Long-Term Incentives
and Wealth Building
 For
most employees, their
long-term security needs are
provided for by:
Social security
Their employer's retirement
plan
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Long-Term Incentives
and Wealth Building
 For
most employees, their
long-term security needs are
provided for by:
 The continuation of their
employer's medical and
insurance plans (and for a small
group of employees).
 Employer-provided long-term
compensation arrangements.
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Wealth and Work
in the United States
 The
majority of the wealthy in
this country did not acquire their
wealth through inheritance.
 It was accumulated through
earnings.
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WEALTH AND WORK
IN THE UNITED STATES
 Savings,
wisely invested and tax
deferred, coupled with valuable,
company paid and tax free
benefits, provide ordinary
workers an opportunity to
accumulate wealth.....
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WEALTH AND WORK
IN THE UNITED STATES
 For
those in more lofty positions
of power within most
organizations, the opportunities
for wealth building are
"remarkable".
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Tax Legislation
and Long-Term Incentives
 Federal
tax law and long-term
compensation practices are
inextricably joined, (sometimes
dysfunctionally), but more often
than not the relationship has
been constructive, and
economically rational.
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Tax Legislation
and Long-Term Incentives
 Over
the years Congress has
used tax legislation to promote
both individual and corporate
behavior by:
 Providing a wide variety of
deductions and credits to corporate
and individual income tax
obligations.
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Tax Legislation
and Long-Term Incentives
And
 Promoting individual security and
enhancing the lifestyles of all
workers and their dependents.
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Fixed and Variable
Long-Term Compensation

The most common arrangements for
long-term compensation have been
those that provide retirement
programs to supplement federal
social security benefits.

Additionally, many of these long-term
compensation plans involve the
deferral of a certain amount of
current pay until retirement.
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Three Types Of Deferred Plans

Qualified Deferred

Capital Accumulation

Other Deferred and Supplemental
Retirement Income Arrangements
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Qualified Deferred Plans
 Plan
qualification requirements
are defined under section 401(a)
of the Internal Revenue Code
and the term qualified can relate
to a variety of employer-offered
benefits.
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Qualified Deferred Plans

Qualified, as it relates to pension,
profit sharing, and stock bonus plans,
permits the employer to deduct all
contributions to such plans in the
year the contribution is made, and
none of the employer's contribution is
treated as employee taxable earnings
until the employee receives the
distribution.
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"To Be Qualified"
The plan must be in writing.
 The employee's rights under the
plan must be legally enforceable.
 The employer must intend to
maintain the plan indefinitely.
 The employer must provide for
reasonable notification to
employees of benefits under the
plan.

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"To Be Qualified"

The plan must be maintained for the
exclusive benefit of the employees.

The plan must be funded.

The plan must be nondiscriminatory it cannot discriminate in favor of
shareholders, officers, or highly
compensated employees.
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"To Be Qualified"

Contributions and benefits covered
by the plan must become nonforfeitable according to prescribed
requirements.
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Qualified Deferred Plans
Social Security
 Employer-Provided Retirement
 Savings or Thrift
 Cash or Deferred Arrangement
(Coda)- 401 (K).
 SEP's and Keogh's
 Continuation of EmployerProvided Health and Medical
Insurance.

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Social Security
More than 60%
of all retirees
depend on SS
for over one
half of their
retirement
income.
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Qualified Retirement Plans
 About
50% of the non-farm U.S.
workforce receive some form of
retirement protection from
employers through either:
 Private Pension
 Deferred Profit Sharing
 Stock Bonus Plans
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Private Pension Plans
 Defined
Benefit Plan
 Includes a formula that defines the
benefits an employee is to receive.
 Defined
Contribution Plan
 Involves the payment of a
specified annual amount to the
account of each participant.
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Pension Plans
 All
pension plans are concerned
with the following five basic
issues:
 Standard Retirement Age
 Size Of Benefit
 Discrimination In Plan Design
 Early Retirement
 Vesting
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Profit Sharing Plans

The employers contributions to the
plan are a percentage of corporate
profits.

