Advisors say success can depend on getting access to the top people in the firm
When advisors recount war stories–the times they won or lost the lucrative deal–the factor that often proved crucial was not their selling skills, financial expertise or the innovativeness of the plan. Rather, the key was whether they gained access to the parties who counted: the men and women at the top.
"Whether a company adopts a plan with us is a function of our building strong relationships with the decision-makers," says Herb Daroff, a partner at Baystate Financial Partners, Boston, Mass. "In the past, we might have made recommendations the company liked. But because we didn't develop those relationships, somebody else–maybe the controller's brother-in-law–got the business."
Adds Kevin Rex, a principal at Summit Financial, Parsippany, N.J.: "If you can't get past the gatekeepers to the decision-makers, chances are you'll end up spinning your wheels and doing work for nothing."
Who holds the levers of power over the executive benefits plan? Sources interviewed by National Underwriter agree that at most small businesses–typically firms with fewer than 100 employees–the CEO and/or president will almost always have the final say. But depending on the firm's size, structure and corporate culture and the political clout of individual employees, other players will provide input, even if they don't vote on the plan.
Among them: the chief financial officer; human resources or benefits director; accountant, controller and/or treasury officer; and attorney. At larger companies, more people who function in one of these or a related capacity may also have a say.
Daroff notes that he's drafting a plan involving 29 participants at a firm with approximately 400 employees. C. Haines, a chief marketing and sales officer at Cbiz/Benmark, Atlanta, Ga., says the firm's clients, all community banks, almost always seek approval from their boards of directors.
Success in selling the executive benefits package hinges not only on identifying and securing access to the company's top brass. Also crucial, observers say, is the ability to tailor presentations to their concerns.
H.R. reps, for example, tend to focus on incentives that will best secure plan objectives, including the so-called three Rs: recruit, retain and reward. CFOs, while supporting these goals, also have to be mindful that plan costs can be carried without unduly impacting key measures of business performance. Two ratios that bear close scrutiny: executive compensation dollars as a percentage of company assets and as a share of gross revenue.
CFOs, to be sure, aren't the only ones eyeing the numbers. Outside parties–shareholders, financial analysts and, at times, customers or suppliers–may also weigh in on the merits of an executive comp plan. Daroff cites one client, an architectural firm, which had to revise its plan after submitting financial statements to prospective customers as part of a bidding process on contracts.
"We're revising the nonqualified plan from one based on a defined benefit to a less desirable defined contribution arrangement," says Daroff. "You could try to explain [to prospective customers] the enhanced retention value of the better plan. But these are blind bids and the last thing they want is a verbal explanation to go with it."
Corporate attorneys, for their part, want to ensure that plan recommendations don't get so creative as to prompt an audit by the Internal Revenue Service. Nor do they want to see the plan made untenable in three or five years by new federal regulations.
"Companies have gotten hit time and again with IRS challenges," says Joseph Maczuga, president of CPSI Group, Troy, Mich. "We've seen that happen most recently with equity split-dollar arrangements. The client wants to know the plan can be sustained over the long term."
For companies crossing the line on new 409A restrictions, for example, that's not in the offing. Prominent among the IRC rule's provisions are guidelines on elections and distributions. For those execs who elect to defer compensation after Dec. 31, the election cannot take effect until 12 months after the election date; the first payment must be deferred for not less than five years from the date such payment would otherwise have been made.
Michael Goldstein, president and general council of BenefitsGroupWorldwide, Los Angeles, says 409A will force many firms to amend, or entirely revamp, their executive compensation packages. And given the added complexity of nonqualified plans mandated by the rule–experts anticipate a proliferation of scheduled distribution accounts and "rolling" three- and five-year distributions from plans that comprise multiple accounts–small businesses will increasingly place a premium on the ability to service their plans easily.
"Servicing is becoming a much bigger issue, almost as important as plan design," says Haines. "Company execs want to know how the plan will be booked and administered, and how participants can access reports."
