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There is often confusion among Compensation Committees regarding Supplemental Executive Retirement Plans or “SERPs.” While the prevalence of use is high – somewhere between 40% and 50% of companies use SERPs as an element of their compensation plan – the available data on the actual value of SERPs is low, making benchmarking and peer comparisons difficult.
Principal Greg Swanson discusses the potential internal and external consequences of not fully analyzing and evaluating the value delivered through a SERP.
Transcript
"One of the most important things that we can do for our clients as independent advisors is to help them get into a position where they can make thoughtful, informed decisions. One of the areas where we often see confusion, or the lack of a sense of making an informed decision, is SERPs, or Supplemental Executive Retirement Plans. Within the banking industry, the prevalence of SERPs is quite high. Depending on any group of companies you might look at, maybe 40 to 50 percent of those companies will offer some form of supplemental retirement to their senior executives. With the other components of pay like salary and short-term incentives, or long-term incentives, or equity awards, there's a lot of available, useful information around those components.
With SERPs, whether it's through surveys or through even the proxy statements, surveys are only going to give you prevalence-type information, but not give you information about the value delivered through the SERPs. Proxy statements, while there is a column in the summary compensation table related to SERPs, that information, for purposes of benchmarking or structuring compensation internally, is really not useful information.
The challenges associated with setting SERP to the side and not incorporating it on a holistic basis show up in both on an external basis and internal. If you're doing benchmarking, compared to a group of peer companies, and you're only looking at cash compensation and maybe equity, or total direct compensation, which is commonly what's looked at, and you're leaving SERP out to the side, if you feel good about your competitive positioning, looking at just cash and equity compensation, and you don't provide a SERP to your executives, the likelihood that you're under-competitive is really high.
On the flip side, if you do provide a supplemental retirement arrangement to your executives and you've only benchmarked the components that pay of cash and equity, you likely are going to be over-competitive once you add in that SERP component. The reason is that some of your peers are going to have SERPs in place for your executives, but not all of them. From an internal perspective, it's really important when you are incorporating, if you are incorporating SERPs, to know the value that you're delivering in compensation so that, on an internal equity basis, you understand what's being delivered through that vehicle.
There's the big question of whether or not to even incorporate a SERP to your total compensation structure. For some banks, it's not going to be the right fit. From a cultural perspective or from a philosophical perspective, SERPs aren't going to be something that you incorporate. For those of you that say, "It does fit for our culture, it does fit our comp philosophy and we like that as a long term retention tool," it's going to be really important for you to be able to understand the value that's delivered through that vehicle in light of your other compensation components in your design process.
A couple of challenges that we see with compensation committees is that while it may be the right vehicle, and culturally and philosophically you feel like a SERP is the right thing to incorporate—for lack of full information and feeling like the compensation committee can make an informed decision, that the decision is stable—decide to put aside, and that's not good. On the other hand, if you do put it an SERP arrangement and don't have that information, we find the compensation committees sometimes are putting in a SERP and wondering, "Did we go the right thing?" That's not a good result either.
Either way, what's important is that whether you decide to put in a SERP arrangement or what kind of SERP, or what the design looks like, the important thing is that it's informed and you feel good about the decision that you made. What we recommend to compensation committees that they do is really grapple with what value is being delivered to that executive for that year of service or performance is turn the SERP issue into not the benefit out in the future but what value is really being earned in this given year of service, and then incorporating that with the other components of pay to get a holistic view of comp."
