Executive Deferred Compensation balancing responsibilities.

AuthorMurphy, Rosemary
PositionExecutive Compensation

Executives have enjoyed the benefits of Executive Deferred Compensation (EDC) plans for years. Designed for an organization's top management and/or highly compensated employees, these nonqualified plans (also known as Top Hat, Voluntary Deferral or 401(k) Mirror/Restoration plans) have increased in popularity as companies continue seeking ways to attract and retain key talent, while securing current assets to pay future benefits.

EDC plans allow top management to defer income tax on current compensation, including bonuses. Unlike qualified plans, such as 401(k)s, plan participants can contribute as much as their employer will allow, up to 100 percent of compensation. In some cases, the company makes contributions to the plan as well, sometimes with guaranteed rates of return.

Since many corporate decision-makers are also EDC plan participants, a dilemma emerges: How do EDC plan sponsors, who are also plan participants, balance their personal interests with those of the business and other stakeholders when designing and managing nonqualified plans?

Changing Landscape

During the market boom of the late 1990s, many companies began changing their EDC plans offerings from guaranteed rates of return to market-based returns. Much of this was attributed to management wanting its executives to enjoy the same great market-based returns in their nonqualified plans as they did in their qualified plans. Executives were able to map their 401(k) investments to their EDC plans -- which made plan communications more manageable -- but companies also enjoyed market performance, as their EDC assets began to keep pace with their EDC liabilities.

Trends indicate that today's executives may be more hesitant to participate in EDC plans with their own dollars. While tax-deferred growth on income is still attractive, participants with large account balances have become increasingly concerned they may not see the compensation they elected to defer.

On average, ADP Retirement Services reports a decline in 2003 elections for voluntary deferred compensation. Along with concerns about companies' financial stability, this drop can be traced to the economic climate, concerns over job security and an overall belief that now, it's best to be conservative with current cash compensation.

Companies are reacting to the changing environment as well. One trend emerging at companies with large deferred compensation liabilities is the consideration to accelerate payments to...

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