With the current economic environment and political climate in Washington, executive pay packages have come under fire. For anyone employed by a public company or a firm that has received TARP funds, you now have a new best friend keeping close tabs on you, the federal government's "pay czar."
At the same time, everyone else should take note that the pay control virus will undoubtedly spread, perhaps subtly, to companies in other parts of the private sector that want to avoid finding themselves in the news.
The implications of all this will be felt in the year ahead. Whether you work for a public corporation or a private company, you can be absolutely certain that the pendulum in executive benefits is quickly swinging toward more security. This includes adequate disability income insurance and re-engineering company-sponsored life insurance for more flexible solutions for executives.
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To meet the security objective, there are new products available in the disability arena, which finally have the potential for producing a level of coverage that highly-paid executives need. Unfortunately, most current plans are restricted by a group limit or "cap," which oftentimes meets the needs of most rank-and-file employees; however, they fall short in providing the type of coverage required for high-income earners.
Most existing disability insurance plans only cover between 35 percent to 45 percent of an executive's compensation. In an attempt to solve this problem, the insurance industry responded by developing guaranteed issue individual supplemental policies to try to fill the gap.
Unfortunately, these efforts still fall woefully short due to underwriting constraints of the carriers. As a result, the insurance industry has now developed new products to bring the executives' benefits in line with their rank-and-file counterparts. These products require no medical underwriting and can replace 60 percent of total income, and have the ability to cover income up to $4 million per year.
That's not all. These programs can be designed to work almost seamlessly with the current group plan. These particular plans can unwittingly eliminate the reverse discrimination issue common in so many firms, an issue that, unfortunately, escapes attention until an executive becomes disabled. An executive caught in this situation faces possible financial disaster due to the disability. At the same time, the firm finds itself attempting to explain to the executive and to his or her family that the plan only replaces a small fraction of the 60 percent of what he or she thought they would be receiving. This is a scenario that is played out every day. We refer to this as "The 60 Percent Illusion."
Life insurance packages are also receiving much more attention in executive suites, particularly with the virtual elimination of "spit dollar" life insurance plans by the federal government a few years ago. Recent legislative changes have also left traditional deferral plans on life support.
Firms have responded by increasing their company group life insurance plans, not realizing that even a group program could cost an executive an additional $4,000 a year in individual income taxes for a product they can't take with them when they retire or leave under any circumstance.
Once again, the life insurance industry responded by providing flexibility with term life insurance solutions at a fraction of the total cost of company-paid group insurance. These programs are portable so if you leave, you will not lose your coverage. They also provide a substantial tax break for most of the highly compensated executives. The tax break is decreased by the fact that the executives pay the actual cost for their own term life insurance program.
If an executive currently has company-paid group insurance, it may in fact be inexpensive for the company to provide it. However, the situation is quite different for the executive; the coverage is taxable to the executive, on the value of the insurance in excess of $50,000 and is subject to a government table. This table is commonly referred to as Table I. For a middle level executive, the tax liability can be thousands of dollars.
In comparison, a flexible and portable life insurance product could have a tax liability of just a few hundred dollars with the policy fully portable at current rates if the executive separates from service for any reason. These life insurance plans also can provide the executives assistance with estate planning.
When it comes to executive benefits in the coming year, it seems clear, given the economic and political landscape, that a top issue will be security — and that means avoiding loss. We can expect to see highly compensated executives showing far more interest in understanding the details of their benefits. In light of this situation, expect the trend to be back to basics.
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