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Long-Term Incentivesand Wealth Building
For most employees, their long-term security needs are provided for by:Social securityTheir employer's retirement
plan
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Long-Term Incentivesand Wealth Building
For most employees, their long-term security needs are provided for by: The continuation of their
employer's medical and insurance plans (and for a small group of employees).
Employer-provided long-term compensation arrangements.
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Wealth and Work in the United States
The majority of the wealthy in this country did not acquire their wealth through inheritance.
It was accumulated through earnings.
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WEALTH AND WORK IN THE UNITED STATES
Savings, wisely invested and tax deferred, coupled with valuable, company paid and tax free benefits, provide ordinary workers an opportunity to accumulate wealth.....
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WEALTH AND WORK IN THE UNITED STATES
For those in more lofty positions of power within most organizations, the opportunities for wealth building are "remarkable".
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Tax Legislationand Long-Term Incentives
Federal tax law and long-term compensation practices are inextricably joined, (sometimes dysfunctionally), but more often than not the relationship has been constructive, and economically rational.
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Tax Legislationand Long-Term Incentives
Over the years Congress has used tax legislation to promote both individual and corporate behavior by:
Providing a wide variety of deductions and credits to corporate and individual income tax obligations.
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Tax Legislationand Long-Term Incentives
And
Promoting individual security and enhancing the lifestyles of all workers and their dependents.
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Fixed and VariableLong-Term Compensation
The most common arrangements for long-term compensation have been those that provide retirement programs to supplement federal social security benefits.
Additionally, many of these long-term compensation plans involve the deferral of a certain amount of current pay until retirement.
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Three Types Of Deferred Plans
Qualified Deferred
Capital Accumulation
Other Deferred and Supplemental Retirement Income Arrangements
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Qualified Deferred Plans
Plan qualification requirements are defined under section 401(a) of the Internal Revenue Code and the term qualified can relate to a variety of employer-offered benefits.
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Qualified Deferred Plans
Qualified, as it relates to pension, profit sharing, and stock bonus plans, permits the employer to deduct all contributions to such plans in the year the contribution is made, and none of the employer's contribution is treated as employee taxable earnings until the employee receives the distribution.
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"To Be Qualified"
The plan must be in writing. The employee's rights under the
plan must be legally enforceable. The employer must intend to
maintain the plan indefinitely. The employer must provide for
reasonable notification to employees of benefits under the plan.
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"To Be Qualified"
The plan must be maintained for the exclusive benefit of the employees.
The plan must be funded.
The plan must be nondiscriminatory - it cannot discriminate in favor of shareholders, officers, or highly compensated employees.
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"To Be Qualified"
Contributions and benefits covered by the plan must become non-forfeitable according to prescribed requirements.
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Qualified Deferred Plans
Social Security Employer-Provided Retirement Savings or Thrift Cash or Deferred Arrangement
(Coda)- 401 (K). SEP's and Keogh's Continuation of Employer-Provided
Health and Medical Insurance.
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Social Security
More than 60% of all retirees depend on SS for over one half of their retirement income.
+ 60%
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About 50% of the non-farm U.S. workforce receive some form of retirement protection from employers through either: Private Pension Deferred Profit Sharing Stock Bonus Plans
Qualified Retirement Plans
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Private Pension Plans
Defined Benefit Plan Includes a formula that defines
the benefits an employee is to receive.
Defined Contribution Plan Involves the payment of a
specified annual amount to the account of each participant.
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Pension Plans
All pension plans are concerned with the following five basic issues: Standard Retirement Age Size Of Benefit Discrimination In Plan Design Early Retirement Vesting
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The employers contributions to the plan are a percentage of corporate profits.
There is no required contribution but employers must make substantial and recurring contributions to meet requirements.
Profit Sharing Plans
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These plans are not usually set up with retirement income in mind, and as a consequence the normal method of distribution is lump-sum payment.
Profit Sharing Plans
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Stock Bonus Plan
Employer contributes stock to the plan.
The actual allocation among participants depends on the same requirements as a defined benefits and a defined profit sharing plan, although the plan functions like a defined contribution plan.
