Executive Benefits as a Strategic Advantage

Transcription

1 Executive Benefits as a Strategic Advantage Recruit, Motivate, Reward and Retain the Best Executive Talent for your Business February 2012 Lockton Companies While a high unemployment rate may imply an employers market in terms of a large pool of applicants, the reality is that competition for talented, experienced executive leadership is fierce. Reduced revenues, tight budgets, greater regulations, and financial uncertainty mean organizations must accomplish more with fewer resources. The need for key leadership to navigate these choppy JASON MAPLES Executive Vice President Executive Benefits jason.maples@lockton.com FRANK ARCARA Producer Executive Benefits frank.arcara@lockton.com waters is more critical than ever. How can your company recruit, motivate, reward, and retain top executive talent? Having a comprehensive, well designed executive benefits program is a great start. Enhancing executive benefits can provide a huge advantage at a nominal cost. The Executive Playing Field Offensive and Defensive There are two primary reasons why Executive Benefits are used to recruit, motivate, reward, and retain key leadership. L O C K T O N C O M P A N I E S

2 If an executive feels the grass is greener Offensive Reasons somewhere else, they begin to disengage Highly compensated executives are often frustrated by if an executive feels the grass is greener the limitations imposed in group benefits and ERISA somewhere else, they begin to disengage. (Employee Retirement Income Security Act of 1974) laws. These constraints make it impossible to replace the same percentage of income at death, disability and retirement as compared to non-highly compensated employees. As a result, highly compensated executives are reversely discriminated against. Defensive Reasons If an executive believes that they can accomplish their financial goals (e.g., save enough money for children s education, save for retirement, ensure that the family has sufficient resources to carry on if the executive dies or becomes disabled) with their current employer, they are less likely to look elsewhere. The reality is, if an executive feels the grass is greener somewhere else, they begin to disengage. FIVE STEPS TO BUILDING A COMPETITIVE EXECUTIVE BENEFITS PLAN A well designed executive benefits program is often best to implement in stages. Depending on your company s industry or size, all five elements may not be applicable or necessary. Group insurance programs typically insure base incomes only and it is not uncommon for an execute to receive as much as half their income from incentive compensation programs. Step #1: Equalize Group Long-Term Disability and Group Life Insurance Payout Ratios Long-term group disability (LTD) and group life insurance (LI) plans are usually structured to replace a certain percentage of income to a cap. For example, in case of a disability claim, a typical LTD plan may pay 60% of an individual s base salary to a maximum benefit of $10K/month. In this instance, any person earning more than $200K a year will receive less than 60% of their salary in the event of a claim. A typical group life insurance policy replaces 2X earnings to a cap of $200K, meaning anyone earning in excess of $100K is not receiving full benefits. Finally, these group insurance programs typically insure base incomes only and it is not uncommon for an executive to receive as much as half of their income from incentive compensation programs. 2

3 February 2012 Lockton Companies One of the easiest and quickest ways to enhance an executive benefits plan is to equalize LTD and LI policies for executives to solve the reverse discrimination issues inherent in these group plans. The plans can be designed to insure all compensation (including incentive compensation) and are easy to implement. Moreover, most of these programs can be provided on either a guaranteed issue or simplified issue basis saving your executives the frustration often caused by full medical and financial underwriting. This solution will give your top talent the comfort of knowing that their families will be taken care of in the event of disability or premature death. Step #2: Implement Nonqualified Deferred Compensation (NQDC) Plans ERISA limits tax-deferred retirement savings contributions to $17,000/year (for 2012) or $22,500 for executives above the age 50. As a result of these limits, highly compensated employees cannot save the same percentage of income on a tax preference basis as compared to non-highly compensated employees. For example, someone making $50K can contribute up to 34% of their income to their 401(k) plan, while someone making $200K cannot even contribute 9%. Nonqualified deferred compensation plans (NQDC plans), or top hat plans, provide highly compensated employees with pre-tax savings opportunities enabling them to contribute up to 100% of their income. NQDC Top hat plans provide highly compensated employees with pre-tax savings opportunities enabling them to contribute up toe 100% of their income. plan distributions and allocations are also more flexible than those under formally funded programs, such as 401(k) plans. When setting up an NQDC, there are three options to consider: Executive deferrals only Restorative matches Discretionary contributions Executive Deferrals With this option, the executive simply elects to defer a portion of their compensation (to a maximum of 100%) on a pre-tax basis. In addition, the executive elects a payment schedule for the funds. This can help supplement retirement savings, can fund a child s college education, or a second home and/or any other financial planning objectives. Restorative Matches In addition to executive deferrals the company may choose to make a restorative match. For example, if a company has a 3% safe harbor match on 401(k) contributions, the IRS under 401(a)17 currently limits the company s ability to match on income above $250,000. The NQDC plan could allow the company a mechanism to make an executive whole on the company s match, in this example, 3% on their income above $250,000. 3

