Compensation and Executive Benefit Strategies

Continued heightened scrutiny of traditional executive compensation poses challenges for companies that strive to offer attractive benefits packages to their most valuable employees. As compensation committees and boards of directors have been forced to justify each pay and bonus decision, concern about shareholder and investor perception of excess keeps many companies from updating existing executive compensation plans or implementing new plans.

Given this environment, companies that offer deferred compensation plans are not only scrutinizing the price and performance of plan funding vehicles, they are thoroughly reevaluating their existing approaches to delivering compensation and benefits to executives. As a result, more firms than ever are seeking advice on approaches to executive compensation. The good news is that new approaches do exist that can help firms achieve their goals while addressing the myriad current challenges.

Fewer Consultants, Less Competition, More Uncertainty
Consolidation of executive benefit consulting firms has meant fewer dedicated providers while at the same time fringe players – such as life insurance and investment professionals that dabbled in executive compensation as a non-core business – have left the industry. Some compensation consultants and administrators are now under the same roof as manufacturers of plan funding vehicles, such as corporate-owned life insurance, resulting in less flexibility and choice for buyers, and causing them to seek objective advice and funding strategies.

In addition, questions about healthcare reform, particularly how it will be paid for, will likely play a significant role in how companies will finance their executive compensation plans in the future. As Congress seeks additional revenue sources, they may look to instruments that today serve as the underlying funding vehicle for many deferred compensation plans.

On the positive side, lobbying groups and industry players have had success in helping legislators to understand that deferred compensation is not necessarily excessive compensation. An executive who defers pay for some time in the future could lose that money if the company goes bankrupt in the meantime. Since executives who defer pay put their own money at risk, the arrangement actually aligns their interests with that of shareholders.

Recognizing this risk, many companies have sought out ways to help increase the security of the nonqualified plan benefits they offer to their executives.

Confidence is Up, But Effects Come Later
In contrast to a year ago, today companies are becoming more confident about the future and their potential return to profitability. For the first time in several months, there's talk of "when" bonuses will resume, not "if." Companies are reinstituting their 401(k) matching programs and thinking more about how to use benefits packages to attract, retain and motivate key people.

Yet deferred compensation is by definition a lagging indicator. Employees and employers make these decisions to pay or defer this kind of compensation at least a year in advance. At this point, with interest in retirement planning more focused than ever, the need to address the issues of plan design, funding and security of nonqualified plans is particularly acute.