Executives play an essential role in a company, and their compensation is much different than workers who are paid hourly wages or a salary. Executive compensation programs tie pay to performance, so executives earn more of their potential salary if they get results. Like all shareholders, these team members have significant benefits to gain if the company performs well.
Successful executive compensation plans are structured in this manner for a few reasons. With a compensation plan that sees executives paid after they have helped a company succeed, the company can afford to pay a larger and more attractive salary. By the time the compensation is due, the company is — theoretically — in a better financial position. Since organizations can create more generous compensation plans when compensation is linked to performance, they can recruit more qualified executives who are then highly incentivized to succeed, which bolsters the enterprise’s chances of success.
Attracting and retaining key people can be paramount to the success of your business. Trust the experts at Gunn-Mowery to help develop the right executive compensation programs to attract and retain the best.
Five Basic Tools
In executive compensation, there are five basic tools used to compensate and reward executives. These five basic tools include:
|1. Base Salary|
|2. Short-Term Incentives|
|3. Long-Term Incentives|
|4. Employee Benefits|
|5. Perquisites (Perks)|
Total Cash Compensation (TCC) is the term generally used to refer to the total compensation package.
Deferred Compensation Plans
A portion of executive compensation is deferred. Deferred compensation means that a part of the executive’s payment is given later. Taxes payable on this form of compensation are also deferred. Common deferred compensation plans include stock-option solutions and pension and retirement plans.
There are two types of deferred compensation:
- Qualifying: Pension arrangements overseen by ERISA (the Employee Retirement Income Security Act)
- Non-qualifying: Plans that have no limits on contributions, can be used with contractors and can be offered to some employees and not others. These are the types of deferred compensation plans usually used to attract and retain talent.
While they are more flexible, non-qualifying plans do need to follow laws and can create significant IRS penalties if mistakes are made. If you plan on offering non-qualifying deferred compensation plans, make compliance a priority. Also, these plans are essentially a contract between the executive and the company. Even if a company does poorly, they still may need to pay agreed-upon amounts to the executive, so it is crucial to structure with future contingencies in mind.
Do you need to retain the best executive talent to lead your organization? Contact us at Gunn-Mowery, LLC to review your options for deferred and executive action plans. We can help you create solutions for your organization, and we offer personalized help to our clients. That’s the Upside of Insurance that comes from working with us.