4 Discretionary Contributions NQDC plans also provide the company a mechanism to make discretionary contributions to any employee s account at any time, for any amount, and with any vesting schedule the company desires. This design strategy can be used for signing bonuses, retention bonuses, profit sharing, to replace stock options, or to incentivize performance. The Benefits Employers can provide a program to recruit, reward, and retain key talent Freedom to discriminate and select participants among highly compensated management Benefits are tax-deductible when paid Assets which finance the plan are owned as corporate assets Earnings from assets may accumulate tax-deferred depending on the plan financing option The company may recover all costs to run the plan depending on plan design IRS approval is not required requires only onetime Top Hat filing No testing, no required audit, and no 5500 reporting Step #3: Offer Executive Long-Term Care Insurance As people live longer and healthcare costs increase, everyone is worried that their retirement savings will not be enough to cover future health emergencies and longterm needs. Everyone is worried that their retirement savings will not be enough to cover future health emergencies and long-term needs. Offer long-term care policies to reward a specific group of employees who are critical to the success of your business. These policies are not subject to ERISA workplace discrimination laws like other benefits are (e.g., 401(k) plans), so they can be carved out for specific employees and their spouses. The Benefits A fully paid long-term care policy that your executives can take with them if they leave your company solves a very real problem for them and their families. As a result, they are free to focus on the strategic needs of your business instead of worrying about their future. Executives pay no taxes on the benefits received from the policies, and the value of the premiums is not included in their taxable income (though there may be a few exceptions to this). Your company can use pre-tax dollars to pay the long-term care premiums as long as the amount of premium is imputed to the insured, and you can obtain even lower premiums if multiple policies are purchased under a group plan. 4

5 February 2012 Lockton Companies Step #4: Offer Personal Excess Liability (Umbrella) Coverage Highly compensated executives often have high value personal assets (high value homes, cars, boats and planes) that are at risk in the event of an injury, accident, judgment, or other liability claim. These events can also require large amounts of time away from work to defend. Step #5: Consider Key Person Insurance Executive talent is often one of the few sustainable differentiators that organizations possess. So when an executive or key individual is disabled or dies, the business and its investors may suffer not only because of the individual s lost productivity, but also because the business can no longer benefit from the individual s intellectual capital, relationships and reputation. Offer personal excess liability coverage to a defined group of executives. A group policy can enable executives the ability to obtain higher limits of coverage than they could on their own, and at discounted rates. The Benefits Access to high limits of personal liability coverage (up to $50 million) with little underwriting scrutiny. Flexibility in the design of the program. The company may choose who is eligible and the participants can choose their own limits. Discounted group premium. This benefit can be paid by the employer, employee, or any combination of the two. Due to the group aspect of this coverage, significant premium savings are evident especially at higher limits. Automatic coverage. For mandatory programs, in which the entire group is included for coverage, new employees are automatically granted coverage upon employment. This helps close gaps and allows the company to fully leverage their benefits. Executive talent is often one of the few sustainable differentiators that organizations possess. Obtain key person insurance. This insurance is for the business, not the executive. It provides funds to the business and/or its investors to cover expenses associated with finding qualified replacements and to cover revenue deficits in the event of the loss of a critical employee. Benefit While the tangible benefits go to the company or its investors, all executives benefit. They can rest assured that the company is prepared to withstand the loss of a key executive. The company has planned ahead and will most likely not suffer long-term financial hardships or insolvency. Executives know that their plans and livelihood will not suffer greatly because of a business that struggles after the loss of a key executive. 5

