Executive Compensation Benefits, Plans & Structure

Executive Compensation Benefits, Plans & Structure

Executive Compensation Benefits, Plans & Structure

To maximize executive compensation benefits, it’s critical to consider how your executive pay plan will benefit you now, in several years and during retirement.

A great deal of focus, therefore, should be placed on the “structure and timing” of your executive compensation plan.

The overall goal is to leverage your income and benefits by maximizing tax strategies in the short and long term.

Today, we’ll provide some compensation background and then focus on nonqualified deferred compensation (NQDC) plans (including providing a detailed scenario that could likely apply to you), benefits exclusively available to executives and other critical employees.

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Background: Executive Compensation Plans

According to the Harvard Business Review (HBR), modern executive compensation systems can generally be analyzed along four dimensions:

Fixed vs. Variable

Short-Term vs. Long-Term

Cash vs. Equity

Individual vs. Group

HBR makes an important distinction between fixed vs. variable: Total direct compensation is made up of a base salary (set in advance and paid in cash) and short-term and long-term incentives.

Both kinds of incentives are variable or at-risk elements and may be contingent on the achievement of certain organizational or individual goals.

On average, 28% of senior executives’ variable compensation is paid the year it’s awarded (or immediately thereafter) and 72% is paid in future years, according to HBR.

Executive Pay Plans Start With a Financial Plan

Just as a company aligns their executive pay to the organization’s objectives and key metrics, you should align your needs to your short- and long-term goals.

As an executive, you understand the necessity behind planning in order to achieve favorable business outcomes. The same is true for your compensation plan. Before signing on the dotted line, therefore, a key question to ask yourself is: Am I leveraging my compensation plan to match my personal goals (e.g., the decision to retire early)?


Listen to the full episode of the Adviser You Can Talk To Podcast: Making the Most of Equity Compensation.

Executive Compensation Benefits

There are many components within executive compensation plans, including:

  • Base Pay
  • Equity, Nonqualified Deferred Compensation, Restricted Stock
  • Fringe Benefits
  • And other perks, like a company car and use of company plane.

Tip: Learn 4 Ways to Maximize Your Equity Compensation.

Let’s concentrate on nonqualified deferred compensation (NQDC) plans, available only to executives and critical employees.

According to the Newport Group’s annual Compensation, Retirement and Benefits Trends report, “Over half of the organizations surveyed found nonqualified plans to be critical and very important in supporting executive retention in tandem with the tax efficiencies offered.” (Simply put, it’s a key retirement-income planning negotiation tool.)

NQDC plans enable you to defer a sizeable portion of your executive compensation and related income taxes until the “deferral” is paid to you.

The date you select to defer your income is a negotiating point between you and your employer. It could be one, five, 10, 15 years out or sometime in retirement.

You may also have more than one deferral date, providing you flexibility to pay for key life milestones, like paying for college or wedding, etc. (These milestones are just two examples why starting with a financial plan is key to effective executive compensation planning and negotiating.)

Overall, leveraging nonqualified plan benefits maximizes your wealth management plan.

NQDC Disadvantages

Tax advantages for NQDC plans are substantial, however, there are many disadvantages, including:

  • You can’t take a loan from NQDC funds or roll the money into an IRA (like you can with a 401(k).
  • The money isn’t accessible until the deferral date(s).
  • Job separation may cause a disbursement, (i.e., unplanned tax burden).
  • The funds are part of your employer’s assets and, therefore, are subject to loss and are exposed to your employer’s creditors. A NQDC plan is essentially a promise from your employer to pay you.

Before Contributing To a NQDC Plan: First max out all available qualified plans, like 401(k), HSA, IRA, Keogh (HR-10) plan and profit-sharing plan.

Tip: Before signing your executive compensation package, here’s a friendly reminder about which type of stock option is taxed twice.

Equity Compensation Structure

The structure of your executive pay plan is a critical wealth-planning tool. Therefore, we’ve produced three in-depth podcasts to help you maximize your benefits and guide you through your choices, including:

Expanding the Benefits of Restricted Stock (podcast)

An equity compensation discussion detailing how you can maximize the benefits of restricted stock units and awards.

Making the Most of Equity Compensation (podcast)

A detailed discussion about non-qualified stock options (NSOs) vs. incentive stock options (ISOs), and how to make tax-efficient stock exercising decisions.

When, Why and How To Use Employee Stock Purchase Plans (podcast)

A discussion around ESPPs, including how lookback periods can be used to maximize your options.

Next Steps

There are many metrics used to determine executive pay, however, it’s the market and your negotiating skills that ultimately determine your compensation package.

To leverage your compensation, you must be clear about your short- and long-term financial and life goals.

Our team of financial planners and wealth advisers are available to help you analyze your compensation package, including running multiple scenarios for NQDC plan deferral timelines and related impact on your taxes and net worth. We can also guide you through bunching your tax deductions to help mitigate the tax impact from deferred lump sums.

Contact Adviser anytime for assistance. We pride ourselves on being The Planner You Can Talk To.

Tax and legal information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice. Always consult a licensed attorney or tax professional regarding your specific legal or tax situation.
Our statements and opinions are subject to change without notice. All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.

Podcast released on March 10, 2021. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

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