Jeff Roberts: Manager, ADP Executive Deferred Compensation
PLANADVISER: What does the current nonqualified deferred compensation [NQDC] market look like? To whom are such plans currently being offered?
Roberts: At one time, these plans were found primarily at Fortune 1000 sized companies. Now, mid-sized companies are adopting these plans in greater numbers, and there is even interest from small companies who want to attract, retain and motivate their key employees.
Publicly-held companies typically offer various forms of equity-based compensation to their key employees. While stock option grants are in decline, we have seen a recent increase in the prevalence of performance units and restricted stock at public companies. For many years, privately-held firms would offer additional cash compensation in lieu of equity-based compensation when competing for talent. Recently, private employers are increasingly interested in performance based compensation programs that do not result in an immediate cash payment.
PA: How do you see these privately-held employers looking at plan design—long-term-incentive plan design—to structure these programs? What are they considering? What options make more sense for certain employers over others?
Roberts: Some privately-held employers have a particular plan design already in mind before they reach out to attorneys, vendors and consultants to begin discussions. We frequently hear from business owners who want awards to be 100% discretionary and subject to a very long vesting schedule. While this design may work at some companies, we typically try to connect the business owner with an experienced executive compensation and benefits consultant who can assist in reviewing peer group pay and benefits practices, identifying appropriate performance metrics and reviewing the demographics of the key employee population.
Next, the consultant can assist with designing an incentive plan which rewards company and individual performance without driving unintended performance that can be detrimental to the company. The vesting schedule can be designed so the plan participants can see the program’s value while also creating the “golden handcuffs” which help to retain key employees who drive the success of the business.
PA: How should an employer communicate the value of these executive benefit plans to employees?
Roberts: The best employers do two things that are very helpful. They provide access to financial planning for their executive team – either paying for the service completely or partially, or simply making an introduction. These employers work with the financial planners to explain the details of the executive benefit plans. When the financial advisors understand the plans, they can provide customized, personal advice to the executives and help them maximize their return from these plans in terms of company contributions and deferred taxation.
Second, the best employers incorporate the CEO or the CFO (Chief Financial Officer) into their communication strategy. Whether via a live meeting, webinar or memo, the message is much more likely to have an impact when it comes from a top officer of the company. These two strategies can help key employees to better understand and benefit from your executive benefit plans.
PA: How does the plan sponsor know if it should offer a plan like this? What type of demographic would indicate whether this was the right plan option or benefit offering?
Roberts: Ultimately, executive compensation and benefit plans are designed to attract, retain and reward key employees. If someone crucial to your organization has left recently, you may want to review your executive total rewards strategy. If you already have something in place that seems to work, and you don’t have a turnover issue, there may be no need to review your executive compensation and benefits plans. But if key people have left recently, and their leaving put a strain on the business, perhaps you should have this conversation before the next key employee walks out the door.
PA: How should plan sponsors look for a recordkeeper if they’ve decided to offer such a plan, and what kind of participant experience should they be offering to employees?
Roberts: Both the record-keeper and the financial advisor should have experience working with executive compensation and benefit plans. If your financial advisor is primarily focused on 401(k) plans, you may need to lean harder on your record-keeper to stay compliant with the special rules which apply to deferred compensation and long term incentive plans. Many plan sponsors are looking to consolidate vendors so they have a single point of contact and a single website for the 401(k), deferred compensation and long term incentive plans. While this trend towards vendor consolidation has benefits, be sure your record-keeper has plenty of experience working with executive benefit plans so they can track and enforce the unique features of these plans and keep you from, potentially, a costly §409A violation.
The views expressed in this article are the speaker’s own and not necessarily those of ADP, LLC or its affiliates. The article is for general information only and is not intended to provide investment, financial, tax or legal advice or recommendations for any particular situation or type of retirement plan.