The fast pace and mobility of today.s business world have not changed one key fact: It takes good people at the top to make your business successful. You need the right tools to get and keep those people. One of those tools is the compensation provided to your executives.
There are three components of a successful compensation system:
The primary attraction of nonqualified deferred compensation is the ability to individually tailor the benefit, not only to each business, but also to each executive employee. You have total flexibility in this regard without concern for the level of benefits provided to nonhighly compensated employees or other executives.
This facet of executive compensation takes many forms, all useful in various circumstances. Nonqualified executive compensation can be cash-based, stock-based, or "phantom stock"-based.where the amount earned by the executive tracks the increase in value of the company.s stock but no real stock is involved in the program.
Nonqualified executive compensation can stand alone or can tie in with an existing 401(k) plan to allow the seamless deferral of very large amounts of compensation. Nonqualified executive compensation can be a reward or an incentive provided by the employer, and can be combined with the opportunity for the executive to shelter large amounts of otherwise taxable income for a lengthy period of time.
Further, nonqualified executive compensation can provide security for the employee against a surprise merger or other change of ownership of the employer (for example in what is called a "change in control agreement"), letting the executive relax and do his or her job for the employer.
The downsides of nonqualified deferred compensation can usually be dealt with effectively through careful planning. Although the amounts involved are not deductible to the employer until paid to the executive, this is usually a minor limitation. Further, the risk to the employee of nonpayment can be greatly minimized through use of a .rabbi trust..
While usually thought of in the context of large employers, we have seen an increasing tendency to use executive nonqualified deferred compensation in medium and even small businesses. The Department of Labor.s rules limit the usefulness of this type of program with rank and file employees, but any other employee who can in good faith be regarded as "highly compensated" or as a "management employee" can be provided executive deferred compensation.
In fact, we recently discussed this type of executive deferred compensation with an employer with about 40 employees for the purpose of keeping its top four managers loyal to and interested in the company during a five-year expansion phase. If nothing else, another employer seeking to lure these valuable employees away will have to replace the executive deferred compensation which the four individuals will forfeit should they depart prematurely. Thus, executive deferred compensation is not only a benefit to the executives involved, but can also be a significant benefit to the employer in achieving its short and long-term goals.
Warner Norcross & Judd LLP is a full-service law firm with offices in Grand Rapids, Muskegon, Holland and Detroit. Anthony J. Kolenic, Jr., is a partner with the firm and is a member of the Employee Benefits Law Group. Tony may be reached at 616.727.2625. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.
There are three components of a successful compensation system:
- Cash compensation, fringe benefits and perks;
- Qualified deferred compensation such as 401(k) and profit sharing plans; and
- Nonqualified deferred compensation arrangements.
The primary attraction of nonqualified deferred compensation is the ability to individually tailor the benefit, not only to each business, but also to each executive employee. You have total flexibility in this regard without concern for the level of benefits provided to nonhighly compensated employees or other executives.
This facet of executive compensation takes many forms, all useful in various circumstances. Nonqualified executive compensation can be cash-based, stock-based, or "phantom stock"-based.where the amount earned by the executive tracks the increase in value of the company.s stock but no real stock is involved in the program.
Nonqualified executive compensation can stand alone or can tie in with an existing 401(k) plan to allow the seamless deferral of very large amounts of compensation. Nonqualified executive compensation can be a reward or an incentive provided by the employer, and can be combined with the opportunity for the executive to shelter large amounts of otherwise taxable income for a lengthy period of time.
Further, nonqualified executive compensation can provide security for the employee against a surprise merger or other change of ownership of the employer (for example in what is called a "change in control agreement"), letting the executive relax and do his or her job for the employer.
The downsides of nonqualified deferred compensation can usually be dealt with effectively through careful planning. Although the amounts involved are not deductible to the employer until paid to the executive, this is usually a minor limitation. Further, the risk to the employee of nonpayment can be greatly minimized through use of a .rabbi trust..
While usually thought of in the context of large employers, we have seen an increasing tendency to use executive nonqualified deferred compensation in medium and even small businesses. The Department of Labor.s rules limit the usefulness of this type of program with rank and file employees, but any other employee who can in good faith be regarded as "highly compensated" or as a "management employee" can be provided executive deferred compensation.
In fact, we recently discussed this type of executive deferred compensation with an employer with about 40 employees for the purpose of keeping its top four managers loyal to and interested in the company during a five-year expansion phase. If nothing else, another employer seeking to lure these valuable employees away will have to replace the executive deferred compensation which the four individuals will forfeit should they depart prematurely. Thus, executive deferred compensation is not only a benefit to the executives involved, but can also be a significant benefit to the employer in achieving its short and long-term goals.
Warner Norcross & Judd LLP is a full-service law firm with offices in Grand Rapids, Muskegon, Holland and Detroit. Anthony J. Kolenic, Jr., is a partner with the firm and is a member of the Employee Benefits Law Group. Tony may be reached at 616.727.2625. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.