Compensation Plans and Methods

Qualified Retirement Plans

A Qualified retirement plan is one that meets the requirements of Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA) and is thus eligible for favorable tax treatment. These plans offer several tax benefits: they allow employers to deduct annual allowable contributions for each participant in the year the contributions are made, but taxes on those contributions (and earnings on those contributions) are deferred until withdrawn for each participant;  usually years after the initial contribution.   Qualified retirement plans are highly regulated and have, over the years, been the subject of significant additional legislation and litigation.  Plans must limit contributions, benefits, relative benefits between highly and non-highly compensated employees, the timing of distributions, and many other plan characteristics.  Failing to properly draft and operate such a plan can result in substantial income and excise tax liabilities to employees and employers, and expose employers to claims for benefits and breaches of fiduciary duty.  Employers need assistance in implementing, operating and, where appropriate, terminating such plans.  Residual liability resulting from such plans, even after termination, can be substantial.

Otto S. Shill, III is a Human Resources Planning Attorney with over 25 years of experience in advising employers and employees concerning issues related to qualified retirement plans.

Executive Compensation Plans and Deferred Compensation

Frequently, companies determine that certain key executives and other management employees should be compensated beyond base salary, normal bonuses and qualified retirement plan contributions.  Sometimes, that kind of compensation can encourage management employees to continue with an employer for an extended period of time.  Stock option plans, stock bonus plans, phantom stock plans, split dollar life insurance plans, deferred compensation plans coupled with Rabbi trusts, are all examples of techniques that have been popular tools in addressing these issues.  To accomplish that objective and still postpone the income tax consequences to those employees is a complex task.  The solutions are found in rules, regulations and decisions concerning tax and fiduciary laws.  In addition, new laws enacted in recent years have seriously limited everyone’s ability to defer income.

Otto S. Shill, III is a Human Resources Planning Attorney with over 25 years of experience in advising employers and employees concerning issues related to executive non-qualified deferred compensation and stock based compensation issues.

Employee Compensation and Bonus Programs

Bonus programs reflect a company’s definition of success, how that definition is measured, and the extent to which that measure is met. Bonuses are similar from company to company. The reason is that most companies subscribe to a pay-for-performance philosophy whereby bonuses are tied to two important measures: how well you are doing with respect to your manager’s expectations; and how well your company is doing with respect to its expectations.

Individual and group performance goals are hard to set, because they should be neither too ambitious nor too easy to achieve. It is best for employees to set next year’s performance goals once current year results are known. However, the manager should resist the temptation to base an employee’s performance goals on an outstanding year. When that happens, both employee and manager can become disappointed. In these instances, managers often give their employees discretionary bonuses at the end of the year to make up for the loss of performance-based bonuses.

Managers also give out discretionary bonuses – bonuses that are not tied to a formal performance target – when it is too difficult to establish formal performance goals.

Depending on the bonus program and your level within the organization, your bonus may be determined not only by your own performance, but also by the performance of your team or work group.

Otto S. Shill, III is an Arizona Human Resources Planning Attorney with over 25 years of experience in consulting with employers and employees concerning bonus plans and programs.

Ownership by Employees

Employers sometime determine that it is appropriate to allow key employees to participate in the ownership of a company.  In addition, employees or partners often become members of, or shareholders in, companies as a result of services they perform or intend to perform, rather than on the basis of capital that they contribute.  The issues associated with these types of arrangements are primarily income tax related and can be complex to solve.  Often solutions involve some sort of deferred compensation plan or program.   No company or business owner should engage in discussions or promises to employees or potential partners or other owners without the advice of a qualified attorney to assist in structuring appropriate plans and programs.

Otto S. Shill, III is a Human Resources Planning Attorney with over 25 years of experience in advising employers and employees concerning issues related to providing company ownership opportunities to employees.

Fiduciary Matters

Employers who adopt benefit plans for their employees frequently assume the role as the primary fiduciary for those plans.  The must make manage plan operations, interpretation of plan provisions, benefits distribution, and plan investment.  Those can be weighty decisions that affect the lives of employees for the long-term, and can have important regulatory implications.  Bad decisions or failures to comply with applicable rules can result in liability for resulting losses, taxes and penalties and expensive litigation.

Otto S. Shill, III is a Human Resources Planning Attorney with over 25 years of experience in advising employers and employees concerning fiduciary issues