Greg Holmgren
September 12, 2024
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Attracting and retaining talented executives is one of the most critical challenges for any business, regardless of its size. For companies to thrive in today’s competitive market, they need more than just a good salary to offer their top-level leadership. Executive benefit plans provide a powerful solution by offering high-value, tailored compensation that goes beyond traditional pay and bonuses. These plans give companies the tools to secure long-term commitment from key talent, while also aligning leadership interests with company performance. Executive benefits are for companies of all sizes — the main criterion is having at least one key employee whose departure would cripple the business.
This article will explain how executive benefit plans work and why implementing one might be a good strategic move for your company.
What are Executive Benefits?
Executive Benefits usually refers to a range of perks and rewards offered to senior executives, or top talent, in your organization that are critical to your ongoing success as a
business. These benefits can be used as a tool for recruiting, retaining, motivating, or rewarding those whose knowledge, experience, and skill make significant contributions to the company’s success. These plans go beyond traditional employee benefits and are tailored to meet the unique needs and expectations of high-level executives. They also communicate your appreciation of their value to the organization and your concern for their financial well-being.
Unlike qualified benefit plans (such as 401(k)s), executive benefit plans offer far greater flexibility in design, contribution limits, and eligibility. While qualified plans are regulated by the Employee Retirement Income Security Act (ERISA), executive benefit plans fall under a category known as non-qualified plans because they do not have to meet the same regulatory requirements. This allows businesses to customize their offerings specifically for executives and top-level managers.
What are some of the more common Executive Benefits offered?
Executive benefit plans can take various forms, depending on the company’s goals and the specific needs of its leadership team. Common types include enhanced benefit plans, which add to the core benefit plans offered to all employees, and longer-term incentives, which can be tied to equity and are most often earned over a period of years.
Supplemental Executive Retirement Plans (SERPs)
SERPs are employer-funded plans that provide additional retirement income to executives. These plans are typically used to supplement the retirement savings an executive receives through a qualified plan like a 401(k) or pension, particularly because qualified plans have contribution limits that can be restrictive for high earners.
Unlike 401(k)s, which cap annual contributions (currently at $23,000 in 2024, with an additional $7,500 for those over 50), SERPs have no such limits. Companies can contribute any amount they see fit to help executives build a more substantial retirement nest egg.
SERPs are usually designed to reward longevity and loyalty. Often, they include vesting schedules that require the executive to stay with the company for a set period before they can receive the full benefit. For example, an executive might only become fully vested in a SERP after ten years of service, thus providing a strong incentive for long-term retention.
Stock Options and Equity-Based Compensation
Many companies, especially in the tech and startup sectors, offer stock options or other forms of equity-based compensation as part of their executive benefit package. But most privately held companies are reluctant to offer actual stock for several reasons: their companies are not regularly valued, the owners are concerned about diluting their ownership stake, or offering options means complex legal and administrative burdens.
But privately held companies can offer equity-based compensation through offering phantom stock, which grants employees the right to receive cash or equivalent compensation based on the performance of the company’s real stock or a hypothetical stock value. The plan can be written to reward growth in company value, or a more specific measure based upon the employee’s role. For example, the head of sales does not control production costs but does directly impact revenue. So, break down the company plan into components and create a plan the rewards the head of sales for hitting the sales component of the plan.
Equity-based plans are often subject to vesting schedules, ensuring that the executive remains with the company long enough to earn their stock options or shares.
Executive Bonus Plans
Executive bonus plans involve the company purchasing a life insurance policy for the executive, who then owns the policy. The company pays the premiums, and these premiums are considered taxable income for the executive. However, the executive benefits by receiving a life insurance policy that builds cash value, which can be accessed tax-free during retirement.
In most cases, these plans are structured as Section 162 Executive Bonus Plans, where the company can deduct the premium payments as a business expense. These plans are relatively simple to implement, making them a popular choice for companies looking to offer a valuable benefit without the complexity of other non-qualified plans.
Split-Dollar Life Insurance Plans
A split-dollar life insurance plan is a unique arrangement where both the company and the executive share the costs and benefits of a life insurance policy. In most cases, the company pays a portion or all of the premiums, while the executive benefits from the death benefit and any accumulated cash value within the policy.
Split-dollar plans can be structured in several ways, but the key advantage is that they offer tax benefits to both parties. The company may eventually recoup the premiums paid, and the executive gains access to life insurance benefits that can serve as a financial safety net for their family or be used as a retirement income source.
