Case Study: Executive Retirement and Retention

Client Profile

The family-owned business with 300 employees was founded in 1910. Family members led the organization through most of its history until they began hiring executives from other firms in their industry about 20 years ago. The current senior leaders are mid- to late-career hires who are not family members and therefore do not have the same ties to the company that fostered retention in the past. 

The company sought help to assess and recommend changes and improvements to the company’s executive retirement/deferred compensation program. 

Challenge

Conversations with majority owners and board members revealed that:

• Supplemental executive retirement programs (SERPs) were in place for two key sales executives.
• Other key positions were not covered by similar non-qualified programs, including the CEO, CFO, and Human Resources VP.
• The company wanted to enhance retirement security for the two previously covered positions and the three uncovered positions, particularly in the wake of recent plans to freeze the company-wide retirement plan.
• The owners expected to sell the company in the next three to four years, and wanted to incentivize key leaders to remain until after the sale (and beyond, if agreeable to all parties after the transaction).  

Our Approach 

We implemented a four-part review process:

1. Based on our knowledge and industry standards, we recommended a competitive retirement benefits package that would conform to the organization’s human resource objectives and financial constraints.
2. Reviewed and recommended approaches for adding retention or “handcuff” provisions to the program, considering constraints within applicable law, including Internal Revenue Code Section 409A to avoid “excess parachutes” and associated tax penalties.
3. Worked with the company’s legal counsel and financial advisors to recommend a funding approach that balances benefit security, efficient use of resources, and avoids undesired tax consequences, such as constructive receipt of income and taxation to the executives prior to benefits being paid.
4. Estimated the impact of the proposed programs on the company’s financial statements, and recommended and implemented prudent ongoing administrative processes, including annual valuations and strategies with respect to FICA taxation.

Solution

Based on the assessment and recommendations, the company’s board implemented an offering customized for each executive that:

• Tailored the benefit level to each executive based on length of service, current remuneration, proximity to retirement, and importance of their position and duties to the company’s success.
• Provided retention incentives by withholding benefits until normal retirement age (typically 65) while incorporating a trigger for immediate retirement eligibility upon a change in control.
• Avoided excess parachute payments and the associated tax penalties (that potentially arise with a change-in-control trigger) by careful design of benefit levels and other features.
• Utilized appropriate funding options, including no funding, i.e., earmarking a reserve on the company books; non-trust assets (marketable securities or corporate-owned life insurance); or housing assets in a trust, offering benefit security while avoiding constructive receipt and taxation (a rabbi trust).
• Provided an additional measure of benefit security through plan features such as a lump sum payment option that accelerates payments (as opposed to a payout spread over 20 years or more).

Results

The company was acquired by a large competitor within two years of implementing the executive retirement plans. The primary purpose of enhancing retirement security and rewarding key leaders for their service was achieved. Retention objectives were exceeded, as all five of the key executives remained onboard to guide the transaction to its completion, and beyond.