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Plan Limitations
There is a limit on the level of pay that can be taken into account... Appropriate discounts for early retirement...Special provisions for survivors...Etc.
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Employee Stock Ownership Plan
A defined contribution plan that operates like a qualified stock bonus plan. (TRASOP'S and PAYSOP'S were discontinued in 1986).
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Savings or Thrift Plans
Possibly the most commonly provided defined contribution plan.
Over the years many employers have developed savings or thrift plans that encourage employees to set aside certain amounts of earnings in order to have a more secure retirement.
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Savings or Thrift Plans
An employee can contribute up to 6% of eligible annual compensation on either a before or after tax basis with all or a portion of this amount matched by the employer.
As a general practice the employee is given a number of investment options to which his or her funds can be directed.
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SAVINGS OR THRIFT PLANS
All earnings in these plans are tax deferred until the funds are distributed to the participant.
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401 (K) Cash or Deferred Arrangement (CODA)
The major feature of a 401 (k) plan is that employees have the right to agree to a reduction in salary in exchange for a comparable employee contribution to a qualified trust.
The amount of deferred and accumulated earnings are excluded from current income and are taxed only when distributed.
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SepSimplified Employee Pension Plan
Restricted to employers with less than 26 employees. They are restricted to most of the same restrictions applicable to any qualified plan.
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Keogh Plans
Self-Employment Plans
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Capital Accumulation
Equity-Based Programs Provides employees (usually key
executives) with an opportunity to acquire stock in their employer's corporation.
Almost all large corporations provide long-term incentives for their executives with stock options the most common type of award.
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Capital Accumulation
Long-term Bonuses
Plans designed to provide awards that are earned over a specific period of time - anywhere from 2 to 5 to as high as 10 years into the future..
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Capital Accumulation
Insiders - Outsiders The securities and exchange
commission (sec) issues regulations regarding the communication and the acquisition of stock by certain key personnel.
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Capital Accumulation
The key personnel are the five most highly compensated executives and their cash compensation must be documented on corporate proxy statements, registration statements, and periodic reports .
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Capital Accumulation
The SEC defines "insiders" as officer, directors, and those individuals holding 10 percent or more of the stock in the corporation, and....
They must disclose their stock ownership and provide monthly reports of changes in amount of ownership.
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A major issue that must be addressed by most organizations is the pension plan payments to highly compensated employees.
ERISA places a limit on pension payments (as of 1993) of $115,641. Highly paid employees normally earn a higher retirement benefit than that allowed by ERISA.
Other Deferred and Supplemental Retirement Income Arrangements
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TO OVERCOME THIS PROBLEM MANY ORGANIZATIONS HAVE DEVELOPED "ERISA EXCESS
BENEFIT PLANS" TO KEEP THE HIGHLY PAID EXECUTIVES
"WHOLE".
To overcome this problem many organizations have developed ”ERISA excess benefit plans" to keep the highly paid executives "whole".
Supplementary executive retirement plans (SERPs) have since improved on and consumed the "excess benefit plans" providing an even more attractive benefit to the highly compensated executives.
Other Deferred and Other Deferred and Supplemental Supplemental
Retirement Income Retirement Income ArrangementsArrangements
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Other Deferred And Supplemental Retirement Income Arrangements
SERPs are unfunded, non-qualified retirement plans. Payments come out of general company assets or company-owned life insurance trusts.
Additionally, SERPs can and do provide retirement benefits that are more generous than those provided the rest of the workforce.
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Executive CompensationObscene or Motivational
Base salary Short-Term bonuses Equity and equity related
components (stock ownership) Long-Term performance bonuses Severance packages Supplemental retirement programs Special benefits and perquisites
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Executive CompensationObscene or Motivational
Company Car, Parking
Club Membership
Chauffeured Limousine
Counseling Service
Spouse Travel
Use of Company Plane / Yacht
Home Entertainment Allowance
Special Living Accommodations
Executive Perks
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Executive CompensationObscene or Motivational
Special Dining Rooms
Company Credit Cards
Medical Expense Reimbursement
No-and-low Interest Loans
College Tuition Reimbursement For Children
Executive Perks
