Pub. 14 2017 Issue 2

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S 20 By Trey Deupree, Equias Alliance C ompensation is one of the most effective tools in moti - vating executives to higher levels of performance. How- ever, in today’s market, the compensation committee and the board have a variety of alternative compensa- tion approaches to select from to most effectively at - tract, motivate and retain executive talent. Banks are seeking max- imum performance from executives while executives are seeking income and, especially, retirement security. Although most banks do a fully satisfactory job retaining solid performers by paying competitive salaries and bonuses, they are uncertain what to do when it comes to providing something truly special for their top executives while, at the same time, prudently managing expenses to protect the interests of shareholders. Saving for Retirement According to the trade association the Insured Retirement Insti- tute, baby boomers are turning age 65 at a pace of roughly 10,000 per day, and if you’re a baby boomer who is fast approaching retire- ment, you might be wondering if you’re on target with your retire- ment savings goals. Compounding the problem are IRS rules requiring no discrim- ination in favor of higher paid employees. Amounts that can be contributed to qualified retirement plans, such as 401(k) plans, are subject to statutory limits. The 2017 maximum pre-tax contribu- tion is $18,000, with a catch-up contribution limit for employees aged 50 or older of an additional at $6,000. Therefore, qualified benefit plans do not fully meet the financial needs of executives be - cause of their low limit on annual deferrals. Today, financial planners, advisors, and consultants all seem to agree that retirees should plan for replacing 60 percent to 80 per- cent of preretirement income during the retirement period. While the right income-replacement ratio is highly dependent on a num- ber of factors, most bank executives will not reach this level without help from nonqualified benefit plans. 401(k) Look-Alike Plan One way banks can address these limitations is by offering a 401(k) look-alike plan. This nonqualified deferred compensation plan allows a select group of executives to make voluntary defer- rals on a pre-tax basis with a matching contribution from the bank. Interest may also be credited to the executives account. Executives defer paying income taxes on money contributed now until retire- ment, a time when they may be in a lower tax bracket. By tying the matching contributions to performance bench- marks, such as department and individual criteria, the executive is motivated to achieve higher results. When such plans are properly designed, if the shareholders do well, so will the executives. Note: As with any incentive-based compensation, matching contribu- tions to the 401(k) look-alike plan should not provide executives with incentives to take imprudent risks that are not consistent with the long-term health of the bank. Deferring income into nonqualified plans does have its disad - vantages. For the bank, nonqualified plans—unlike their qualified counterparts—are not favored by a current tax deduction. The tax deduction is delayed until the officer receives the benefit. There is also risk because nonqualified plans need to remain un - funded to achieve the desired tax deferral. Anonqualified planmust remain just a promise to pay a retirement benefit. It is a liability on the bank’s books and nothing more. In the event of bankruptcy or company takeover, executives in the plan stand to lose some or all of the money in the nonqualified plan. Summary Knowing that retirement security is a primary concern of your executives, it may be time for your bank to rethink its approach to executive compensation. By adding a 401(k) look-alike plan, the ability to attract and retain talented executives will be greatly en- hanced. n Reward Key Officers with a 401(k) Look-Alike Plan