After several tumultuous years of rule changes, nonqualified deferred compensation plans (NQDC) and executive benefit plans seem to be settling down. The big news of 2011 was there really was no big news. The full effects of 409A “say-on-pay” executive compensation proxy disclosure rules and other provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (aka the Dodd-Frank Act) have been absorbed by companies, and few signs of any definite new rules cloud the horizon.
In the last year, little has changed toward NQDC plan adoption and no major shift taken place in terms or funding mechanisms, says Steve Ulian, head of Institutional Retirement Relationship Management for Bank of America Merrill Lynch. Larger companies remain more apt to offer NQDC than smaller ones; while only 25% to 30% of firms with 100 to 500 employees offer NQDC, 73% of companies with more than 25,000 do so.
However, some firms re-evaluated or pulled back on NQDC, due to 409A and the new proxy disclosure rules, says Jack Abraham, a principal and practice leader for PwC Human Resource Services retirement practice. In particular, 409A caused some firms to abandon NQDC and forced others to limit amounts in plans or eliminate them completely, he says.
There is no question that the passing of 409A had a significant impact on NQDC, says Ulian, and led many firms to drop the plans. That impact, though, has died down somewhat, with 99% of plans that feature NQDC indicating they will continue to offer these plans for at least the next three to four years, says Ulian. “Plan sponsors are complying with 409A and still feel that these plans offer a meaningful way to attract and retain talent,” he says.
The proxy disclosure rules, however, eliminated many executive perks. Numerous companies, for example, ceased paying for golf club memberships and reduced their severance packages, says Abraham.
For most firms, however, “say on pay” has been a nonevent. “It’s been mostly about compliance,” says Abraham. There have been a few instances where shareholders voted down pay packages, but for the most part, these pass shareholder muster. While “say-on-pay” encouraged compensation committees to rethink the packages, it was not a driving force in changing them structurally, notes Abraham. The levels of compensation are somewhat affected by the rule, he says, yet have remained robust, with many executives having seen increases in their overall pay packages last year.
Current trends include a move to long-term incentives in cash and equity, with a lock-out period, says Abraham. Eliminating postretirement and postemployment payments are also trends, he says, because they are not viewed as tied to performance and companies do not want to disclose them.
In the last year, firms also have become increasingly interested in bundling NQDC and executive equity plans with other qualified plans and outsourcing to one service provider, says Ulian. Companies want one provider to service all plans, in a total retirement package.
Another new trend is education for executives—presenting them with basic information about how their plans and other benefits work, says Ulian. Because many participants in NQDC and equity plans rank in the top 5% of employees, it was assumed they had the sophistication to understand their plan’s features and design. Experts came to realize, though, that executives need their packages explained in plain English as much as their staff does their 401(k)s. Sponsors want service providers who can help employees understand their options, says Ulian.
Right now, says Abraham, companies want to tie pay to performance but ask, “What is the best way to do so?” Some compensation experts theorize that executives should hold the firm’s debt, in addition to equity. A belief now exists that executive compensation must diversify away from equities to better align interests, says Abraham. Some think that executives need to operate as debt holders, as well, to better align incentives, he says. For example, if bankruptcy is in the best interest of the company, executives who are also debt holders would be more willing to consider that route. If executives just hold equity, however, they may not be interested in bankruptcy because this option holds no value. Some companies are considering restructuring some executive compensation as debt, to be made in payments after retirement, says Abraham.
—Elayne Robertson Demby