+1 (208) 254-6996 [email protected]

Based upon the readings, conduct external research and apply what you have learned. Do you agree or disagree with the company’s approach? The paper should be at least 1 page. Be sure to include references.  

Part Four: Extending Employee Benefits: Design and Global Issues

Don't use plagiarized sources. Get Your Custom Essay on
Assignment
Just from $13/Page
Order Essay

Chapter Ten: Managing the Employee-Benefits System

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Learning Objectives

In this chapter you will gain an understanding of:

differences between the traditional and flexible approaches to benefits designs.

essentials of communicating the benefits program.

methods for managing benefits costs.

outsourcing employee benefits.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Overview

Chapter ten begins with a comparison of traditional and flexible benefits plans.

Followed by a discussion of communicating the employee benefits program.

Managing the costs of employee benefits is then discussed.

The chapter concludes with a look at outsourcing the benefits function.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

A Comparison of

Traditional Benefits Plans

Contain the same set of benefits for each worker.

Creates administrative ease.

Represents a one-size-fits-all approach.

Flexible Benefits Plans

More companies are using flexible benefit plans

Gives employees a choice of benefits.

A cafeteria plan is one example.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Exhibit 10.1

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Traditional Benefit Plan Structure

10 – ‹#›

Exhibit 10.2

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Comprehensive Cafeteria Plan

10 – ‹#›

A One-Size-Fits-All Approach

Traditionally, every employee in a company received the same benefits.

Regardless of needs or preferences.

Differences in needs and preferences influences the adequacy of these benefits.

Most companies use cafeteria plans to ensure employees’ needs and preferences are met.

Benefit alternatives aid recruitment and retention.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Employer Choice to Customize Benefits

With Flexible benefits or cafeteria plans

employees choose from a set of designated benefits and different levels of these benefits.

Employees may accept or reject certain benefits.

Companies implement these plans to meet the challenges of diversity.

Limited evidence suggests positive reactions to flexible plans.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Cafeteria Plans under Section 125

IRC Section 125 requires:

participants must be given a choice between at least one taxable benefit and one qualified benefit.

Qualified benefits are employer-sponsored benefits for which an employee may exclude the cost from federal income tax calculation.

For the purposes of Section 125 cafeteria plans, some choices are not qualified benefits.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Exhibit 10.3

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Allowable and Prohibited Qualified Employee Benefits in Section 125 Cafeteria Plans

10 – ‹#›

Additional Guidelines for Section 125 Plans

The plan must:

Be in writing.

Allow a choice between two or more benefits,

At least one non taxable and one taxable benefit.

Permit only current and former employees to participate.

Require a yearly benefit choice.

Prohibit any benefit that defers an employee’s receipt of compensation.

Meet nondiscrimination requirements.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Additional Guidelines for Section 125 Plans

Nondiscrimination rules

prohibit preferential treatment to highly compensated and/or key employees.

Failure to meet these rules eliminates tax benefits.

Three possible violations relate to:

Eligibility – companies have at least some non-key employees in the plan.

Benefits – all should receive the same amount.

Concentration – key employee benefits should not exceed 25 percent of the total benefits.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Types of Flexible Benefit Plan Arrangements

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

The four most common types include:

10 – ‹#›

Salary reduction plans

Modular plans

Core-plus-option plans

Mix-and-match plans

Pretax Salary Reduction Plans

Pretax salary reduction plans

permit employees to set aside a portion of wages on a pretax basis for qualified benefits expenses.

Two well-known versions are:

Flexible spending accounts permit employees to pay for certain benefit expenses.

Premium-only plans enable employees to pay their share of the cost for company-sponsored plans.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Types of Flexible Benefit Plan Arrangements

With modular plans

employers offer numerous fixed benefit packages to meet the needs of different employee groups.

Core-plus-option plans

extends a mandatory core package and employees choose optional benefits.

