By:  R. Scott Richardson

Attracting and retaining the most talented senior executives are key responsibilities of the bank board. But how do you do that, especially in an age where compensation programs are changing and there is more pressure on bank boards to design compensation programs that reward performance?

News Designing the Pay-For-Performance SERP: Executive Retirement Plans Transformed Attracting and retaining the most talented senior executives are key responsibilities of the bank board. Jan 8, 2014 Category: Articles By: Scott Richardson Attracting and retaining the most talented senior executives are key responsibilities of the bank board. But how do you do that, especially in an age where compensation programs are changing and there is more pressure on bank boards to design compensation programs that reward performance?

For key employees, one of the more popular ways to provide wealth accumulation opportunities is through a nonqualified deferred compensation plan, more specifically a Supplemental Executive Retirement Plan or SERP. Traditionally, SERPs have been defined benefit (DB) plans, where the bank promises to pay a fixed dollar amount (e.g., $50,000 per year) or a percentage of compensation (e.g., 25 percent of final average salary) during retirement. Defined benefit SERPs offer the highest attraction and reward value, and are often used to address the disparity between key and rank-and-file employees. (Typically, rank-and-file employees have a greater percentage of their income replaced in retirement than executives using traditional retirement plans.)

Accounting rules dictate how the bank should expense and accrue for the benefit. If the participant remains employed by the bank until retirement, the benefit will be paid. Defined benefit SERPs are not tied directly to bank performance, and this has led to some criticism and resistance to implementing them.

SUMMARY:  A taxpayer with modest income surrendered a policy on his life. On that date, the policy was subject to a significant loan. The Tax Court held that the amount of the loan in excess of the taxpayer’s investment in the contract was includible in his income and was not excludible as a discharge of indebtedness even though he was insolvent. The judge then applied a three-factor test in finding taxpayer was not liable for an accuracy-related penalty because of good faith and reasonable reliance on professional advice.