There is no required contribution but
employers must make substantial
and recurring contributions to meet
requirements.
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Profit Sharing Plans
These plans are not
usually set up with
retirement income in
mind, and as a
consequence the
normal method of
distribution is lumpsum payment.
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Stock Bonus Plan

Employer contributes stock to the
plan.
 The actual allocation among
participants depends on the same
requirements as a defined benefits and
a defined profit sharing plan, although
the plan functions like a defined
contribution plan.
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Plan Limitations
 There
is a limit on the level of pay
that can be taken into account...
Appropriate discounts for early
retirement...Special provisions for
survivors...Etc.
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Employee
Stock Ownership Plan
A defined
contribution
plan that
operates like a
qualified stock
bonus plan.
(TRASOP'S and
PAYSOP'S were
discontinued in
1986).
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Savings or Thrift Plans

Possibly the most commonly
provided defined contribution plan.

Over the years many employers have
developed savings or thrift plans that
encourage employees to set aside
certain amounts of earnings in order
to have a more secure retirement.
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Savings or Thrift Plans

An employee can contribute up
to 6% of eligible annual
compensation on either a before
or after tax basis with all or a
portion of this amount matched
by the employer.

As a general practice the
employee is given a number of
investment options to which his
or her funds can be directed.
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SAVINGS OR THRIFT PLANS
All earnings in
these plans are
tax deferred
until the funds
are distributed
to the
participant.
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401 (K) Cash or Deferred
Arrangement (CODA)

The major feature of a 401 (k) plan is
that employees have the right to agree
to a reduction in salary in exchange for
a comparable employee contribution to
a qualified trust.

The amount of deferred and
accumulated earnings are excluded
from current income and are taxed only
when distributed.
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Sep
Simplified Employee Pension Plan
Restricted to
employers with less
than 26 employees.
They are restricted
to most of the same
restrictions
applicable to any
qualified plan.
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Keogh Plans
Self-Employment Plans
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Capital Accumulation
 Equity-Based
Programs
 Provides employees (usually key
executives) with an opportunity to
acquire stock in their employer's
corporation.
 Almost all large corporations provide
long-term incentives for their
executives with stock options the most
common type of award.
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Capital Accumulation
 Long-term
Bonuses
 Plans designed to provide awards
that are earned over a specific
period of time - anywhere from 2 to
5 to as high as 10 years into the
future..
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Capital Accumulation
 Insiders
- Outsiders
 The securities and exchange
commission (sec) issues
regulations regarding the
communication and the
acquisition of stock by certain
key personnel.
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Capital Accumulation

The key personnel are the five most
highly compensated executives and
their cash compensation must be
documented on corporate proxy
statements, registration statements,
and periodic reports .
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Capital Accumulation

The SEC defines "insiders" as
officer, directors, and those
individuals holding 10 percent or
more of the stock in the corporation,
and....

They must disclose their stock
ownership and provide monthly
reports of changes in amount of
ownership.
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Other Deferred and Supplemental
Retirement Income Arrangements

A major issue that must be addressed
by most organizations is the pension
plan payments to highly
compensated employees.

ERISA places a limit on pension
payments (as of 1993) of $115,641.
Highly paid employees normally earn
a higher retirement benefit than that
allowed by ERISA.
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Other Deferred and Supplemental
Retirement Income Arrangements
To overcome this problem many
organizations have developed ”ERISA
excess benefit plans" to keep the
highly paid executives "whole".
 Supplementary executive retirement
plans (SERPs) have since improved
on and consumed the "excess benefit
plans" providing an even more
attractive benefit to the highly
compensated executives.

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Other Deferred And Supplemental
Retirement Income Arrangements

SERPs are unfunded, non-qualified
retirement plans. Payments come
out of general company assets or
company-owned life insurance
trusts.

Additionally, SERPs can and do
provide retirement benefits that are
more generous than those provided
the rest of the workforce.
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Executive Compensation
Obscene or Motivational
Base salary
 Short-Term bonuses
 Equity and equity related
components (stock ownership)
 Long-Term performance bonuses
 Severance packages
 Supplemental retirement programs


Special benefits and perquisites
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Executive Compensation
Obscene or Motivational
Executive Perks
Company
Car, Parking
 Club
Membership
 Chauffeured
Limousine
 Counseling
Service


Spouse Travel
Use of Company
Plane / Yacht
 Home
Entertainment
Allowance
 Special Living
Accommodations

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Executive Compensation
Obscene or Motivational
Executive Perks
Special Dining
Rooms
 Company Credit
Cards
 Medical Expense
Reimbursement

No-and-low
Interest Loans
 College Tuition
Reimbursement
For Children

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