Serps – a Briefing on Executive Retirement Benefits

Upper Saddle River, N.J. – July 18, 2006 – There continues to be a barrage of media reports concerning new excesses relating to executive compensation. Recent revelations have concerned back dating of stock option grants, grossing up bonus payments to cover related taxes, and extremely lucrative retirement benefits .

A Supplemental Executive Retirement Plan (SERP) is a type of retirement plan that is extremely common, and has long been used to replace retirement benefits which would otherwise be reduced because of ERISA limitations. SERPs typically take the form of a predetermined level of post-retirement income replacement. The percentage of income that is guaranteed has been increasing, and it is not uncommon to see 80% or more. Although most plans contain a carve out for Social Security and other company-provided retirement benefits, the benefit is typically not tied to performance.

In the case of for-profit, publicly-traded companies, many organizations already have other forms of Long-Term Incentives (LTIs) that have the potential of providing extra funds to enhance retirement benefits without the need for SERPs. Privately-owned, for-profits tend to utilize fewer equity-based plans, but still offer other opportunities for capital accumulation that can assist with post-retirement income. Although these may take the form of SERPs which are time based, many companies have also adopted some form of performance based LTI, most commonly referred to as phantom stock plans.

Phantom stock plans typically provide participants an opportunity to share in the upside growth of the company. These may pay out at the end of a fixed performance period (3-5 years), or be career-based and paid at retirement. They typically provide motivational value to achieve desired growth and profitability objectives, while defusing criticism that the plan is a “give away” based on longevity only.

In the not-for-profit (NFP) world, the use of variable compensation is rapidly growing as an important component of overall compensation. There is a pronounced move towards the adoption of true formula-based incentive plans, with defined goals and objectives. While the belief has been that not-for-profits have no “profits” to share, this perception has long since been replaced with the recognition that there are definable and measurable goals, and that if achieved, will advance the organization’s mission and also trigger the payment of variable compensation. Similarly, the achievement of longer-term goals can also be used to fund enhanced retirement benefits, that can replace or at least supplement the typical SERP.

Paul R. Dorf, Ph.D., APD