Why You Should Consider Offering Executive Benefit Plans
Now that we’ve covered the different types of executive benefit plans, let’s explore the reasons why your company might consider offering these plans. By offering tailored compensation packages to executives, companies can enhance retention, align leadership interests with corporate performance, and provide tax-advantaged income opportunities to high-earning executives.
Attract and Retain Top Talent
One of the primary reasons companies offer executive benefit plans is to attract and retain top leadership talent. In a competitive job market, the standard salary-and-bonus structure may not be enough to lure top-tier executives, who often expect more sophisticated compensation packages. By offering additional benefits such as deferred compensation, supplemental retirement plans, or stock options, your company can stand out as an attractive employer.
For example, offering an NQDC plan or a SERP provides key executives with a sense of financial security beyond their current paycheck. These plans are often structured with retention in mind, requiring long-term commitment from the executive to fully realize the benefits, thus helping the company hold onto its most valuable talent for the long haul.
Align Executive Incentives with Company Performance
Equity-based executive benefit plans, such as phantom stock or restricted stock units (RSUs), are designed to align the financial interests of your leadership team with the performance of the company. When executives are given a direct stake in the company’s success, they are more likely to focus on long-term strategies that drive profitability, increase shareholder value, and ensure sustainable growth.
For example, if a CEO receives stock options that are only profitable when the company’s stock price rises, they are incentivized to pursue business strategies that will enhance market value, aligning their personal goals with the company’s success. Learn how aligning executive incentives with company performance can also play a crucial role in maximizing the value of your business and help you achieve your Freedom Score as a business owner here.
Provide Tax-Efficient Compensation
Many executive benefit plans offer tax advantages that make them highly appealing to high-earning executives. For instance, with deferred compensation plans like NQDCs, executives can defer their taxable income until a later date when their tax bracket may be lower. This allows them to optimize their tax liabilities and invest more in their future.
Similarly, executive bonus plans and split-dollar life insurance plans can offer tax-efficient ways for executives to receive compensation while providing the company with tax-deductible expenses. These benefits can be a powerful recruitment tool for top talent seeking to maximize their income while minimizing tax exposure.
Ensure Long-Term Financial Security for Executives
Qualified retirement plans like 401(k)s often have contribution limits that restrict how much high-income earners can save for retirement. For executives, these limits may not be sufficient to meet their long-term financial goals. By offering supplemental retirement plans like SERPs, your company can help fill this gap and ensure that its top leadership has a secure retirement plan in place.
This focus on long-term financial security can be a key selling point when recruiting high-level talent, as it demonstrates that the company is invested in the financial future of its executives.
Customization and Flexibility
Executive benefit plans are highly customizable, offering businesses the flexibility to tailor packages to the specific needs of their leadership team. This customization ensures that the compensation plan reflects the company’s goals and the individual financial priorities of its executives.
For example, you could offer a combination of stock options, deferred compensation, and an executive bonus plan to create a well-rounded compensation package that balances short-term income with long-term financial incentives. This flexibility allows your company to design benefits that work for both the business and its executives.
Conclusion
Executive benefit plans are a powerful tool for businesses looking to attract, retain, and motivate their top leadership. These plans provide a range of benefits, from tax-efficient compensation to supplemental retirement savings, that go beyond the limitations of traditional salary and bonus packages. By offering executive benefit plans, your company can create a highly competitive compensation structure that aligns leadership interests with long-term company success.
In today’s market, where top executive talent is in high demand, offering tailored compensation solutions like non-qualified deferred compensation plans, SERPs, and equity-based compensation can help your business stand out as an employer of choice. Whether you’re looking to enhance retention, provide financial security, or drive company growth, executive benefit plans offer the flexibility and incentives to meet your company’s goals.
How can Freedom Financial help with Executive Benefits?
Freedom Financial Partners can help you design and implement an executive benefit strategy that aligns with your goals and objectives. We will lead you through a process that begins by helping you clarify what you want to accomplish; continues by discussing and identifying who you would like to benefit and what design might work best; and finishes by helping you implement the plan and comply with code section 409A. The first step is to schedule time to talk with us to determine if this is a strategy that can help your business.
To schedule a free initial consultation regarding executive benefits with us, please us the link below to schedule with one of our advisors or call Tambra at (651) 797-3532.
