The traps in designing benefit packages: when crafting benefit plans for their top brass, corporations often make these 10 common mistakes.

• Author: Mullin, Peter
• Position: EXECUTIVE COMPENSATION

THE SIZE AND NATURE of executive benefits packages have captured headlines in recent years with Enron's missteps and Congress' resulting efforts at compensation reforms. Despite this new acute awareness of how these packages are developed, industry experts find that many companies continue to make a number of common errors when creating benefits packages and, in particular, when designing nonqualified benefit plans. The outcome could unintentionally harm the executives, the company, or both.

Many executives might actually be questioning the value of their income deferral plans today following the changes made as a result of Sarbanes-Oxley and other legislation. However, the fact is that the value of income deferral plans has increased significantly as a result of these recent tax changes. They remain the only solution for tax-effective wealth accumulation in a world where government restrictions create reverse discrimination against executive savings. And while these compensation deferral plans have increased in importance, a number of errors are often made when designing these programs.

To this end, Mullin Consulting has identified the following list of the most common mistakes made by companies when designing executive benefit plans.

1. Overemphasis on industry peer group

   Companies too often look to peer groups within their industry in designing competitive packages for top executives. This was fine a decade ago. In today's marketplace, however, top executives are making more lateral moves from companies outside their industry. It's no longer good enough to just compete with companies inside your own industry for executive talent; executive benefit plans must be competitive with those offered nationally.

2. Over-reliance on stock options

   Companies are still relying too heavily on stock options, which created significant executive wealth in the '90s but have lost their luster in the last 18 months. Companies therefore need to better diversify their packages, educate themselves on other alternatives, and create improved strategies to balance the risk.

3. Ceding plan control to a single executive

   Once a plan design is in place, companies often allow executives to take control of plan provisions, with management sometimes becoming beholden to whatever a top executive wants to do with the assets inside the plan. The result is that this lack of central control can negatively impact the overall company plan.

4. Treating the plan like a 401 (k)

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