Equias Alliance is in the BOLI and benefit plan news often.


Deciding on the Right Retirement Plan for Executives

By: David Shoemaker, Ken Derks | September 19th , 2014

Banks are challenged to attract and retain both key executives and key producers. While cash compensation plays a major role in this process, many community banks use nonqualified benefit plans, which provide supplemental retirement income as an attractive recruiting and retention tool.

According to the American Bankers Association's 2013 Compensation and Benefits Survey, 64 percent of banks offer some type of nonqualified deferred compensation plan. These plans are limited to select management or highly compensated employees. Nonqualified plans are generally categorized as either defined benefit plans or defined contribution plans.

With different types of nonqualified plans available, how do you decide which plan your bank should provide?

In a typical defined benefit plan, the executive is promised a fixed dollar amount or percentage of final pay at retirement as the plan is designed to overcome a retirement shortfall or achieve a specific wage replacement ratio. The executive receives a stated amount (e.g. $50,000 per year) for a stated period of time (e.g. 15 years) beginning at separation from service, or a specified date or age.

Defined contribution plans vary in design. The executive's deferred compensation balance might consist of all bank contributions, all executive contributions, or a combination of the two. Bank contributions might be predefined, such as a specific dollar amount or percentage of salary each month, or they may vary based on achievement of certain performance goals (often called performance-driven retirement plans). The deferral or contribution is credited with interest by the bank and the accrued amount is paid beginning at separation from service or a specified date or age.

On the surface, it may seem that the performance-driven designs provide more alignment of the executive and shareholder interests; however, that may not be the case for the following reasons:

  1. Executives generally prefer defined benefit plans over performance-driven plans. The defined benefit plans provide a base level of retirement income to supplement the variable/uncertain amount of retirement income from the executive's 401 (k) plan and stock awards. The executive may favor the employer that offers the defined benefit SERP and may be willing to take a lower retirement benefit because of the higher degree of certainty.
  2. Once implemented, properly designed defined benefit plans are easy to administer and the expense can be budgeted for years to come.

Both benefit plan types require various terms and conditions to be documented in a contract between the bank and the executive. 

A couple of recent examples will help illustrate the board's rationale for the implementation of both types of SERP:

Defined Benefit

Bank A conducted a nationwide search to hire a CEO. As part of the CEO's compensation package, the board of directors agreed to provide a SERP designed to replace 70 percent of his final compensation, after taking into consideration his 401 (k) and social security benefits. The board considered various alternatives but believed the defined benefit SERP was the most effective method to achieve its objective. Since the executive was only 50 years old, he would earn the SERP over the next 15 years. The executive was incentivized to take the position, in part, because of the promise of a stable retirement income, which would allow him to focus his energy on bank performance. In addition, the executive was provided with restricted stock that would provide alignment of the executive's and shareholders' interests. Lastly, the board favored the stability of expense the defined benefit SERP provides and the fact that the design does not promote excessive risk-taking.

Performance Driven

At Bank B, the board felt strongly that supplemental executive retirement benefits should be provided using a performance-driven design. The board believed that to maintain a high-performance culture that aligns management and shareholder interests over the long-term, a defined contribution approach was the best fit. The plan provided that annual contributions would be measured based on performance targets established by the board. To provide additional protection against excessive risk-taking, the benefit payments would not begin until age 65 and would be payable in monthly installments over a 10-year period. All benefits would be forfeited if the executive was terminated for cause, if there was a material misstatement of the financial statements, or if the executive competed with the bank after termination of employment.


There is no one size fits all approach with regard to nonqualified benefit design. The facts and circumstances of the case, including bank culture and objectives, will dictate the best design for any given bank and executive. For more information on this topic, please see: "Is Your Compensation Plan Generous Enough?"

Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIPC. Equias Alliance is independent of ProEquities, Inc.

David Shoemaker, CPA/PFS, CFP®, is a principal of Equias Alliance, which through consultants has assisted over 800 banks in the design of nonqualified benefit plans, performance based compensation and (BOll). To learn more, contact David Shoemaker at 901-754-4924 or dshoemaker@equiasalliance.com.

Ken Derks is a principal of Equias Alliance, which through consultants has assisted over 800 banks in the design of nonqualified benefit plans, performance based compensation and (BOll). To learn more, contact Ken Derks at 469-252-1037 or kderks@equiasalliance.com.

Equias News

Q3 2017 Equias Alliance/Michael White 2017 BOLI Holdings Report
Click here to read more

Compensation Strategies to Attract, Retain and Motivate Millennials – BankDirector
Click here to read more

Top 10 Reasons Banks Own BOLI – Joe Schaefer, MBA
Click here to read more

More Equias News

Current Events

Ohio Bankers | OBL Economic Summit | February 6 | Greater Columbus Convention Center, Columbus, OH

American Bankers Association | National Conference for Community Bankers | February 25 - February 28 | Hilton Hawaiian Village Waikiki Beach Resort, Honolulu, HI

More Current Events



Insurance services provided by Equias Alliance, LLC, a subsidiary of NFP Corp. Doing business in California as Equias Alliance Insurance Services, LLC (License #0H52337). Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Kestra IS is not affiliated with Equias Alliance LLC, NFP Corp., or any other entity listed herein. Kestra IS does not provide tax or legal advice and is not a Certified Public Accounting (CPA) firm. Not all persons listed on this website are registered with or offer securities through Kestra IS. Only appropriately licensed individuals can offer securities through Kestra IS.

This site is published for residents of the United States only. Registered Representatives of Kestra IS and Investment Advisor Representatives of Kestra AS may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact our Compliance department at 844-5-KESTRA (844-553-7872).

Any web site links referenced are being provided strictly as a courtesy. Neither us, nor Kestra IS or Kestra AS are liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of the links provided.

Equias Privacy Policy

butten linkedin

Consultant Login

Copyright ©2018 Equias Alliance. All rights reserved.