Alternative Forms of Non-Qualified Deferred Compensation. WILLIAM GRANVILLE III, ChFC

Transcription

1 Alternative Forms of Non-Qualified Deferred Compensation WILLIAM GRANVILLE III, ChFC

2 Current Business Environment Challenges Low-Interest Rate Environment Compliance & Regulatory Burdens Loan Demand Industry Consolidation Succession Planning Impact of Obamacare (ACA) Attracting and Retaining Key People 2

3 Regulatory Guidance Interagency Guidelines re. Bank Compensation Compensation arrangements are critical tools in the successful management of financial institutions. These arrangements serve several important and worthy objectives including attracting skilled staff, promoting better organization-wide and employee performance, promoting employee retention, providing retirement security to employees... 3

4 According to recent ABA Compensation Survey data, approximately two-thirds of banks provide deferred compensation plans for CEO and senior officers. American Bankers Association. (2013). ABA 2013 Compensation & Benefits Survey. 4

5 ABCs of Non-Qualified Deferred Compensation In contrast to Equity compensation which is a grant or transfer of property. NQDC is a contractual obligation (promise to pay) of the Corporation. A NQDC Plan or "Top Hat" Plan is an "unfunded" Deferred Compensation Plan, where an Employer makes an unsecured promise to pay an Executive compensation in the future for services rendered today. 5

6 ABCs of NQDC The Corporation is not permitted to create and fund a trust or custodial account segregated from the balance sheet of the Corporation. Plan eligibility should be reserved for Key Executives which represent approximately the top 5% of the total workforce of the organization. 6

7 ABCs of NQDC Advantages: Tax deferral: The Executive is not taxed until income is received. Flexibility: The plans can be completely customized. Selection: Bank can be selective as to who is offered the plan and the terms for each participant. Golden Handcuffs: Vesting schedules are not governed by qualified plan guidelines. 7

8 ABCs of NQDC Disadvantages: Credit Risk Plan participants are unsecured creditors IRC 409a Strict limits on acceleration of payments Strict limits re. changing distribution of payments Accounting Treatment Negative P&L Impact Balance Sheet Recognition Plan Financing Limitations Financing assets are Corporate assets, must be Bank eligible investments, and concentrations must fall within agency guidelines 8

9 Common Plan Design: SERP/Salary Continuation Plans Key features of SERP: Timing of distributions: Post-Retirement Benefit Calculation: Defined Benefit Plan Contributions: 100% Employer Funded 9

10 EXECUTIVE COMPENSATION & BUSINESS EVOLUTION STARTUP GROWTH MATURITY TRANSFER Goals for Key People: Attract Retain Reward Protect Variables to Consider: Closely-Held or Public (SEC)? Family Owned? Geographical Market? The Organization s Strategic Plan? Age of the Executive? Unique Abilities and Skills of the Executive? Goals and Motivation of the Executive? Budget/Cash Flow? Your Executive Compensation strategy should have the flexibility to grow along with your business. 10

11 Alternative Plan Designs 11

12 What is Phantom Stock? Phantom Stock Securities Phantom Stock Plans are contracts between the employer and the plan participants (executives) designed to parallel actual ownership of equity Phantom stock is a NQDC arrangement. Unsecured promise not a transfer of property Form of Payment = Value is measured by the Company s stock on a per share basis 12

13 Why Phantom Stock? Enhance the recruitment and retention of key executives, particularly those with highly desirable skills and knowledge Align the interests of shareholders and key executives, encouraging executives to think more like owners with a longer term view of success Share the economic value of your Bank with key executives without bringing them on as equity partners or requiring them to invest cash 13

14 Why Phantom Stock? Reward key executives without triggering an immediate taxable event Share the economic value of your Bank with key executives while avoiding the risks inherent in having additional shareholders Create Golden Handcuffs to incentivize key executives to remain with the Bank long-term 14

