In yesterday’s Advisor, consultant David Wudyka offered insights on designing executive pay plans; today, more of his tips, plus an introduction to a unique guide just for smaller HR departments.
Wudyka is managing principal of Westminster Associates in Wrentham, MA. His tips came at a recent BLR/HRhero-sponsored webinar.
Perquisites
Perquisites are benefits unique to executives, says Wudyka. As some may be taxable, always clarify that issue before finalizing your plan. Some examples of perquisites:
- Country club memberships
- Cars
- Financial or legal planning
- Computers
- Phones
- Assistants
- Special health plans
Imputed Income
Sometimes tax is assessed when a form of compensation is considered “of value” or “excessive.” For example, when too much life insurance (over $50,000) is paid to an employee, the value over $50k is treated as taxable income to employee.
Qualified and Non-Qualified Plans
“Non-qualified plans” plans offer no direct tax advantage to the employee. A common non-qualified plan is the “rabbi trust” (named for its initial beneficiary). Funds are placed in a trust and tax deferred (but not “tax-advantaged”) for the executive. No “change of heart” by employer is permitted. However, in the event of bankruptcy, the funds are not protected.
“Qualified plans” are “tax advantaged” to the employee. Such a plan might, for instance, permit employees to take certain proceeds and then later treat the proceeds as a capital gain instead of income.
Phantom Stock
Companies that have no stock often base incentives on phantom stock, says Wudyka. The phantom stock describes the value of “stock” that does not exist. It is what the stock value would beif the company were publicly traded.
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‘Restricted’ and ‘Performance’ Stock-Based Plans
Restricted stock plans place a restriction upon the executive, usually to fulfill an agreement to receive a stock payout. For example, staying with the company until a designated date in future.
Performance stock plans require executives to meet a performance goal. For example, stock price rises above a certain level, or the company beats an industry in some measure of performance or stock price, etc.
If you are implementing plans like this for the first time, be aware of potential tax and accounting implications, says Wudyka. If you are uncertain about these, always consult internal or external tax and legal resources before finalizing your plan.
“Predicting” Executive Base Pay
Regression analysis is commonly used as a technique to predict base pay level for executives, says Wudyka. Analyzing pay survey data with regression analysis typically shows that there is a high correlation (about .7) between company size and pay levels. This means that 70% of the variation in base pay can be “explained” by the variable of revenue.
Adding other variables often helps to “explain” the other 30%, leaving you with a highly accurate guide for base pay.
Compensation—from the mailroom to the president’s office it’s never easy, and in a small department, it’s just that much tougher.
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