C CORP: INFORMALLY FUNDED PLAN COST (OVER LIFETIME OF PLAN) BENEFIT: $4,361,150 Net Present Cost CASH $353,501 MUTUAL FUNDS $226,377 COLI $16,000 46

47 INFORMAL NQDC PLAN FUNDING VEHICLES 70% 60% 64% 50% 40% 30% 20% 10% 30% 6% 9% 21% 0% CORPORATE OWNED LIFE INSURANCE MUTUAL FUNDS BONDS COMPANY STOCK SEPARATELY MANAGED INVESTMENT ACCOUNT 47

48 NQDC PLAN FUNDING 60% 50% 40% 30% 20% 10% 0% 57% 27% 8% 8% LESS THAN 50% 50-65% 66%-99% 100% OR MORE 57% OF COMPANIES HAVE 100% OF THE PRE- TAX LIABILITY FORMALLY FUNDED 48

49 PLAN ADMINISTRATION 43% 54% THIRD COMBINATION PARTY 3% IN HOUSE 2017 Study by AdvisorNews 49

50 SYNOPSIS OF NON-QUALIFIED BENEFIT PLANS ü ATTRACT, RETAIN AND REWARD VALUABLE EMPLOYEES ü PROVIDE ADDITIONAL RETIREMENT INCOME FOR HIGHLY COMPENSATED EXECUTIVES ü SERVE AS A GOLDEN HANDCUFF ü TIE COMPENSATION TO COMPANY PERFORMANCE ü ACHIEVE OPTIMAL TAX-EFFICIENCY 50