Be Part of the Ultimate Safety & Compliance Community
Trending news, knowledge-building content, and more – all personalized to you!
Executive compensation or “total compensation” typically consists of salary, employee benefits, bonuses, supplementary pension benefits, deferred compensation, and other fringe benefits, including severance pay. The compensation program should be established according to company culture and human resource goals. The company’s pay philosophy will determine the mix of total compensation it provides to executives.
An executive’s salary may be determined by a combination of several factors including years of experience, sustained level of performance, size of company, industry peer group, and must often receive board or committee approval.
Employee benefits. The typical employee benefits which an employer provides to its employees also makes up a portion of an executive’s total pay package. This would include time off with pay, health and dental insurance, short-term and long-term disability coverage, life insurance, and retirement plans (i.e., a defined contribution plan or a defined benefit plan). However, there are often additional employee benefits given to executives which may include additional executive life, disability insurance coverage (usually at a level higher than the average employee), retirement plans (see Supplemental Pension Plan), and deferred compensation arrangements (see Deferred Compensation).
Awards/bonuses. Bonuses and other awards are often determined by the performance goals in place and whether or not they are met. Incentive plans can take many forms, the most common being:
Supplemental pension plan. For a select group of management or highly compensated employees, an unqualified pension plan or a Supplemental Employee Retirement Plan (SERP) may be offered in addition to the qualified plan. The compensation limits are not governed by the maximum Internal Revenue Service (IRS) limitations as under a qualified plan. Therefore, the employee can take advantage of the unlimited benefits earned under this plan. There are no tax benefits associates with this type of nonqualified plan.
Deferred compensation. Deferred compensation may include a qualified plan such as a 401(k) plan, or it can also take the form of a nonqualified deferred compensation (NQDC) plan. This is any elective or non-elective plan, agreement, method, or arrangement between an employer and an employee (or service recipient and service provider) to pay the employee compensation some time in the future. These plans can include voluntary deferral of earned income, mandatory deferrals of bonuses, as well as other types of retirement plan vehicles. NQDC plans do not afford employers and employees with the tax benefits associated with qualified plans because, unlike qualified plans, NQDC plans do not satisfy all of the requirements of Section 401(a).
Fringe benefits (perquisites or “perks”). Corporate executives often receive extraordinary fringe benefits that are not provided to other corporate employees. Any property or service that an executive receives in lieu of or in addition to regular taxable wages is a fringe benefit that may also be taxable income. These types of benefits begin where the usual employee benefits leave off and are usually not performance based.
The following lists some of the most common fringes provided to executives.
Severance package. Most executives of larger companies insist upon a written employment contract at hire which will include a severance package (often called a “golden handcuff”), and is usually prepared or approved by an attorney. The amount of severance pay (often referred to as a “golden parachute”) varies and may include several months of pay, or several years of pay in some situations, upon termination of employment or a change in control. Because of the potential loss of future income, severance pay benefits are highly important to executives. The terms of the employment agreement should be specified in the contract.
Increased scrutiny. There has been much in the news regarding CEO and executive pay. It continues to come under increased scrutiny by shareholders, board of director groups, the Internal Revenue Service (IRS), as well as by employees of the company.
In addition, the latest scandals involving stock option backdating have caused attention to be focused on the unethical ways that executives are receiving these special benefits. The Pension Protection Act of 2006 (PPA) has just begun to scratch the surface, and will no doubt keep executive compensation on the radar screen of the public going forward.
Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, contains numerous provisions affecting executive pay. One section of the Act addressed shareholder voting rights regarding executive compensation and golden parachute agreements (severance and benefits paid upon termination of employment or a change in control).
Provisions include the following:
Rulemaking. On October 18, 2010, the SEC issued proposed rules enabling shareholders to cast advisory votes (nonbinding) on executive compensation and golden parachute arrangements. Following a request for public comments, the final rule appeared in the Federal Register on February 2, 2011.
Public companies subject to the federal proxy rules must now provide shareholders with a vote on executive compensation (say-on-pay).
Shareholders must:
Small companies were given a temporary exemption until January 21, 2013, to conduct say-on-pay and frequency votes.