THOUGHT LEADERSHIP

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.