During the past year, there has been a gradual improvement in the U.S. economy as the unemployment rate has declined and jobs growth has increased. As the economy slowly expands, more job opportunities will be available for bank executives. Therefore, it will become increasingly important that bank directors understand and evaluate whether the benefits package they offer their key executives remains competitive in today’s changing market.
In the past 18 to 24 months, we have seen an increase in the number of banks exploring the implementation of various nonqualified benefit plans as another form of compensation in addition to a salary and an annual incentive plan. These plans include stock options, phantom stock, stock appreciation rights, restricted stock and long-term incentive plans.
Defined Benefit: SERPs & SCPs
A Supplemental Executive Retirement Plan (SERP) or, as it is sometimes referred to, a Salary Continuation Plan (SCP), is becoming increasingly prevalent in community banks, especially where equity or equity-related plans such as phantom stock or stock appreciation rights are not used. These are nonqualified retirement plans that are designed to help key executives increase their retirement income.
- These plans can be structured to replace a specific percentage of the executive’s final pay or to provide a fixed dollar amount.
- Of the banks offering a SERP/SCP, the targeted percentage of the executive’s final compensation replaced by the SERP/SCP normally ranges from 20 percent to 40 percent. However, there are some banks that have targeted a percentage up to 85 percent of compensation.
- Banks typically budget a fixed amount for retirement benefits. The annual benefit amount is generally paid over 10 to 15 years, and typically ranges from $10,000 to more than $100,000. It is not uncommon to see annual expense accruals of $50,000 or more.
Defined Contribution: Performance Driven Plans
We have seen an increasing number of banks explore a defined contribution plan that allows the bank to contribute a dollar amount or a percentage of the officer’s base pay based on the performance of the bank and the officer.
- Typically, the annual contributions vest over 3 to 5 years, but vesting can be extended to 10 years or longer.
- It is possible to design the plan to pay a portion of the benefit before retirement in cash, which can be attractive to younger officers as they plan for college savings and housing costs and are not in a position to focus on retirement planning.
Deferred Compensation Plans
We have also seen a growing number of banks consider a Deferred Compensation Plan (DCP) for their key executives. This type of plan allows bank officers to defer their salary and/or annual cash bonus on a pre-tax basis and earn a pre-tax rate of return.
- DCPs can be designed for either voluntary or mandatory deferrals and with or without an employer contribution or match.
- These plans can also include the use of clawbacks or holdbacks which can be an important risk mitigation tool in performance based incentive plans.
- Of the banks with a DCP, some structure it with a voluntary employee deferral and employer contribution or match, while a majority offer a voluntary employee deferral, but no employer contribution or match. The crediting rate assigned to the plan can be a reasonable fixed or indexed rate or can be tied to bank performance.
- State tax laws vary as to if and when the deferred amounts are required to be included in income.
Virtually all banks now provide medical insurance, dental insurance, life insurance and a 401(k) plan to their key employees.
- Many banks also offer long-term disability insurance and short-term disability insurance.
- Some banks also provide supplemental life insurance, supplemental disability insurance and long-term care insurance to key executives. Perquisites such as a company car or car allowance and country club memberships are also frequently available.
In order to attract and retain key executives in this increasingly competitive market, banks will need to differentiate themselves from the competition by offering not only a base salary, an annual incentive plan and a standard benefits package with the usual perquisites, but also other attractive benefits such as a nonqualified Supplemental Executive Retirement Plan or Deferred Compensation Plan. These types of plans provide meaningful financial benefits for the executives, and can be designed so that the costs of the program are known in advance.
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