The purpose of this Post is to highlight the question of whether, in today's economic environment, deferred compensation monies should be secured with a secular trust. This Post is Part 7 of a 7-Part series addressing compensation adjustments that Compensation Committees could consider in order to continue to incent and retain their executive officers in today’s economy.
Background
It is well-settled that the assets of non-qualified deferred compensation programs are subject to the claims of the company’s general creditors. Securing the assets with a Rabbi Trust does nothing to change that answer.
With today's market volatility and many companies struggling to survive, some executives may not value deferred dollars because of the fear that these deferred dollars will be swept by the company's creditors. And if the executives do not value the program, then the program is not providing the necessary incentive and retention benefits. So does it make sense to consider a different vehicle or approach?
Rise or Resurgence of the Secular Trust?
We "might" see a small resurrection of the secular trust (where the assets are held outside of, and apart from, the company and are not generally subject to the claims of the company’s creditors). With a secular trust, taxation to the executive is generally triggered at the time the monies are transferred to the trust, though the timing of such taxation could be deferred if certain vesting schedules or clawback provisions are implemented as part of the initial secular trust design. And too, any asset growth within the secular trust could be captured outside of the company's balance sheet and outside of the company's proxy statement.
Related Posts
Blog posts that are part of this 7-part series include:
- “Considerations with Respect to Upcoming Equity Grants” (Part 1 of 7)
- “Consider Changes to Increase Cash Flow” (Part 2 of 7)
- “Address Outstanding Performance-Based Equity Awards” (Part 3 of 7)
- “Retention Packages to Discourage Poaching” (Part 4 of 7)
- “Revisit Stock Ownership Policy Requirements” (Part 5 of 7)
- "Modifying or Terminating a 10b5-1 Trading Plan" (Part 6 of 7)
PartnerTony’s multi-disciplinary legal practice focuses on executive compensation, ESOPs and employee benefit arrangements (including their related tax, accounting, securities and corporate governance issues) in the United ...
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