The success of any executive benefit arrangement starts with a complete understanding of the goals and objectives of the organization and the participating executive(s).
Understand the perspectives of all parties
A decision is only as good as the alternatives considered
Deferred Compensation (DC) Plans are a promise by an employer to pay specific benefits to an executive in the future. DC Plans commonly involve vesting provisions and must be subject to a substantial risk of forfeiture (SRF) to avoid current income inclusion if the employer is a non-profit organization.
|Benefit expenses are accrued periodically
|A liability is recorded until the benefits are paid
|The benefits are taxed when constructively received
|Because these balances can accrue over a long period, the resulting large payments can be viewed negatively
|In most cases, deferred compensation plans result in the largest benefit expenses
|Moderate relative to other alternatives
|The need for long-term vesting arrangements tends to encourage retention
Executive Bonus Plans involve an employer making a bonus payment to an executive to pay the premiums on a cash-value-oriented life insurance policy. These payments are includable in the executive's taxable income and are rarely subject to vesting requirements. However, depending on the employer's objectives, access to policy values can be restricted as a retention mechanism.
|Compensation expenses as payments are made
|Cash is reduced as payments are made
|The payments are includible in income when paid
|Neutral unless additional compensation is viewed negatively
|Additional compensation expenses
|Lower relative to other alternatives
|More suitable for short to mid-term retention objectives
Split-Dollar Plans are not a type of insurance but a method for two parties to share the benefits of one or more life insurance policies. These arrangements have been used for decades as a way for employers to retain and reward executives. The "loan regime" form of split-dollar, if appropriately designed, is non-compensatory and used when the employer wants to provide a retirement benefit.
|Other interest income
|Other asset that could be accretive
|So long as sufficient interest is returned to employer, there is no income inclusion
|Improved due to capital recovery feature
|Depending upon plan structure and employer specifics, there could be opportunity and other costs
|Can be capital intensive
|Vesting is flexible and can be structures to accommodate various retention objectives