Let’s explore some of the most common executive benefits and how they work.
Attracting and retaining top executive talent requires more than just a competitive salary. Many companies offer executive benefits as part of a compensation package to provide long-term financial security and incentives for key leaders. These benefits often go beyond traditional 401(k)s and pensions, helping executives build wealth, protect their families, and secure their future. Let’s explore some of the most common executive benefits and how they work.
Supplemental Executive Retirement Plans (SERPs)
What Are SERPs?
Supplemental Executive Retirement Plans (SERPs) are employer-funded retirement plans designed to provide additional income for executives. Since high earners often hit contribution limits on qualified plans like 401(k)s (capped at $23,000 in 2024, with an extra $7,500 for those over 50), SERPs help bridge the gap by allowing employers to contribute an unlimited amount.
How Do They Work?
- Funded entirely by the employer
- No contribution limits, unlike 401(k)s
- Often include vesting schedules, meaning executives must stay with the company for a set period before receiving full benefits
For example, an executive may only become fully vested in a SERP after ten years of service, encouraging long-term commitment to the company.
Stock Options and Equity-Based Compensation
What Are They?
Stock options and other equity-based compensation plans give executives an ownership stake in the company, aligning their financial success with the company’s performance. While public companies often offer stock options, privately held companies may opt for alternative equity-based compensation due to valuation complexities and concerns about diluting ownership.
Phantom Stock as an Alternative
Privately held companies can offer phantom stock, which provides executives with cash or equivalent compensation based on the company’s growth, without actually transferring ownership.
Example of a Tailored Equity Plan:
If a company’s head of sales does not influence production costs but directly impacts revenue, their equity-based plan can be structured to reward sales growth rather than overall company profit. This customization ensures that the executive is incentivized in a way that aligns with their role.
Like SERPs, stock options and phantom stock plans typically have vesting schedules, requiring executives to remain with the company for a certain period before fully benefiting.
Executive Bonus Plans
What Are They?
Executive bonus plans involve the company purchasing a life insurance policy for an executive. The executive owns the policy, while the company pays the premiums. These premiums are considered taxable income for the executive, but the benefit is a valuable life insurance policy that builds cash value, which can be accessed tax-free during retirement.
Why Companies Use Executive Bonus Plans:
- Structured as Section 162 Executive Bonus Plans, allowing companies to deduct premium payments as a business expense
- Easy to implement compared to other non-qualified plans
- Provides a financial safety net for the executive’s family and retirement planning
Split-Dollar Life Insurance Plans
What Are They?
A split-dollar life insurance plan is a cost-sharing arrangement where both the company and the executive contribute to a life insurance policy. The executive receives the death benefit and any accumulated cash value, while the company may recover its investment over time.
Advantages of Split-Dollar Plans:
- Tax benefits for both the company and executive
- Provides life insurance protection and retirement income
- Customizable to meet both company and executive needs
Should Your Company Offer Executive Benefits?
Executive benefits are powerful tools for attracting, retaining, and rewarding top leadership. At Malden Solutions, we specialize in designing customized executive benefit plans that help businesses stay competitive and keep their top talent. Contact us today to explore the best options for your executive team.
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