Executive Compensation and the Role of the Compensation Committee

Post Employment Plans

Most executive plans have post-employment plans that help the executive defer compensation until a later date for tax purposes and may jointly be part of retirement planning. Companies offer deferred plans that are qualified broad-based, non-qualified executive only, or both. Most executive compensation packages contain significant non-qualified deferred compensation which is governed by IRC section 409A (explained earlier) and come in a number of forms:

• Top-hat plans are a supplemental executive retirement plan typically designed with a defined benefit which is both unsecured and unfunded.
• Deferred bonuses are distributed over several annual installments or at retirement and are the result of postponing receipt of cash compensation in the stipulated tax year in which the income is earned.
• Rabbi trusts are assets that are transferred to an irrevocable trust to be held for the benefit of executive employees. Assets are irrevocably segregated, so it does protect the executive from nonpayment due to a change in control (CIC) or a "change of heart" by the employer. However, creditors can access the funds.
• Secular trusts generally provide for full and immediate vesting with the assets segregated. They are triggered by an event like a CIC or at retirement age. Creditors cannot reach the money held in a secular trust and it may be used in tandem with a Rabbi trust.

These are just a sampling of the most common types of deferred compensation plans. Corporate owned life insurance (COLI) is a vehicle used to informally fund these plans without penalties. For more information on this topic, please see DLC Course 42: Accumulated Earnings and Deferred Compensation.