Mix-and-match plans

employees purchase benefits with flexible credits.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Exhibit 10.6

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A Sample Core-Plus-Option Plan

10 – ‹#›

Communicating the Employee-Benefits Program

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

There are two broad considerations:

10 – ‹#›

Meeting legally mandated requirements

“Good business sense” communication issues

Legal Considerations in Benefits Communication

Employers must satisfy disclosure requirements set fourth under ERISA.

To satisfy these requirements employers provide written:

summary plan descriptions, and

summaries of material modifications.

ERISA specifies that written notices be so the “average” participant can understand them.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Summary Plan Description

A summary plan description describes:

administrative contact information,

an explanation of benefits,

disclosure of employee rights under ERISA,

eligibility criteria and disqualification conditions,

claims procedures, and

if a retirement plan is insured by the PBGC.

ERISA also sets disclosure time deadlines.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Summary of Material Modification

A summary of material modification describes changes to the plan, including:

plan administrators, claims procedures, eligibility rules, and vesting provisions.

ERISA requires employers distribute summaries within 210 days after the end of the year in which material change occurred.

Summaries go to employees and the Department of Labor.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

The “Good Business Sense” of Benefits Communication

Effective communication programs should have three primary objectives:

To create an awareness of current benefits.

To provide understanding of available benefits.

To encourage the wise use of benefits.

A variety of media can be used to communicate such information.

Brochures, meetings, presentations, counseling.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Managing the Costs of Employee Benefits

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Some alternative methods to mange costs:

10 – ‹#›

Employee contributions

Waiting periods

High deductible plans

Employee education

Utilization reviews

Case management

Provider payment systems

Lifestyle interventions

Employee Contributions

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Employees typically share the cost of benefits with pretax or after-tax contributions.

10 – ‹#›

Pre-tax contributions

employees may exclude contributions from income before calculating tax obligations

After-tax contributions

do not reduce the amount of annual income subject to income tax

Waiting Periods

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Often correspond to the length of probationary periods.

10 – ‹#›

Waiting periods

specify the minimum amount of time an employee must remain employed before becoming eligible for one or more benefits

The Affordable Care Act limits waiting periods for health-care plans to a maximum of 90 days

High-Deductible Plans

High-deductible plans shift more of the expense from employer to employee.

Lower premiums means employers save money.

Some companies have adopted high-deductible workers’ compensation plans.

Companies pay a lower premium in exchange for agreeing to pay a predetermined deductible.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Employee Education

Employees typically overused their benefits.

Employers used to enjoy lucrative tax breaks and employees took benefits for granted.

Fee-for-service plans, common decades ago, allowed freedom to go to any doctor, anytime.

Employers absorbed rising costs but competitive pressures force cost cuts.

Increase employee contributions and educate them on the costs and the reasons for rising costs.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Utilization Reviews

Utilization reviews evaluate the quality of specific health-care services.

Performed by doctors and nurses.

Three types may be considered.

Prospective reviews or precertification reviews

evaluate the appropriateness of proposed medical treatment as a condition for authorizing payment.

Concurrent reviews focus on current hospital patients.

Retrospective reviews take place prior to payment.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Case Management

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Serious health problems may be acute or chronic.

10 – ‹#›

Case management

many plans use independent case management companies to ensure participants receive essential care on a cost-effective basis

Provider Payment Systems

Provider payment systems are arrangements between insurers and health care providers.

May include one of more cost savings features.

Percentage discounts reduces providers’ usual charges.

Capped fee schedules sets maximum dollar amounts for each service.

Partial capitation pays physicians a fixed dollar amount for each patient assigned to them.

Full capitation also pays a fixed amount but that amount may vary from patient to patient.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Lifestyle Interventions

Lifestyle interventions refer to any activity that changes how a person lives life.

Most companies allow employees to choose whether to participate in wellness programs.

Some companies feel it is their responsibility to decide whether intervention is mandatory.

