Short-Term Benefit Plans Can Bring In Top Talent

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To help attract top talent to their organizations, business owners are being forced to consider offering benefit plans that short-term executives will have access to.

A Short Term Deferred Compensation (STDC) plan is a creative form of nonqualified deferred compensation in which benefits typically are “accrued” or “earned” over a relatively short period of employment.

As an alternative or supplement to salary or bonus increases, equity compensation awards, or long-term deferred compensation arrangements, the STDC plan can be designed to be selective, flexible and cost-effective.

In this article, I will review the fundamentals of STDC plans, discuss some important plan design and funding considerations, and will help you identify prospects for these creative benefit arrangements.

Fundamentals. STDC plans may be designed as either supplemental or deferral plans. Under a supplemental plan, executives are not required to “defer” any portion of their salary or bonus income in order to receive benefits under the plan.

For example, lets assume that ABC Company wishes to recruit an experienced executive to “turn around” one of its struggling divisions. In order to recruit this talented executive, the company will establish a STDC plan that will provide the executive with a series of deferred compensation payments that will begin after the assignment has been successfully completed.

In contrast, deferral plans require that executives defer a portion of their salary or bonus income. Deferral plans can be attractive benefit solutions when companies are unwilling to increase an executives current salary or bonus compensation, or when companies are unwilling to provide their executives with long-term deferred compensation benefits.

For example, lets assume that XYZ Company is seeking to provide 3 of its younger executives with an additional savings and benefit plan. As an alternative to increasing their current compensation, the company could establish a 10-year deferral plan that includes some attractive “matching” and “interest crediting” options.

Plan Design & Funding Considerations. A STDC plan is governed by the terms and conditions of its deferred compensation agreement.

In many cases, STDC plans can be improved by providing pre-retirement disability and death benefit protection. In other situations, it may make sense to provide these pre-retirement benefits using separate benefit programs such as bonus disability or life insurance plans, sick pay plans or through split-dollar life insurance programs.

Deferred compensation payments made under STDC plans can be designed to take place prior to or after an executives retirement. Typically, deferred compensation payments are paid over an installment period in order to avoid lump sum taxation of deferred compensation payments and to spread employer benefit outlays.

In general, deferred compensation payments can be funded by using business cash flow or by establishing “informal” sinking funds using investments and/or life insurance products. Practically speaking, the funding strategy should be based upon a careful analysis of the types of benefits that will be provided, key person life insurance needs, cost recovery considerations and other relevant factors.

Sales & Marketing Tips. In general, your best prospects for STDC plans are profitable and well-established companies that employ one or more “top hat” key employees. Typically, your better prospects are larger companies that offer comprehensive group and retirement benefit programs.

As you approach these prospects, you may wish to use the concept of a STDC plan as a “door opener” to discuss a companys executive compensation strategy. In this world of shorter executive tenures, increasing executive mobility and competition for top talent, STDC plans are likely to become more common in the future.

is second vice president of advanced sales at Travelers Life & Annuity Company, Hartford, Conn. He can be reached at brian1.mckenna@citigroup.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 2, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.