Evaluating the alternatives among supplemental executive benefit plans, also known as SERPs, can be a daunting task. Since most organizations do not deal with SERP-related issues regularly, they may be ill-prepared to ask the right questions. At TriscendNP, we understand how common it is for both Boards and executives to have biases for or against certain plan types. If these biases aren’t subject to analysis based on objective criteria, Boards and participating executives could set themselves up for poor outcomes. Keep reading to learn more about how to avoid some of these biases and objectively compare plan types.
While there are important qualitative factors that drive plan decisions, this blog will cover quantitative measures, and how they may differ in importance to organizations and participating executives.
First, consider the organization’s perspective. Organizations tend to be most interested in the characteristics of the plan that affect its financial statements. Matters such as the timing, amount of cash flow to fund the plan, and the treatment of the plan on the organization’s income statement and balance sheets are paramount.
Executives should look at each plan side-by-side from a financial statement perspective. This can include developing comparative balance sheets, income, and cash flow statements. Additionally, we suggest the organization’s internal rate of return (IRR) and opportunity costs, be considered. While opportunity costs do not show up on the financial statements, their measurement can be very important when comparing plan types.
The first step in a decision process is determining which decision factors are most important to the organization and the executives. These factors are directly connected to the objectives the organization hopes to achieve in implementing the plan. For example, credit unions focus on the balance sheet and internal rate of return. However, healthcare organizations tend to be more cash flow-sensitive and concerned with the practicality of the benefit. While the priority of decision factors can vary by type of organization, executives’ concerns tend to be relatively consistent.
Executives often wear dual hats when participating in decision-making. While in their role as a company officer, they are concerned with the impact to the organization’s financials, they also view the available alternatives at a personal level. Concerns such as rate of return risk, sequence of returns, taxation, and cash flow flexibility are common, and plan type comparisons should be made objectively.
Understanding the unique needs of both the organization and the executive sets the stage for an effective decision and increases the likelihood that the organization and the participating executive will be pleased with the result. To learn more about TriscendNP and how we help organizations and their executives evaluate options, make good decisions, and rest easy, contact us today.
