Design Flaws May Lead To Excessive Risk


    Design flaws within some equity programs may have encouraged executives to take excessive risks that were contrary to the long-term financial interests of companies and their shareholders and the struggling economy may have highlighted the extent to which this happened, says ‘Using SERPs to Create a Balanced Executive Compensation Program,’ a report by executive benefits consultancy firm Fulcrum Partners LLC. Bruce Brownell, one of the company’s founders and a specialist in IRC 409A, says “Well-balanced risk and rewards are one of the foundations of an effective compensation program. Over the past two decades, stock-based incentives have been the primary means used by companies to motivate and retain valued executives. But the current economic downturn has exposed potential weaknesses in this approach. It is becoming increasingly clear that stock price alone does not always correlate with either executive performance or sustainable long-term shareholder value.” The report highlights that in many situations the introduction of a supplemental executive retirement program (SERP) helps promote a more diversified ‘portfolio’ approach to executive rewards.