Scotts Miracle-Gro Company.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Outsourcing the Benefits Function

Outsourcing

refers to an agreement where an employer transfers responsibility to a third-party provider.

Independent companies with expertise.

Outsourcing is on the rise with the top reason being for the expertise.

Can be expensive in the short run.

Efficient arrangements can be less costly than handling plans within the company.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Summary

Chapter ten began with a comparison of traditional and flexible benefits plans.

Followed by a discussion of communicating the employee benefits program.

Managing the costs of employee benefits was then discussed.

The chapter concluded with a look at outsourcing the benefits function.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10 – ‹#›

Part Four: Extending Employee Benefits: Design and Global Issues

Chapter Eleven: Nonqualified Deferred Compensation Plans for Executives

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Learning Objectives

In this chapter, you will gain an understanding of:

who executive employees are and the characteristics of nonqualified deferred compensation (NQDC) plans.

examples of NQDC plans used for executives’ retirement.

funding mechanisms for NQDC plans.

stock-based compensation plans.

separation agreements for executives.

reporting and disclosure requirements.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Overview

The chapter begins by defining executive employment status.

Then nonqualified deferred compensation plans (NQDC) are defined and discussed.

The chapter continues by discussing nonqualified retirement plans for executives.

A discussion of funding mechanisms follows.

Stock options and stock purchase plans are defined, as well as separation agreements.

The chapter ends with a discussion on reporting and disclosure requirements.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Who are Executives?

The IRS notes two employees with a central role in a company’s competitive strategy:

highly compensated employees, and

key employees.

The IRS uses the term:

“key employees” to determine the necessity of top-heavy provisions in qualified retirement plans, and

“highly compensated employees” for nondiscrimination rules in employer benefits.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Key Employees

Key employee means any employee who at any time during the year is either:

an officer with pay more than $175,000, or

an individual who was either a 5% owner or a 1% owner whose pay is more than $150,000.

Officer in this definition is:

an administrative executive in regular service,

who holds a title of officer, or the authority of an officer.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Highly Compensated Employees

The IRS defines a highly compensated employee as one of the following:

a 5% owner during current or preceding year, or

for the preceding year:

had compensation in excess of $120.000, or

was in the top 20% of the most highly compensated employees.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Defining Nonqualified Deferred Compensation Plans (NQDC)

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

NQDC plans allow executives to accumulate more money for retirement than allowed by qualified plan limits.

11 – ‹#›

Nonqualified deferred compensation (NQDC)

the IRS says this plan is an agreement between an employer an employee to pay compensation in the future

Defining Nonqualified Deferred Compensation Plans (NQDC)

Companies use nonqualified retirement plans to achieve one of two objectives:

restoration, and

supplemental retirement benefits.

Restoration

restores retirement income limited by qualified plans income limits.

Supplemental retirement benefits

increase retirement benefits more than restoration plans.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Characteristics Distinguishing Nonqualified Plans

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Nonqualified plans differ from qualified plans in three important ways:

11 – ‹#›

ERISA qualification criteria

Funding status

Mandatory retirement age

ERISA Qualification Criteria

NQDC plans fail to meet ERISA criteria.

Qualified plans meet all ERISA standards.

Some ERISA Title I and Title II provisions set minimums to qualify pension plans.

Title I specifies:

reporting and disclosure,

participation and vesting minimums,

funding,

fiduciary responsibilities,

administration,

continuation coverage,

portability, access, and renewability.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

ERISA Qualification Criteria

Which standards are not usually met?

Executives’ pay exceeds the IRC limits for qualified plans.

ERISA prohibit favoring highly compensated employees.

Executive plans violate nondiscrimination rules

which prohibits favoring highly compensated employees in contributions or benefits, availability, rights, or plan features.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Funding Status

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Each company decides whether to establish funded or unfunded plans.

11 – ‹#›

Funded plans

place money in trust funds or insurance contracts in an executive’s name, so no risk of forfeiture

Unfunded plans

only contain the promise to pay in the future with no designated funds to honor the promise

Funding Status

Companies consider several factors when deciding, we look at three.

