Change in Pension Calculations Drives Up CEO Pay

For larger firms, an exceptional one-year increase in CEO compensation resulted from revisions to pension calculations.

S&P 500 firms last year funded an average $1.3 million to their CEO retirement benefits, compared to $467,000 in 2013—a 10.6% one-year increase, according to research released by The Conference Board.

The research found that among larger firms (with market capitalization of $5 billion or greater), these exceptional one-year rises in 2014 mostly resulted from decisions by many organizations to revise their calculations for CEO pension contributions. Key factors that prompted these changes include lower discount rates and longer life expectancy, as reflected in updated mortality tables from the Society of Actuaries.

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“In total CEO compensation reported last year by companies in the index drops to 4.4% if change in pension value is excluded from the calculation,” notes James F. Reda, managing director, executive compensation at Arthur J. Gallagher & Co. and co-author of the research report. “Changes in pension value only apply to defined benefit pension plans, including supplemental executive retirement plans, which are less common in smaller companies. Thus, similar volatility in pension calculations was largely absent among Russell 3000 companies.”

The median total compensation of CEOs of U.S. public companies in the Russell 3000 index soared 11.9% in 2014 over the previous year and as much as 34.7% over 2010. For these companies, equity awards (excluding stock options) represent 34.7% of the total value of the CEO pay package, and the median grant-date value of stock awards grew about 25% in 2014 due to market increases.

The analysis also found only a small part of CEO earnings comes from base salary; performance-based components now dominate. Annual bonuses were up in 2014, with the largest five-year increase rate among smaller companies. Stock awards continue their rise as the most important component of CEO compensation, even though significant variation in use is seen across industries and size groups. Growth companies in the information technology, materials and health care sectors are the only subgroups that continue to rely extensively on stock options.

Key Findings are available for download at www.conference-board.org/comp2015. The complete report, “CEO and Executive Compensation Practices: 2015 Edition,” will be released this autumn. To receive a complimentary copy when it becomes available, register at www.conference-board.org/directornotes.

Kaiser Predicts Cadillac Tax Implication on Benefits

Employers may revise their plans to avoid the tax by reducing options, or increasing costs, for employees, a report says.

Up to one in four employers (26%) could be subject to the Patient Protection and Affordable Care Act’s (ACA’s) tax on high-cost health plans (Cadillac tax) in 2018, unless they make changes in their plans, according to projections from the Kaiser Family Foundation.

Using data from the forthcoming 2015 Kaiser/HRET Employer Health Benefits Survey, the analysis also estimates that the share of employers potentially affected by the tax could grow significantly over time—to 30% in 2023 and 42% in 2028—if their plans remain unchanged and health benefit costs increase at expected rates. The foundation says it is likely that many employers will revise their plans to avoid the tax, at least initially, through modifications that could include reducing options for employees or shifting costs to workers in the form of higher deductibles and other patient cost sharing.

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According to the analysis, the tax is calculated on total costs for an employee across health benefit programs but assessed separately against coverage providers. If an employer uses multiple providers for health benefits, the employer and service providers may not know until the end of the year whether they owe a tax or how much it may be. The potential complications associated with allocating the tax burden and managing reimbursements to insurers (and potentially other service providers) may spur employers to simplify their benefit arrangements, and reduce the number of options for employees and the number of coverage providers. 

The Cadillac tax threshold may be surpassed for some employees of an employer but not for others if employees are able to choose different amounts of benefits. This may make employers reluctant to give employees the ability to select benefit options that have the potential to trigger the tax.

NEXT: Limiting FSAs and increasing employee costs.

One current benefit that may be at particular risk is the option to contribute to a flexible spending account (FSA) because, as currently structured, it allows employees to add up to several thousand dollars to their benefit costs. These plans are separate from the core health insurance options provided by employers, so limiting or eliminating them provides a way for employers to lower costs without affecting the plans that most employees rely upon and value the most. Employers also may consider reducing other ancillary health benefit options (e.g., critical disease or hospital indemnity plans) offered on a pre-tax basis if the cost of the core health insurance plans approach the tax thresholds.

Discussions about employee health benefits often focus on giving employees choices and sometimes focus on making employees aware of costs by having them pay all of the additional costs if they select more expensive plans, the report says. Under the Cadillac tax, a significant additional cost for plans that exceed the threshold is borne in the first instance by the employer, who may be reluctant to permit employees to elect these plans if it can be avoided. Employers could structure the employee contributions for plans above the threshold so that they include a surcharge, which would pass the tax incidence on to the employees who selected the plans. Doing so would require knowing before the beginning of the year if, and (perhaps roughly) by how much, the options selected by an employee would exceed the threshold. This approach would be possible for an employer sponsoring multiple plan options on its own or offering insured health benefits through a private exchange (where the insurers could collect the additional contribution).

Employers considering this design would need to assess whether, and which, employees would be willing to pay a high surcharge to elect these more expensive benefit options, the foundation says. Plan choice generally results in employees that are less healthy selecting more comprehensive benefit options, and putting a surcharge on these options would increase the adverse selection against these plans, increasing their costs. If the additional contribution for an employee was small (for instance, the excess cost above the threshold is modest), enrollment may not fall too much, but if the additional contribution was large, or grew larger over time, enrollment in the more expensive options would likely shrink and skew less and less healthy. This could affect the viability of these plan options.

The report also explains how the Cadillac tax works. The report is here.

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