“The plans enable executives to accumulate the funds needed so that they have retirement income to meet their needs and those of their families,” Rich DeVita, principal at The Todd Organization, told PLANSPONSOR. “This is of considerable importance as increased life expectancies and low investment returns have caused many to revisit the need for additional savings.”
Over the years, the “pay for performance” trend has led many companies to institute stock options and other equity awards for wealth creation. But with market volatility and stock options “under water,” DeVita said, there are significant variations in these benefits. Some companies have even incurred a compensation expense and then been unable to award that compensation.
Although executives value stock and other equity vehicles, they are concerned about stable sources of retirement income, according to DeVita. “Rising tax rates, increased life expectancy and lackluster investment results of recent years have upped the ante when it comes to the need for additional savings,” he said.
In his paper series, “Executive Benefit Plans: Has the Pendulum Swung Too Far?,” DeVita said companies have many strategies available to help institute both effective equity compensation and retirement programs:
- A hybrid “pay for performance” approach – Pay for performance programs inherently have risk and uncertainty for executives, DeVita explained in his paper. Once an executive achieves an equity award, continued volatility and uncertainty remain about the award amount. To provide more financial stability to executives who have achieved these pay for performance goals, DeVita said companies can allow the executive to contribute a portion of these funds to deferred compensation programs with stable, fixed-rate returns.
- Greater company contributions to deferred compensation plans – A more dependable way of providing compensation and reducing the risk of equity awards, some companies re-allocate a portion of the costs going to equity awards for company matches on deferred compensation.
- Converting some gains from equity awards into fixed-payouts over multiple years – Executives want to find the best distribution and re-allocation strategies for their equity awards, and companies can facilitate this through deferred compensation programs, DeVita said.