The Hay Group, a Philadelphia consulting firm, found that the gap between benefit programs for executives and rank-and-file employees continues to widen with several significant elements of executive programs having risen since the survey was last conducted in 2001.
- the prevalence of deferred compensation plans increased from 74% to 79%
- the prevalence of executive non-qualified retirement plans increased from 64% to 70%
- the target replacement ratios of Supplemental Executive Retirement Plans (SERPs) have increased. This is the portion of annual pay that will be paid out each year after retirement.
- The definition of “compensation” on which SERPs are based is now more likely (18%) to also include their long-term incentive pay than in prior years.
“Even though many companies are finding ways to cut back their overall benefits programs, executive benefits keep increasing,” said Vice President & Director of Hay’s Executive Benefits Practice Joe Sapora, in a statement. “In some cases, special executive-only pension plans understandably simply restore executives’ benefit restrictions under all-employee (qualified) plans; but in some other cases they can be unquestionably abusive.”
An example of questionable design is recognizing long-term incentives in the target retirement formula, Hay said. Most companies (81%) include average salary and annual bonus in their executive pension formula, but a surprisingly high 18% also include long-term incentives (LTI) in this multiplier.
Rank-and-file pension plans often include annual bonus (66% of bonus paying companies), but rarely include LTI, even if it is material. “Including LTI in executive retirement plans provides a means to highly leverage the target retirement benefit, a form of compounding long-term executive capital accumulation” Sapora said. Hay said this issue had a major impact on the recent events at the New York Stock Exchange that resulted in the dismissal of Chief Executive Richard Grasso (See NYSE Chairman Grasso Resigns ).
Countering this trend is the continuing decline in the traditionally more “social” perquisites such as country clubs and luncheon clubs; it appears they may now require a closer relevance to a justifiable business purpose, Hay found.
The 2003 Hay Executive Benefits and Perquisites Survey covers compensation programs of 269 US-based organizations. For more information, go to www.haygroup.com .