A Piece of the Action

Use of company stock and stock options in nonqualified ­deferred compensation plans is on the rise

Companies that offer nonqualified deferred compensation plans (NQDCPs)—and presumably the executives who participate in those plans—appear to be pleased with their offerings and are intent on continuing NQDCP programs, according to the 8th annual PLANSPONSOR/MullinTBG survey of NQDCPs. In fact, 83% of sponsors in the survey said they have no NQDCP changes planned in the coming year, and an additional 14.5% are planning to add to or enhance their NQDCP.

While 71% of companies solely offer an NQDCP, of those firms that do offer at least one other nonqualified arrangement, 58% offer restricted stock units (RSUs) and 50% offer a stock option plan. Both RSUs and stock options are up significantly in the survey this year, indicative of the economic recovery and improved company performance: In 2012, just 43% offered RSUs and 41.5% offered stock option benefits. A new category this year, after-tax benefit plans are offered by just over 6% of respondents. These plans continue to be a good option for companies where a traditional nonqualified deferred compensation plan isn’t a good fit. “It is clear that many companies offering NQDCPs feel that executives should have some ‘skin in the game’ in the form of company stock and RSU programs,” notes Yong Lee, Chief Operating Officer at MullinTBG. “These types of incentives are compelling and can be quite effective ways of retaining key executives and keeping them motivated to excel by further tying their compensation to company performance,” he adds.

The average participation rate in NQDCPs increased from 2012 (44% to 46%), which could be attributable to the tax rate increases that went into effect in January 2013, incentivizing executives to defer more of their compensation in order to reduce their taxable income. Consistent with last year, there was no clear cut definition that is predominant amongst options for defining eligibility. Results vary amongst categories, with title and job grade being most prevalent.

In terms of investment options offered in NQDCPs, market-based investments continue to be the most prevalent option, offered by almost 80% of respondents. A majority of companies offer between 11–20 investment options. This provides executives with an array of investment options covering all major asset classes for diversification purposes, but does not provide too many so as to overwhelm them. Results also support the trend of increased interest in offering managed portfolios as a way to simplify investment decisions for participants.

“With higher taxes and the decline of traditional defined benefit pensions, company-sponsored savings vehicles that offer enhanced deferral opportunities are still fulfilling most company’s objectives to add value by serving as an effective retention tool, making up for qualified plan restrictions, and rewarding outstanding performance that contributes to their and their executives’ bottom lines,” Lee concludes.


Research Methodology

From November 2013 to December 2013, approximately 3,997 corporate sponsors of nonqualified plans were asked to partic­ipate in this study. By the close of the survey, a total of 265 usable responses were received. The questionnaire, developed jointly by MullinTBG and PLANSPONSOR, consisted of approximately 50 questions involving NQDC plan demographics, plan design, purpose of NQDC plan, funding methods, recordkeeping, and other executive benefits offered. The preceding charts represent a portion of the results, with further analysis by annual revenues. For any questions about the research, please contact Jennie Steele, Vice President, MullinTBG at (310) 203-8770 or by e-mail: jennie.steele@mullintbg.com.

Deferred Compensation Snapshot (265 total respondents)

Do you offer an NQDCP?

 Yes, Offer a NQDCP
All Respondents 94.7%
Annual Sales/
Revenues >$1B
96.1%
Annual Sales/
Revenues <$1B
92.7%

What type of NQDC do you offer?

 Voluntary DCP401(k) Mirror (also known as 401(k) Restoration) Section 457(b) or 457(f) Defined Contribution Supplemental Executive Retirement Plan
(DC SERP)
Defined Benefit Supplemental Executive Retirement Plan (DB SERP) Other 
All Respondents 62.2%24.0%9.4%27.9%24.0%5.6%
Annual Sales/
Revenues >$1B
69.9%27.2%6.6%22.8%31.6%7.4%
Annual Sales/
Revenues <$1B
51.5%19.6%13.4%35.1%13.4%3.1%

What other types of nonqualified arrangements does your company sponsor?

 Phantom stock Restricted stock/RSU Stock optionsIncentive programAfter-tax benefit plans (162 Bonus, etc.)None
All Respondents9.1%57.6%50.0%31.8%6.1%70.9%
Annual Sales/
Revenues >$1B
8.3%62.5%52.1%29.2%8.3%62.8%
Annual Sales/
Revenues <$1B
11.1%44.4%44.4%38.9%0.0%81.6%

What is your criteria for eligibility?

 Base salary/
Commissions
Total Compensation:
Base + Bonus
Title Salary + TitleJob GradeOther
All Respondents 8.8%13.7%23.5%20.6%23.0%10.3%
Annual Sales/
Revenues >$1B
9.9%10.7%19.8%21.5%27.3%10.7%
Annual Sales/
Revenues <$1B
7.2%18.1%28.9%19.3%16.9%9.6%

To what is the investment or crediting rate(s) in the NQDCP tied?