Managing liabilities requires preparation and funding compels companies to set aside resources.

Funding NQDC plans is costly – does the investment promote profits or reputation?

Shareholders are sensitive to public debate about excessive executive pay and may view funding the plans as a detrimental cost.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Mandatory Retirement Age

Normal retirement age is the lowest age when a retiree begins receiving benefits.

Employers may not set a mandatory retirement age, except for:

any employee 65 or older who, for two previous years, is employed in a bona fide executive or a high policymaking position, if

that employee is entitled to retirement benefits of at least $44,000.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Nonqualified Retirement Plans for Executives

Four broad classes of plans:

excess benefit plans,

supplemental executive retirement plans (SERPs),

salary reduction arrangements, and

bonus deferral plans.

The focus here is on the first two.

Companies offer excess plans to restore retirement income disallowed by qualified rules, while SERPs award benefits at higher levels than restoration plans.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Excess Benefit Plans

Excess benefit plans

increase retirement benefits by the amount lost due to limits set by the IRS.

Companies design excess benefits plans as extensions to qualified defined benefit or defined contribution plans.

Companies may offer these plans on a funded or unfunded basis.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Supplemental Executive Retirement Plans (SERPs)

SERPs – supplemental benefits that increase total benefits to a greater sum than do restoration plans.

SERP objectives that differ from excess plans:

Inclusion of other types of monetary pay in the calculation of retirement benefits.

Use of SERPs as a tool in executive-level succession planning.

Rewarding substantially higher retirement benefits.

Compensating for short-term employment or older new hires.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Supplemental Executive Retirement Plans (SERPs)

Companies may offer SERPs as funded or unfunded plans.

A common unfunded SERP – top hat plans.

Primary purpose is to provide deferred income for management and highly compensated employees.

Exempt from ERISA’s standards as long as unfunded and only for select employees.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Contrasting Excess Benefits Plans and SERPs

They differ in two additional ways.

Companies bestow vesting rights for both types, but lengthier vesting schedules for SERPs.

Companies may include offset provisions to reduce

contributions to and benefits from SERPs when

executives participate in unrelated company-sponsored retirement programs.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Funding Mechanisms

Funding mechanism is not synonymous with funded plans.

Funding mechanisms by security level:

general–asset approach,

corporate-owned life insurance,

split-dollar life insurance,

rabbi trusts,

secular trusts, and

employee-owned annuities.

Funded and unfunded plans are taxable

for both employees and employers.

Constructive receipt guides when executive’s tax obligations become due.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Funding Mechanisms

Funding with general assets is the most risky.

Bankrupt companies use assets to pay creditors.

Not protected by ERISA.

Corporate-owned life insurance is only a bit less risky.

Companies take out whole life insurance policies, naming themselves as beneficiary.

Recovering the costs of nonqualified deferred compensation.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Funding Mechanisms

Split-dollar life insurance.

The employer and executive share the premiums.

The collateral approach is when the executive maintains ownership.

The endorsement approach designates the employer as the owner.

Rabbi trusts is an irrevocable grantor trust.

The employer, as grantor, must still hand over the trust in the event of insolvency.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Funding Mechanisms

Secular trusts are not subject to creditors in the event of a company bankruptcy.

They must meet ERISA provisions.

Employee-owned annuities offer the greatest degree of security as the employer pays for an annuity in the executive’s name.

Not subject to ERISA because the executive sets up the annuity, not the company.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Stock Options and Stock Purchase Plans

Some basic terminology is followed by five commonly used alternative stock option plans:

stock options,

restricted stock plans and restricted stock units,

stock appreciation rights,

phantom stock plans, and

employee stock purchase plans.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Basic Terminology

Company stock is equity in the company.

Company stock shares is equity segments of equal value.

Stock options is a right to buy shares of stock at a designated price.

Stock grants offers stock to employees.

Exercise of stock options is an options purchase.

Disposition is shareholder stock sale.

Fair market value is the average price.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Restricted Stock Plans and Restricted Stock Units

Under restricted stock plans, a company may grant stock options at market value or discounted value, or provide stock.

Executives must pass through a vesting period before they receive ownership.

Under restricted stock units shares of stock are awarded at the end of the restriction period.

For either, a company may add performance criterion to the vesting period – known as a performance plan.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Stock Options

Incentive stock options

Executives may purchase stock in the future at a predetermined price.

Capital gains or capital loss is the difference between stock price and stock option price.

Tax benefits are that capital gains is taxed at a lower capital gains rate.

Nonstatutory stock options

This option does not qualify for favorable tax rates.

Executives pay income tax when stock is granted.

However, the tax liability is lower over the long term.

Stock prices usually increases.

Capital gains will likely be much greater than current tax.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Stock Appreciation Rights

Stock appreciation rights provide income at the end of a designated period.

Much like restricted stock options.

However, executives never have to exercise their stock rights to receive income.

Companies award payments based on fair market value.

Executives keep the stock.

Executives pay taxes when they exercise their stock rights, after retirement, at lower rates.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Phantom Stock Plans

A phantom stock plan is when boards promise to pay a bonus in the form of the:

equivalent of either the value of company shares or the increase in value over a period of time.

Executives must meet conditions before they can convert phantom shares into real shares:

they must remain an employee for several years,

and they must retire from the company.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Employee Stock Purchase Plan

A formal stock purchase plan allows workers to purchase stock after a set period of time.

Employees set aside money through payroll deductions during the offering period.

These plans may be qualified or nonqualified.

To qualify for favorable tax treatment, companies’ plans must meet several criteria.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Separation Agreements

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Separation agreements specify compensation and benefits an executive will receive after termination.

11 – ‹#›

Negotiated during hiring

Approved by the board

Documented in a contract

Golden parachutes

Platinum parachutes

Golden Parachutes

Golden parachutes provides pay and benefits to executives after a termination due to:

a change in ownership or corporate takeover.

Boards include these clauses because they:

limit executives’ risk due to unforeseen events,

promote recruitment and retention,

silence the executive who may resist a takeover which actually benefits the company, and

counts as a company business expense if paid.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Platinum Parachutes

A platinum parachute may be awarded to a CEO terminated for poor performance.

These are lucrative awards that include severance pay, continuation of benefits, and stock options.

Companies use platinum parachutes to avoid long legal battles or negative publicity.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Reporting and Disclosure Requirements

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Two laws, in particular, are responsible for reporting and disclosure requirements:

11 – ‹#›

The Securities Exchange Act of 1934

The Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)

Securities Exchange Act of 1934

Companies that trade on public exchanges are required to file information with the

Securities and Exchange Commission (SEC).

The Securities Exchange Act of 1934 applies to executive compensation practices.

Companies must complete a Definitive Proxy Statement which reveals information about the CEO and Named Executive Officers (NEOs).

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Exhibit 11.1

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Securities and Exchange Commission Disclosure Requirements for Executive Compensation

11 – ‹#›

Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)

The Wall Street Reform and Consumer Protection Act of 2010 enhanced the transparency of executive compensation.

Commonly called the Dodd-Frank Act.

Three provisions encompass benefits practices:

The say-on-pay gives shareholders a vote on executive compensation;

An independence requirement for compensation committee members and their advisors; and

Disclosure of golden parachute agreements.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Summary

The chapter began by defining executive employment status.

Then nonqualified deferred compensation plans (NQDC) were defined and discussed.

The chapter continued by discussing nonqualified retirement plans for executives.

A discussion of funding mechanisms followed.

Stock options and stock purchase plans were defined, as well as separation agreements.

The chapter ended with a discussion on reporting and disclosure requirements.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11 – ‹#›

Order your essay today and save 10% with the discount code ESSAYHELP