Twelfth Annual Survey of Current Trends Finds Prevalence, Popularity of NQDC Plans Continues to Grow

The key to a company achieving its strategic goals often lies in its ability to attract and retain talented, experienced senior executives, and this, in turn, often depends on the quality of its unique compensation and benefits programs.

Over the last twenty years, predominant themes have surfaced to cause corporations to implement supplemental benefit plans for their executives, most notably continued legislative limitations on the amounts executives can contribute and receive in qualified benefit plans.

For the twelfth consecutive year, Clark Consulting has developed Executive Benefits - A Survey of Current Trends. Based on our evaluation of Supplemental Executive Retirement Plans (SERPs) and Nonqualified Deferred Compensation (NQDC) plans at nearly 20% of the Fortune 1000 companies, we have created a tool to help our clients arrive at sound solutions, and to provide a benchmark for their executive benefits needs.

Legislative Changes

In October 2004, the American Jobs Creation Act was passed, which created a new Internal Revenue Code section that governs nonqualified deferred compensation plans for amounts deferred after December 31, 2004. As a result of the new requirements in the legislation, the design of SERPs and NQDC plans will be changing, as plan sponsors revise their arrangements by the documentary compliance deadline of December 31, 2006.

Accordingly, the statistics and trends contained in the current survey represent the first year that survey responses may reflect changes to nonqualified plans due to this legislation. It appears that nonqualified plans will remain a vital part of an executive's overall financial portfolio. Statistics and Trends

The 2005 Executive Benefits Survey revealed the following statistics and trends:

• NQDC plan prevalence among companies surveyed is at 91%, still at the high level of the past three years. Plan prevalence is now at 92% of surveyed financial institutions - compared to 100% in 2004.
• 65% of survey respondents informally funding NQDC plans use Corporate Owned Life Insurance ("COLI"), and 70% of survey respondents use COLI to informally fund their Supplemental Executive Retirement Plans, compared to 57% in 2004.
• Of survey respondents with NQDC and SERP plans, 77% and 72%, respectively, use a Rabbi Trust.
• 38% of survey respondents allow executives to defer long-term incentives - cash compensation and 18% of long-term incentives - stock awards into NQDC plans, up slightly from 34% last year.

Clark Consulting's survey found that NQDC plans are a more significant component of the executive compensation landscape than ever before, particularly among larger companies. Overall, 91% of survey respondents offer NQDC plans to executives at some level within the organization. "NQDC plans continue to be popular among Fortune 1000 companies due to the flexibility of these plans in comparison to qualified plans," noted Les Brockhurst, President of Clark Consulting's Executive Benefits Practice.

"The results of this year's survey also show that NQDC plans continue to be an important part of an executive's benefits package," he added. Among responding firms with annual revenues above $2.5 billion, 94% reported offering NQDC plans, as did 90% of companies with revenues below that amount. In addition, 83% of all respondents indicated their NQDC plan had been adopted since 1990, with 17% of plans in place before then, demonstrating the continued growth of these plans over the past 15 years.

Survey results indicated that the types of deferrable compensation among responding companies included short-term incentives (97%), base salary (85%), directors' fees and retainers (44%), long-term incentives - cash (38%), long-term incentives - stock (18%) and restricted stock (15%) (see Chart 1). In addition, the survey found that 47% of firms with NQDC plans offer corporate matching contributions (compared to 96% that make matching contributions to their employees' 401(k) plan). Only 6% of respondents allowed transfers of funds from NQDC plans to 401(k) plans.

Interest Rates Vary Widely

Clark Consulting's survey also revealed that the rate at which interest is credited to the accounts of NQDC plan participants can vary widely, with 52% of respondents' plans mirroring the returns of a particular stock index or the investment options available in the firm's 401(k) plan up from 45% in 2004.

Other methods named by survey respondents were, in order of prevalence, Company Stock (28%), Moody's Corporate Bond Index Rate (17%), Fixed Rate (11%), Treasury Notes/T-Bill (7%), and Prime Rate (6%) (see Chart 2).

Among respondents relying on 401(k)/stock index-crediting rates, 77% allow plan participants to change their investment alternative elections on a daily basis up from 76% in 2004.

In terms of how often companies credit interest to their employees' accounts, 69% do so on a daily basis, up from 67% in 2004, while 17% credit interest each month up from 15% in 2004.

NQDC Plan Funding Vehicles

Clark Consulting's survey found that among companies offering NQDC plans, 73% overall are informally funded, while 25% of surveyed plans remain unfunded. Of those plans that are informally funded, the vehicle most commonly used is Corporate-Owned or Trust-Owned Life Insurance (COLI/TOLI), with 70% of plans relying on this method up from 61% in 2004. Other common informal funding vehicles include Company Stock (17%), Mutual Funds (28%), Bonds (3%) a Managed Portfolio (3%) and other (8%) (see Chart 3). The survey also revealed that among companies using COLI/TOLI to fund their plans, 63% use variable life insurance and 37% choose whole life/universal life policies, (see Chart 4).

Rabbi Trusts and Alternatives

Rabbi Trusts continue to be popular with survey respondents, with 77% of surveyed firms reporting the use of these arrangements. Additionally, 15% of respondents indicated they use a Springing Rabbi Trust, 4% use a Rabbicular Trust and 1% uses a split-dollar arrangement, and 5% use an Employer Secular Trust. These types of devices are clearly seen as important protection for plan participants against adverse decisions of the plan sponsor.

For more information about Clark Consulting or to download a copy of the 2005 Executive Benefits - A Survey of Current Trends, please visit us at www.clarkconsulting.com. If you are interested in a hard copy of the survey, please email Melissa Smith at: benefitsurvey@clarkconsulting.com.

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