The rewards being provided to executives are subject to greater disclosure and scrutiny, it’s critical to deliver the right total program at the appropriate value.
At the same time, compensation committees must be able to provide defensible rationales for the components and magnitude of executive compensation programs.
Our practice focuses on complementing the work of your internal and external advisers. We bring a quantitative approach to our processes, even if areas that have traditionally been difficult to quantify. We also maintain a keen focus on quality and compliance, whether we’re looking at initial program design, refining an existing program, or comparing a program to your peer group. Below is an overview of our Executive Compensation services:
Executive Compensation Services Overview
Pay Ratio Consulting+
Beginning with the 2018 proxy season, companies that issue proxies to shareholders will be required to disclose the “pay ratio” — i.e., the ratio of CEO pay to the pay of the median-paid employee in the company worldwide. It sounds pretty basic when you first hear it, but consider these complications:
Pay is defined as “annual total compensation,” meaning that it includes the increase in actuarial liability of any pensions as well as the value of any new equity grants or awards. In order to determine who the median-paid employee is, you need to know the pay of all employees — including part-time and seasonal employees worldwide - and all earnings need to be converted to US dollars For companies with a large employee population or with employees in more than one country, this requirement presents a challenging and time-consuming process.
At October Three, we truly understand the data and are experts at calculating the many elements that go into the compensation of each employee such as differing pension benefits and stock options.
Supplemental Executive Retirement Plan Design, Valuation, & Funding+
You’ve invested a lot of time in designing your qualified plans. But the recruitment and retention of top executives requires different strategies. Do your non qualified plans align with those strategies? Are there employment agreements in place that need to be considered? Do you have policies in place regarding cost, vesting, and retirement? Non-qualified plans need to be 409A-compliant, attract and retain key executives, and have associated costs that are manageable and budget-able. October Three’s actuaries and consultants have the experience and quantitative skills to tackle all sides of that problem.
If you have a Defined Benefit SERP — be it traditional or hybrid such as Cash Balance it will need an actuarial valuation. At October Three, more than half of our staff are either pension actuaries or in the process of becoming actuaries. Our consultants will work efficiently to determine your current plan costs an to assist you in understanding emerging future costs under scenarios that fit your view of the economy.
You fund your qualified plans. But if you’re like many organizations, you informally fund your non-qualified plans using a product that has been pitched to you. We don’t sell those products. This gives us a level of independence that outsiders such as brokers may not have. We can help you by evaluating proposals to find potential pitfalls. Remember that if it sounds too good to be true, it probably is.
Change-in-control agreements often known as golden parachutes are quite common in the executive ranks. If you are contemplating a sale, both you and the potential buyer will want your executives to stay on through the transition and then depart gracefully.
So, while they have a stigma attached to them, golden parachute agreements can be mutually beneficial. They’re also quite complex and so are the governing rules under 280G. Determination of the payment on account of change-in-control can be a challenge.
October Three can bring you an experienced team to look at the complexities of accelerated payment and accelerated vesting and put the appropriate value on them. And, if the result of those calculations is a bit larger than you had hoped, we know that the rules include many rebuttable presumptions. Of course, you’ll want the benefit of O3’s knowledge and experience in rebutting them.
Most of your executives have employment agreements. They’re the subject of negotiation. Your attorneys drafted them. But, for much of what’s in them, somebody else administers them and oftentimes, nobody knows their true costs.
O3 consultants have extensive experience here whether it’s figuring out how to administer the legal terms, alerting you to hidden or not so hidden costs, or making sure that the terms of those executive employment agreements and the plans to which they refer have provisions that behave well with each other.
When there is the need for an unfortunate parting of the ways, we have worked with both companies and their executives to develop cost-efficient programs to ease the exit. But, when they don’t work, experience tells us that executives may take a somewhat different reading of their agreements than you do. By being proactive, you have the opportunity to reduce the frequency of expensive litigation. But, if this is one of those times, O3’s experienced experts can assist both before and during litigation.
Benchmarking Nonqualified Plans+
When you design your executive compensation programs, most of the work is done through quantitative benchmarking. Base pay, bonus programs and long-term incentives are all benchmarked against peer groups. When it comes to the benefits part of executive compensation, it is usually finessed with a message such as, “that’s about right.” In our experience, when we asked why, we were told that the traditional executive compensation consultants just can’t figure out how to put a quantitative value on nonqualified plans and other executive benefits.
October Three is different. Our standard approach develops an annual amount for each of those programs that can be expressed as an annual dollar amount that moves with pay. It’s simple and understandable. It can be explained to shareholders. And it makes sense.
Contact John Lowell
John is here to answer any questions you have about how our Executive Compensation solutions can support your needs.