Case Study: Deconstruction and Redesign of the Executive Compensation Program for a Company with Long-Term Growth and Retention Objectives

This blog is an excerpt of Anne Tyler Hall’s book “Case Studies in ERISA: Why It Matters And How It Benefits You, A Plan Sponsor’s Guide To Employee Benefits Legal Compliance”  request your free digital copy of the book here.


Client: A global firm based in the Southeast with more than 400 employees. It had an existing, but ineffective LTIP and deferred compensation (DC) plan. The LTIP was intended to incent company and individual performance (although the plan design was flawed, and it was not driving performance as the company intended). The DC plan was intended to provide certain executives to defer compensation in excess of amounts allowed to be contributed under the company’s 401(k) plan.

Goal: To optimize long-term company performance by implementing an effective incentive plan.

Plan: Deconstruct the existing long-term incentive plan (LTIP) and DC plan (that was not driving performance as they intended) and completely redesign the incentive compensation program to optimize long-term company performance.

Process: Firstly, Hall Benefits Law reviewed the alternatives for deconstructing the existing LTIP and deferred compensation plans without violating Code Section 409A. Hall Benefits Law then implemented an executive compensation program designed to accomplish the company’s short and long-term objectives.

LTIP: Existing Plan Design Features

The following provides an overview of the company’s existing LTIP design features:

  1. The LTIP in place, a non-account balance plan, was designed as follows:
  • A Committee selected eligible participants and established Company-wide performance goals.
  • Participants were awarded synthetic (i.e., phantom) stock when the company satisfied certain performance goals.
  • Initial payments for each goal were made only when:
    • the employee terminated employment;
    • the employee attained age 65; or
    • upon death, disability, or change in control of the company.
    • A second payment occurred on the first anniversary of the initial payment.
  1. The company found that LTIP participants disliked the payment triggers. For example, if a participant earns an LTIP award when he is age 40 and remains loyal to the company throughout his career, he could not obtain payment for the award until age 65 (or at termination of employment, death, or disability.) The company felt that the payment terms encouraged employees to leave the company solely to receive their LTIP award payment (amounts that totaled well in to six figures for certain participants).
  2. With our guidance, the company decided that it wished to implement a different non-account balance design to drive specific company performance. However, termination of the company’s existing LTIP would result in the following prohibitions pursuant to Code Section 409A:
  • Prohibition on the company’s payment of benefits from the terminated LTIP (other than payments made in accordance with plan terms) for 12 months after the date the plan was terminated; and
  • Prohibition on the adoption of another non-account balance plan for three (3) years from the date of LTIP termination. Under Code Section 409A, an employer must not adopt a new similar type deferred compensation (i.e., non-account balance plan) within 36 months from the date the employer first took the board action needed to terminate the such plan irrevocably. Because the company did not want to prolong the waiting period for adopting a non-account balance plan, we kept the existing LTIP intact. We then discussed two alternatives for handling the LTIP as follows:
    • Merge the LTIP into the new plan (maintaining the original payment dates, which was the root of the plan redesign); or
    • Freeze the LTIP (preventing participants from earning any additional benefits).

Ultimately, the company elected to freeze the LTIP. However, there were still Code Section 409A legal compliance issues to avoid, including:

  • The appearance of any “substitution” (which we analyzed based upon facts and circumstances); and
  • Any variation in time and form of payment under the LTIP, which would result in a plan failure.
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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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