TRENDS IN BANK EXECUTIVE/DIRECTOR COMPENSATION AND BENEFITS

Transcription

1 Bill Enck, CPA, CPC, APA Employee Benefits Consulting Group TRENDS IN BANK EXECUTIVE/DIRECTOR COMPENSATION AND BENEFITS berrydunn.com

2 TYPES OF EXECUTIVE COMPENSATION Stock Options Synthetic equity Nonqualified deferred compensation Supplemental Executive Retirement Plan (SERP) Deferred Compensation Plan (DCP) Qualified retirement plans Other alternatives (e.g., cash bonuses) 2

3 STOCK OPTIONS A Form of equity compensation that gives an individual the ability to receive actual equity. Three types of stock options: Incentive Stock Options (ISOs) Nonqualified Stock Options (NSOs) Employee Stock Purchase Plans (ESPPs) Code Section 423 Broad based option plans Each type of option has different tax ramifications 3

4 INCENTIVE STOCK OPTIONS ISO ADVANTAGES No income to employee at grant No income to employee at exercise AMT may be triggered Capital gain rates on ultimate sale Basis = amount paid Thus, no ordinary income tax at all!! ISO DISADVANTAGES No tax deduction to Employer Strict requirements of IRC 422 must be followed 10 year limit prior to exercise (5 yrs. for certain >10% shareholders) $100,000 limit 4

5 NONQUALIFIED STOCK OPTIONS Nonqualified Stock Options = any option that does not meet the ISO requirements NSO ADVANTAGES NSO DISADVANTAGES Tax deduction for Employer at Grant or Exercise Date Must withhold tax More design flexibility Not subject to ISO requirements No AMT exposure for recipient Taxation of recipient accelerated and ordinary income tax rates apply At date of grant, if FMV of NSO ascertainable (No income at exercise) At date of exercise if FMV of NSO not ascertainable at grant Most common scenario 5

6 STOCK OPTIONS Stock Options FICA Rules & impact of IRC 409A FICA Rules: ISO No FICA since there is no ordinary income NSO FICA payable when the compensation event occurs Generally upon exercise IRC 409A Rules Do not apply to ISOs NSOs granted at FMV! 6

7 SYNTHETIC EQUITY Nonqualified deferred compensation plans that provide benefits to employees based on hypothetical shares of company stock STOCK APPRECIATION RIGHTS PHANTOM STOCK Measured by increase in stock price from Grant Date Measured by stock price at payment date Employees receive cash Employees receive cash Vesting can apply Vesting can apply 7

8 SYNTHETIC EQUITY What are the tax consequences related to synthetic equity? Income Tax No taxable income at grant Ordinary income at time of payment Employer wage deduction FICA Tax Phantom Stock FICA imposed when substantial risk of forfeiture lapses SARs FICA imposed when payments made 8

9 SYNTHETIC EQUITY Do employer s favor SARs over phantom stock? What are the IRC 409A implications? SARs vs. phantom stock Depends on the company s goals SARs reward future performance Phantom stock can reward past and future performance 409A implications Phantom stock is subject to 409A SARs issued at FMV are not subject to 409A 9

10 NONQUALIFIED DEFERRED COMPENSATION PLANS At its most basic - NQDC results from the making of an enforceable promise to pay in a later tax year compensation that is earned in the current tax year. Characteristics of NQDC plans Cover a select group of management or highly compensated employees Employer or employee contributions Deferred amounts are taxable upon the earlier of payment or funding FICA acceleration Employer flexibility Generally subject to IRC 409A 10

11 NONQUALIFIED DEFERRED COMPENSATION SERPs Generally defined benefit plan type benefits Moving towards defined contribution Can be integrated with other retirement benefits provided to executive Generally for executives and not directors What is the average replacement ratio? 11

12 NONQUALIFIED DEFERRED COMPENSATION Deferred Compensation Plan Can apply to executives and directors Can include employee/director elective deferrals and employer contributions Allows participant investment direction Employers generally use a Rabbi Trust 12

13 NONQUALIFIED DEFERRED COMPENSATION Distribution Provisions Must generally follow IRC Sec 409A When and how can benefit payments be selected and/or changed? What are the common forms of payment? Does it make sense to delay payments? 13

14 QUALIFIED RETIREMENT PLANS Is there a way to get more tax deferred benefits to Executives? Does the Bank make the following contributions consistently? Safe Harbor nonelective Contributions Profit Sharing Contributions Consider use of a Class Allocation for nonelective contributions Example: Class 1 President, Class 2 Senior VPs, Class 3 VPs, Class 4 all other employees 14

15 PERFORMANCE BASED COMPENSATION Can apply to annual cash bonuses or deferred compensation Performance metrics based on individual or Bank goals? Consider the Bank s strategic plan Do all eligible employees need the same metrics? Long-term or short-term goals? Apply vesting provisions? 15

16 PERFORMANCE BASED COMPENSATION How to determine performance metrics? Profitability Return on assets Asset quality Return on equity Earnings per share Total return to shareholders 16

17 DIRECTOR COMPENSATION What items need to be reported on Form 1099-MISC? Meeting fees Deferred compensation payments Other benefits provided Medical benefits Long-term care insurance Other Do not need to report reimbursable expenses 17

18 INTERESTED IN MORE? Contact Bill Enck, a Senior Manager in BerryDunn s Employee Benefits Consulting Group, to learn more. [email protected] Website berrydunn.com Blog berrydunn.com/firmfooting 18