The Value of Customized Deferred Compensation
By: David Shoemaker, Beth Taylor | JULY 17TH, 2017
A deferred compensation plan (DCP) can be used to help your bank recruit, retain and reward top and rising talent. A DCP is a nonqualified plan, so it may be fully customized for almost any situation you can think of to provide supplemental income to select officers of the bank. For example, many millennials are still repaying school loans while simultaneously starting families and beginning to think of the future, so what could your bank offer the young, talented employee that would provide incentive to remain employed with you? What could you offer the high achieving loan officer who has no children and does not expect to work past age 55? What about the seasoned executive who knows the business inside and out and would like to retire in the next 10 to 15 years?
While there are endless ways to design a DCP, we use five main strategies to help our clients attract, retain and reward key employees. Each strategy can be customized to fit the employee’s situation.
1. Ten/Two DCP
This is a way to provide a midterm supplemental incentive reward to a key employee. The setup is simple—at the end of the 10th plan year, the bank will provide supplemental income to the employee in years 11 and 12.
- The bank will create an accrual account for the employee in which the bank credits a monthly (or annual) amount equal to a percentage of salary, a set dollar amount or some other amount at the discretion of the bank.
- Interest is credited to the account balance monthly, usually at an annual rate tied to the bank’s return on equity or a financial index.
- At the end of 10 years, the account balance is distributed to the participant in equal monthly installments over two years.
This plan may be customized for a shorter deferral period and/or a longer payment period. In addition, this design could be used for a promising employee who is not yet part of the bank’s senior management team, but is vital to the bank’s success and deserves to be rewarded.
2. Repayment of College Loans
Many millennials graduate from college with $50,000 or more in student loans and expect to spend at least 10 years paying off those loans. Providing extra income through periodic DCP distributions to help retire the loans can help attract and retain talented young employees.
3. Help with Children’s Education
A DCP may be set up so that payments are made while the participant is still employed. As such, it could be structured so that payments are made in the years the participant’s children are expected to be in college.
Suppose your 30-year-old officer has two children, ages five and three. You could set up a DCP so that in-service distributions are made in years 13 through 19, and, if the officer remains until retirement age, a traditional Supplemental Executive Retirement Plan (SERP) is also earned.
This could be provided with a contribution as low as $6,000 per year for a 30-year-old employee. Actual amounts would vary depending on crediting rates, amounts credited and the timing of distributions, among other factors.
4. Three/Six Plan
This plan design uses a rolling vesting schedule. Each award vests over three years, and payments commence after six years. This plan design provides regular cash flow to the participant, but requires forfeiture of the unvested benefits if the participant terminates before retirement age.
5. Traditional Supplemental Retirement Income
Say a community bank is trying to attract a seasoned 55-year-old banker from a larger bank. The executive is at the age where retirement is becoming increasingly important. The community bank may not be able to match the salary being paid from the larger bank, but it could offer the executive a supplemental retirement income of $50,000 per year for 15 years, a total retirement enhancement to his or her retirement income of $750,000. This may be the difference maker in convincing this executive to make the move.
When designed with your situation and employee in mind, a DCP is a valuable tool that may be used to attract, retain and reward specific employees vital to your bank’s success.
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 (BOLI). To learn more, contact David Shoemaker at 901-754-4924 or firstname.lastname@example.org.
Beth Taylor is a senior plan design analyst at Equias Alliance.;