15 Sample Plan Design (PS) The Bank may promise to pay the executive, at a future point in time, an amount equal to the value of a fixed number of shares. For example, the Bank may promise a payment equal to 1,000 shares; the payment will occur in 10 years, when the executive turns 60. If the Bank s stock value is $100, the Bank credits $100,000 to the executive s book account ($100 x 1,000 shares). The value of the book account will vary, with the actual payment dependent on the share price when the payment is made. Handcuff: If the executive voluntarily separates from service prior to age 60, he/she forfeits the compensation promised. 15

16 Sample Plan Design (PS) $100,000 Initial Account Balance 10% compounded growth over 10 years $259, Ending Account Balance 16

17 What is a Deferred Cash Incentive Plan? Way for an institution to ladder annual cash bonuses to be distributed, typically, 3-5 years from date of the award. In-Service Distributions. Lump-Sum Payout Annual awards based on flat dollar amounts, or they can be based on percentage of base salary. 17

18 What is a Deferred Cash Incentive Plan? Size of annual awards can be tiered based on achieving certain benchmarks of individual and corporate performance criteria. Interest Crediting: Varies 18

19 Why Deferred Cash Incentive? May appeal to a younger officer, Rising Star, who may be less motivated by post-retirement income and more motivated by maximizing current income. Some institutions may want limit their exposure to longer-term employee benefit obligations. 19

20 Sample Plan Design (DCI) An annual Deferred Bonus will be credited to the executive s account in the amount of $12,000, $24,000, or $36,000 based upon successful attainment of annual performance objectives: Performance Level Level 1 Level 2 Level 3 Annual Bonus $12,000 $24,000 $36,000 Performance Metrics Loan Growth % Non-Interest income % Efficiency Ratio ROA New Commercial Accts. 20

21 Sample Plan Design (DCI) The account balance will be credited interest at an assumed annual rate of prime plus 1% (currently 4.25%) up to a ceiling interest rate not to exceed 10%. Amount of Benefit: Deferral Account balance attributable to the Annual Deferred Amount, plus interest, credited by the Bank. Distribution Date: The fifth (5th) anniversary of the date each Annual Deferred Amount was contributed to the Deferral Account. Vesting: 5-year cliff. The plan will serve as Golden Handcuffs in order to encourage the executive to remain with the Bank long-term. 21

22 What is an Elective Deferred Compensation Plan? A deferral plan which allows a participant the opportunity to defer the payment of all or some portion of his/her compensation to a later date on a pre-tax basis. Amounts deferred are not taxable income to the Executive or heirs until actually received. Amounts deferred are credited to a bookkeeping account in the name of each plan participant. 22

23 What is an Elective Deferred Compensation Plan? These amounts earn interest which is compounded without current taxation. Account Balance is distributed in installment/annuity payments at retirement age of the participant. 23

24 Why Elective Deferral Plans? Maximize pre-tax retirement savings. ERISA limits how much employees can set aside in tax-qualified retirement plans (qualified) Deferrals capped at $17,500. Tax planning Expiration of Bush era tax cuts have effectively increased income taxes on high-income earners. Some executives tax rates have gone up. They are looking to reduce their tax bill by deferring some compensation. 24

25 Sample Plan Design (EDC) AnyBank Texas sponsors an Executive Deferral Plan with the following features: Eligibility: Senior Officers at the EVP level or higher that have been employed with the Bank for a minimum of 24 months. Cap: On an annual basis, participants can elect to defer up to $25,000 of current income. Interest: Interest credited on the participant's deferral account at 7.5%. Upon retirement, the Plan will pay the accrued benefits over a ten year period (120 months). 25

26 Best Practices Well Drafted Plan Document Proper Accounting Ongoing Administration & Compliance Communication of Benefits Plan Reviews 26

27 27 Questions?

28 William Granville III, ChFC CEO & Managing Member Granville Financial Group 1980 Post Oak Blvd Suite 1500 Houston, TX O: F: