Beyond the Headlines on Executive Bonuses
While Executive Compensation excesses certainly do exist, most companies, their executives and Boards act with the best interests of the company. They make decisions that are prudent, make good business sense, and seek to provide competitive total compensation for their employees, key talent and leaders. Succession planning and talent retention strategies include compensation and long-term rewards, all key to a strong business future
On May 20th, 2009 the following article appeared in the Wall Street Journal, “Banks Use Life Insurance to Fund Bonuses.” The author attempted to compare a cost-effective, legitimate business practice to a questionable practice known as “janitor insurance”. (This refers to a practice where some major corporations including Wal-Mart and Walt Disney purchased policies on millions of rank-and-file workers, often without the employee’s knowledge and when the employee died, the tax-free insurance policy proceeds were not paid to the employee’s family, rather to the employer.)
Not surprisingly, this article, for the most part, missed the most significant aspect of the statistics quoted. In the last four years, the amount of life insurance on employees owned by employers has nearly doubled. Why? Because it is cost effective and makes good business sense. It allows companies to provide competitive retirement benefits to its key leaders and eventually recover the costs of those benefits. If more companies had behaved as prudently in the design of their executive compensation packages, the federal government might not be caught up in such a massive bail out plan of so many troubled companies.
Simplified, here’s how this works. Insurance policies are set up as informal pension plans for the executive/key employee. The Employer makes non-tax deductible deposits to plan. The money deposited to the plan grows tax-free. When the employee retires, money is withdrawn or borrowed from the policy to provide supplemental retirement benefits to the executive/key employee. These monies are tax-deductible to the Employer when paid out to the executive. (In many cases, retirement benefits are paid out of current profits and the insurance policy values are not liquidated.) When the executive/key employee dies, the remaining death benefit is paid tax free to the Employer. It works for larger companies, and often makes sense for an employer who wishes to provide a retirement benefit that is both cost effective and makes business sense.
Contact us if you’d like more information on designing a plan for your key employees.
