Non qualified Plans Offer Added Rewards.

• Author: Scharff Jr., Robert L.
• Position: Executive compensation

Financial executives are increasingly being called upon to help their companies cost-effectively build top-notch executive teams. By understanding the important role that nonqualified, supplemental retirement benefits play in executive compensation, CFOs, treasurers and other financial executives can provide companies with innovative solutions for attracting and retaining management teams that will maximize shareholder value.

Companies face many challenges in establishing superior executive teams. The labor market for talented managers remains quite tight, and is expected to stay this way for several years. At the same time, it has become more difficult to cost-effectively compensate key executives. The stock market's recent performance has made options a less attractive incentive. It is clear that while executives are often able to determine a company's financial performance, they are seldom able to determine the value that the equities markets place on that performance.

Moreover, many companies now are concerned about the potential shareholder dilution created by options. A recent study by the Investor Responsibility Research Center (see "Business Briefs," May 2001 issue) found that at S&P 500 companies, average potential dilution jumped to 13.3 percent in 2000 from 11.4 percent in 1999 and just 9.2 percent in 1995. (Average potential dilution is determined by dividing the total number of shares and options reserved by the company for use in equity-based incentive and compensation plans by the total voting power of shares currently Outstanding.) In addition, negative publicity surrounding options repricing is a major barrier for many companies contemplating expanding option grants.

While cash compensation can be used, of course, this approach has limitations and downsides. Current cash payments don't provide an incentive for executives to stay with the company long-term. Furthermore, with key executives typically paying marginal tax rates above 40 percent, a sizable amount is often required for cash compensation to help retention.

Why Plans Are Important

For many executives, nonqualified, or supplemental, retirement plans can be a larger component of retirement income than qualified retirement plans (i.e., pension, profit sharing, and 401(k) plans). Nonqualified plans are in place at the vast majority of large and medium-size companies and typically cover the top 3 to 5 percent of executives.

These plans are increasingly vital because of...