Executive Compensation - Hospitals and Other Not for Profits

By Bruce K. Knox
President of Professional Firm Executive Benefits Practice
Retirement Capital Group, Inc.

All industries struggle with the constant battle of balancing executive compensation issues. What's fair? What can we afford? How can we induce our key people to stay? These and others are compensation issues the Boards of Directors constantly contemplate.

Hospitals and other not for profits face the same dilemma, however, these entities typically are dealing with fewer options. Without the ability to offer compensation components such as stock options, profit sharing, etc., these entities must be creative to compete for and keep highly-qualified individuals both in their own industry and the profitable sector. A competitive retirement income package may be one area these entities can enter the executive marketplace on equal terms.

Let's examine this valuable component of an executive compensation package.

The Retirement Dilemma

Highly-compensated executives at hospitals and other not for profit entities are affected by the limitations imposed on tax-qualified retirement plans.

Typical sources of retirement income are as follows:

Social Security;
Qualified Plans,
Nonqualified Plans; and
Personal Savings and Investments.

Unfortunately, for many of the highly-compensated, the limitations associated with each of these are:

Social Security will only provide for 5 -15% of final year's compensation
Qualified Plans have maximum recognized compensation limits (defined benefit plan) and relatively low annual contribution levels (defined contribution plan).
Traditional Nonqualified Plans
- Such as a 457(f) plans require money to be subject to "substantial risk of forfeiture", continue to be subject to the sponsor's creditor risk, even after vesting, and benefits are taxable to the participant upon vesting, even if not paid
- Split Dollar Life Insurance arrangements effectiveness was severely limited due to regulatory changes in 2003.
- 409A regulations further impact the effectiveness of 457(f) and Split Dollar plans, in addition to many other traditional Nonqualified Plans.
Personal Savings and Investments, although viewed as an accumulation vehicle for retirement, are easily invaded for current material wants when not segregated into a separate "bucket" targeted for retirement

Most experts recommend targeting between 65 - 85% of the participant’s final year’s compensation as a guide for meeting annual expenses to maintain existing lifestyle. The chart below illustrates retirement income available from typical sources. Note that the shortfall will need to be made up from personal savings, or nonqualified plans.

Retirement Capital Group has designed the Insured Security Option Plan (ISOP®) to provide a secure funding method for new nonqualified retirement plans as well as for existing plans that are unfunded (paying benefits from current cash flow) or informally funded.

The ISOP®

Puts control in the hands of the individual participant and permits him to tailor a retirement plan to his personal pre- and post retirement cash flow requirements;
Enables a participant to invest in funds that match his risk tolerance level; investment options range from very conservative to very aggressive; and
Replaces the defined benefit method of funding retirement benefits with a defined contribution method designed to target a defined benefit.

Overview of ISOP® Plan Features

Note: This comparison is a general guide illustrating certain characteristics for the three types of plans and not meant to cover every specific characteristics of the plans.

In summary, the ISOP® delivers a secure retirement benefit to professionals for a fraction of the cost of qualified plans while providing significant flexibility in compensation package design to meet the personal needs of the key people driving the success of the firm.

The opinions, estimates, charts and/or projections contained hereafter are as of the date of this presentation/material(s) and may be subject to change without notice. RCG endeavors to ensure that the contents have been compiled or derived from sources RCG believes to be reliable and contain information and opinions that RCG believes to be accurate and complete. However, RCG makes no representation or warranty, expressed or implied, in respect thereof, takes no responsibility for any errors and omissions contained therein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this presentation/material(s) or its contents. Information may be available to RCG or its affiliates that are not reflected in its presentation/materials(s). Nothing contained in this presentation constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any investment product. Investing entails the risk of loss of principal and the investor alone assumes the sole responsibility of evaluating the merits and risks associated with investing or making any investment decisions.

Retirement Capital Group, Inc. (RCG) neither acts as legal counsel, tax advisor nor provides accounting services. Recommendations should be reviewed with appropriate tax advisor or counsel. This report contains proprietary and confidential information belonging to RCG (www.retirementcapital.com). Acceptance of this report constitutes acknowledgement of the confidential nature of the information contained within.