6 The Right Executive Benefits Plan Can be a Powerful Recruiting and Retention Tool High-growth companies succeed because they find creative ways to hire, motivate and keep A Players. A comprehensive, well designed executive benefits program that incorporates most or all of these five steps will serve your business well. A small investment in time, energy, and financial resources will give your company a boost when competing for executive talent. Key Person Life Insurance Equalize Group Life and Disability Insurance Plans Recruit, Motivate, Reward and Retain Key Leadership Group Personal Excess Liability Plans Implement NQDC Plans Executive Carve-Out LTC 6

7 February 2012 Lockton Companies ABOUT YOUR AUTHORS Jason Maples, CLU, ChFC, CFP An Executive Vice President with Lockton Companies, since June 2009, Jason was previously the founder and Managing Partner of Strategic Financial Partners, a Denver executive benefits consulting firm. Jason has served on the board of advisors for the Better Business Bureau, Entrepreneur s Organization and United Way Tocqueville Society. In addition, he is an alumnus of Leadership Denver and has been a recipient of the Denver Business Journal s Forty Under 40 award and the Denver Foundation s Philanthropic Leadership Award. Frank Arcara Frank joined Lockton in 2009 and was one of the founding Producers of the Executive Benefits practice in Denver. Prior to Lockton, Frank began his career with the Vanguard Group as investment advisor. He spent six years as Regional Investment Consultant for Brinker Capital before moving to Denver, CO and joining Strategic Financial Partners, a boutique executive benefits and financial planning firm. He is a Vice Chairman of the Board of Advisors for the Rocky Mountain Children s Law Center, is a charter member of a charity event for the Tennyson Center for Children, and a member of the United Way Tocqueville Society. About Lockton More than 4,100 professionals at Lockton provide more than 15,000 clients around the world with insurance, benefits, and risk management services, offering an uncommon level of client service. From its founding in 1966 in Kansas City, Missouri, Lockton has grown to become the largest privately held insurance broker in the world and 9th largest overall. Independent researcher Greenwich Associates awarded Lockton its 2011 Service Excellence Award for risk management for large companies. For three consecutive years, Business Insurance has recognized Lockton as a Best Place to Work in Insurance. 7

8 Our Mission To be the worldwide value and service leader in insurance brokerage, employee benefits, and risk management Our Goal To be the best place to do business and to work Securities may be offered through registered representatives of Lockton Financial Advisors, LLC, (LFA), a registered broker-dealer, member FINRA and SIPC. Investment advisory services may be offered through investment advisor representatives of Lockton Investment Advisors, LLC, (LIA), a federally registered investment adviser. Securities and investment advisory services may also be offered through representatives of NFP Securities, Inc. (NFPSI) a broker/dealer, member FINRA/SIPC and federally registered investment adviser. Not all members of Lockton, Inc. offer securities or investment advisory services. Lockton, Inc. is the parent company of LFA and LIA. Lockton, Inc. and its subsidiaries are not affiliated with NFPSI. For California, Lockton Financial Advisors, LLC, d.b.a Lockton Insurance Services, LLC, license number 0G Lockton, Inc. All rights reserved. Images 2013 Thinkstock. All rights reserved. g\white papers\denver office\executive benefits_feb2012.indd