The Supplemental executive retirement plan (SERP) is a non-qualified plan for the retirement of a company’s key employees such as the executives, which provides additional retirement benefits that will usually have not been covered in the other retirement plans, and may either be defined benefit or defined contribution plan. A defined benefit plan is one which gives a specified level of retirement income on the employee’s service, pay or even both, while a defined contribution plan is one which a given percent of compensation or a specific amount is used to determine the contributions. In the defined contribution plan, benefits depend on the investment returns. SERPS can be classified into restoration plans and target plans and both are designed to develop a competitive retirement benefits for the executive employees. SERPS differ in companies, especially between profitable and non-profit organizations, depending on the amount of money that each type of organization has set aside for the company’s executives.
SERPS have been thought to have several advantages in that they are flexible thus they can be custom-designed in order to suit the specific needs of an executive employee (Bolicoli.com). They can be used to pay for the employee’s life insurance and thus cater for the beneficiaries of the executive upon death. This retirement plan is also beneficial since it does not incur any government taxes as it is exempted and is not counted as income. This means that the money cannot be guaranteed by the government and thusly, could be diverted for other uses. The plan does not limit the amount of annual contribution and thus the benefits can be increased at any time (Lobosco, 2015). However, one of the disadvantages of this retirement plan is that the deductions are made by the company from the amount upon payment and since these payments lack a definite limit, the amount deducted may be too much.
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Profit organizations are able to provide retirement benefits for their executive employees since they work to increase the revenue earned by the organization and the profits made annually. As such, these companies are able to defer the payment until the retirement period of a given executive comes. Since this retirement plan is funded by the company’s own cash flows, the amount becomes taxable when paid to the retiring executive as income. At this point, the payment is tax deductible to the company and thus the employee is given the agreed amount after the deduction.
Wal-Mart Stores Inc. adopted the SERP to pay highly compensated employees without the money having to undergo taxation by the IRS (Wal-Mart Stores, Inc. 2009). This retirement plan was in accordance with Employee Retirement Income Security Act (ERISA). Retirement benefits of the highly-paid management are deferred until the employee is ready to retire, after which the payments are made to their accounts according to initial agreement with the company. This is done within a 90-day period after the employee’s pay date. The money for the retirement plan is funded by the organization’s profits. Upon death, the money is paid to the employee’s beneficiaries (Onecle, 2013)
Non-profit organizations on the other hand have increased the habit of giving SERPS to their executive officials in order to retain them and to reward them for their long service in serving their organization. A good example is the Great Hudson Valley Family Health Center Inc. which only recently embraced this form of retirement plan for its executive employees after consulting auditors and compensation specialists. Being a non-profit organization, just like others, it is considered to be draining resources by having to compete with profit organizations to provide higher levels of compensation to their executives. For this reason, it is exempted from paying tax by the Internal Revenue Code (IRS, 2016). It thus, has to work around the limited resources within the organization to ensure that they provide fair compensation benefits for their employees as a reward for their high performance and qualifications.
The organization considers variable compensation as a way of giving compensation to its employees. The company has an incentives program through which employees are rewarded for having achieved certain pre-established performance objectives that may be concerned with operations of the organization or finances as this will ensure that the organization is successful (HG.org Legal Resources.). The incentives also act as a way of motivating and retaining the skilled employees, without necessarily infringing on the profits of the organization that would have been used for the intended charity work. As a result, these incentives are added to their salaries based on cost reduction or program goals instead of accumulating the final retirement benefits.
As a way of dealing with employee compensation, the organization has increased the basic salaries of their executives in order to reduce pressure on the amount of compensation being offered. This directly depends on the size of the company which ultimately determines the annual revenue that the organization makes. The organization has adopted this policy since it is less complex in comparison to the retirement plan offered by the IRS.
It has also opted to give low pay with generous benefits in order to retain its employees, a move that most non-profit organizations have adopted (HG.org Legal Resources.). This is because increased benefits portray the competitiveness of an organization without having to spend a lot of the firm’s money. High benefits have increased the modesty of the company and this makes it appealing to people with technical skills who may opt to work for the company. Such employees are mostly those employed in accounting, IT and human resource departments. These generous benefits act as compensation for the employees who can easily be retained by the company which is usually in competition with profit organizations.
When comparing the SERPS offered by the two organizations, both sectors have a number of similarities. Since the retirement benefits plan usually are undefined, this means that they lack the minimum amount requirement that is stated as a requirement for defined benefit plan by the Internal Revenue Code (IRC, 2016). This means that the organizations in both sectors exercise flexibility over the amounts that they give to their executive employees and thus, the probability of asset volatility due to large cash flows is highly reduced on the part of both of them. This also gives a company the freedom to choose which executives to give the retirement benefits to, as they are not ruled by any government policies. A company is thus able to predict its financial capability once the benefits have been paid out. This also means that in the case where undefined contribution plan is not paid, the company gets an increased amount if revenue and is thus able to use its resources in a flexible manner. Another similarity between SERPS by profit and non-profit organizations is that in both cases, the amount paid is not taxable.
One difference that is obvious between the payments of SERPS in the two types of organizations is the time and method of payment. Since profit organizations are able to generate money for payment from their profits and investments, they are able to accumulate the amount and pay it at the end of the executive’s service, when they are about to retire. However, in the case of non-profit organizations, accumulating the amount in order to give a deferred payment may be strenuous to the company and thus most of them opt for alternative payment plans in order to ease on the amount that executives are to be paid with. This helps to ensure that such organizations re not plunged into financial bankruptcy and are able to maintain their officials and other employees.
It is important to note that giving out SERPS creates the mentality of entitlement among the executive employees. In order to deal with this, most board members in this era have found alternative ways to give this long-term compensation based on performance so that it is not necessarily kept until the executive is about to retire. On dealing with the feeling of entitlement, the companies have sought to give compensation to executives depending on the quality of the work done so as to ensure that they improve and sustain their annual performance so as to ensure that the non-profit organization is not experiencing a loss in the annual amount of revenue they earn.
SERPS, when not given as huge sums, may force certain executives to try and leave the company in search of a separate firm that gives more money. A firm can use the compensation as an incentive to hold onto the employee by providing restrictions that will reduce the amount of benefits they were to earn or ultimately cause loss of benefits if they leave the firm. This way, employees will be retained as they await to receive their benefits.
References
Bolicoli.com. (N.d.). Supplemental Executives Retirement Plan . Retrieved from https://www.bolicoli.com/supplemental-executives-retirement-plan-serp
HG.org Legal Resources. (N.d.). Compensation In Nonprofits: Why Variable Compensation Is An Important Consideration In The Design of Effective Compensation Packages .
Retrieved from http://www.hgorg/article/asp?id=6975
Internal Revenue Code. (IRC). (2016). Retirement Plan Information for Tax Exempt Organizations . Retrieved from https://www.irs.gov/charities-non-profits/retirement-plan-information-for-tax-exempt-organizations
Lobosco, K. CEOs Get Retirement Benefits You Don’t . CNN Money. Retrieved from http://money.cnn.com/2015/10/28/retirement/ceo-retirement-benefits/
Wal-Mart Stores, Inc. (2009). Supplemental Executive Retirement Plan . Onecle. Retrieved from http://contracts.onecle.com/walmart/executive-retirement-2009-01-01.shtml
