Recruiting, retaining and motivating vital employees is a constant concern for businesses regardless of the economic and regulatory climate. For business owners and human resource professionals, hiring and retaining quality employees has always been a top priority. The challenge remains as to how to reward key hires in a way that aligns well with the company’s long-term strategic goals.
There are a multitude of key person reward and retention strategies available and a company must weigh the options carefully. Many companies fall into the trap that their pay and benefit strategies must link incentives to various metrics. While complex programs may look good on paper, they are often not implemented or communicated properly. Overly complicated strategies have a tendency to blur the ultimate objectives and produce unintended harmful results, or even worse they just altogether fail.
Sometimes simplicity makes the most sense. One retention and reward plan that companies have used for many years is simple in its design and just as simple to understand; the Supplemental Executive Retirement Plan (SERP).
What is a Supplemental Executive Retirement Plan (SERP)?
A SERP is a deferred compensation agreement between the company and a key executive, whereby the company agrees to provide supplemental retirement income to the executive and their family if certain pre-agreed eligibility and vesting conditions are met.
A typical example of a SERP would provide the executive a retirement benefit from all employer provided retirement benefit plans equal to 50 -70% of the executive’s high three year average compensation, payable for twenty years after retirement. The total retirement benefits from traditional sources, such as a 401k plan and social security, typically fall short of the 50 -70% compensation level. The SERP, in this example, is used to fill in that shortfall known also as the retirement gap. At retirement, the company determines the level of benefits paid from all other retirement benefit plans and any shortfall will be paid as supplemental income by the company to the key executive based upon the terms of the agreement.
SERPs are relatively easy to implement and require no IRS approval or involved administration. The company can select the executives it wants to reward with supplemental benefits, as long as the executive belongs to a select group of management or highly compensated employees. When the supplemental income benefits are paid to the key employee, the company gets a tax deduction.
The retentive qualities of SERPs are simple yet effective; the company can design any type of vesting schedule so that should the executive leave the company prior to retirement, they may get only a portion of their benefit or nothing at all. There is also no third-party protection of an executive’s benefit if the company fails, thus incentivizing the executive to maintain and protect the financial health of the company at retirement and beyond (through their retirement payment stream).
The high rate of retirement of baby boomers is creating a void that needs to be filled by younger talent. Due to higher taxes and increasing restrictions on qualified retirement plans, meaningful retirement income has become a top priority for many emerging executives. A properly designed SERP answers this need and can be an essential component in any company’s recruiting and retention strategy.
A disadvantage to a SERP is that the company must accrue a liability and can only deduct expenses related to the plan when the benefits are paid. While simple in concept, they can be customized to provide different metrics and benefit levels consistent with the plan sponsor’s objectives without added complexity or promotion of risky behavior.
Retaining good people is just as difficult as it has ever been if not more. Replacing a key executive is significantly expensive, but the intangible costs associated with lost leadership and delays in achieving a company’s strategic goals is immeasurable.
The traditional SERP provides a simple, clean plan with known, achievable goals and is proven to be a successful recruiting and retention vehicle.