 All RespondentsAnnual Sales/
Revenues >$1B
Annual Sales/
Revenues <$1B
Outside index**  13.8%16.4%10.0%
Company stock/
Performance
units
6.9%8.6%4.4%
Market-based
investments
79.8%80.5%78.9%
Other10.6%9.4%12.2%

** Outside index (e.g., Moody’s bond index) fixed rate or company performance rate


Are you considering changes to your NQDCP?

 All Respondents Annual Sales/
Revenues >$1B
Annual Sales/
Revenues <$1B
No NQDCP
changes
planned
82.7%79.5%87.4%
Yes (adding/
enhancing
features)
14.5%17.3%10.3%
Yes
(reducing
features)
1.4%2.4%0.0%
Yes
(eliminating
plan)
1.4%0.8%2.3%

In what way(s) are you considering improving your NQDCP?

 Offer/enhance
company match
Add deferral
sources
Add/enhance
distribution
options
Add/enhance
investment
options
Add/enhance
informal funding
vehicle
Add/enhance
benefit
security
Add/enhance plan
education/
communication
Other
    
All
Respondents
22.6%12.9%29.0%45.2%16.1%3.2%41.9%22.6%
Annual Sales/
Revenues >$1B
22.7%18.2%31.8%45.5%18.2%0.0%36.4%22.7%
Annual Sales/
Revenues <$1B
22.2%0.0%22.2%44.4%11.1%11.1%55.6%22.2%

How many investment choices are offered?

 1 2-1011-20 21-30 31-50Over 50
All
Respondents
12.6%14.9%55.0%13.1%2.7%1.8%
Annual Sales/
Revenues >$1B
13.1%14.6%51.5%15.4%3.1%2.3%
Annual Sales/
Revenues <$1B
12.0%15.2%59.8% 9.8%2.2%1.1%

How is your NQDCP ­recordkeeping handled?

 In-house3rd partyCombination
All
Respondents
9.3% 69.6%21.0%
Annual Sales/
Revenues >$1B
4.0%74.2%21.8%
Annual Sales/
Revenues <$1B
16.7%63.3%20.0%

What do you find most important in aN NQDCP provider?*

 Quality of
service team
Online user
experience
(self-service/
ad-hoc reporting
options)
Consultative in
NQDCP/409A
Price Capability to
integrate w/
401(k) provider
All
Respondents
4.12.93.12.52.4
Annual Sales/
Revenues >$1B
4.23.03.12.32.4
Annual Sales/
Revenues <$1B
4.02.83.12.72.4

*1–5 ranking, 5 = “most important”

Do you provide a matching contribution?

 Yes, provide matching contribution
All Respondents 40.2%
Annual Sales/
Revenues >$1B
43.0%
Annual Sales/
Revenues <$1B
36.1%

If so, what type of matching contribution?

 Flat dollar amountPercentBased on pay level Replaces lost
401(k) match
Tied to company
performance
All Respondents 0.0%58.5%4.9%46.3%3.7%
Annual Sales/
Revenues >$1B
0.0%61.5%7.7%44.2%1.9%
Annual Sales/
Revenues <$1B
0.0%53.3%0.0%50.0%6.7%

Do you informally fund your NQDCP?

 Yes, NQDCP is
informally funded
All Respondents57.2%
Annual Sales/
Revenues >$1B
58.8%
Annual Sales/
Revenues <$1B
54.9%

If so, what are your reasons for informally funding NQDCP liabilities?

 Manage
asset-to-liability
ratio
Desire to mitigate
P&L impact
Improve employee
benefit security
Other
All Respondents 38.7%27.7%31.1%2.5%
Annual Sales/
Revenues >$1B
38.2%26.5%30.9%4.4%
Annual Sales/
Revenues <$1B
39.2%29.4%31.4%0.0%

What % of the aggregate NQDCP liability is informally funded?

 100% or
Greater
75 – 99% 50 – 74%0 – 49%
All
Respondents
56.4%33.6%1.8%8.2%
Annual Sales/
Revenues >$1B
60.0%30.8%3.1%6.2%
Annual Sales/
Revenues <$1B
51.1%37.8%0.0%11.1%

What types of informal funding vehicles do you use?

 Corporate
owned life
insurance
(COLI)
Mutual funds/
taxable
securities
Company
stock
Cash Forward Contracts
All
Respondents
46.2%44.7%7.6%20.5% 5.3%
Annual Sales/
Revenues >$1B
42.9%48.1%11.7%18.2%7.8%
Annual Sales/
Revenues <$1B
50.9%40.0%1.8%23.6%1.8%

Do you offer:

 Financial
Planning
Group
 Life Insurance
Individual
(Supplemental)
Executive Life
Insurance
Group LTDIndividual Executive
Disability Insurance
Long Term
Care
Insurance*
All
Respondents
44.6%96.7%42.0%92.5%24.1%26.9%
Annual Sales/
Revenues >$1B
49.6%96.7%36.9%95.9%18.9%27.9%
Annual Sales/
Revenues <$1B
38.1%96.7%48.9%87.8%31.1%25.6%

*Vast majority of LTC insurance programs are offered on a “voluntary/employee paid” basis. Individual Executive Life and Disability Insurance both employer provided.

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