Masonry Magazine June 1961 Page. 5
EXECUTIVE COMPENSATION
(Last of a Series)
By I. Austin Kelly III
President, National Employee
Relation Institute, Inc.
In this concluding article of a series, I. Austin Kelly III, a nationally-recognized consultant, answers a few of the questions commonly raised by contractor executives on how they can most economically and best set up a schedule of separate executive compensation and pension plans tailored to the needs and desires of their firms and employees.
Think twice before deciding on a contributory plan. While it appears to have many advantages it means management loses control over changing provisions of the plan and can be blocked by actions of employees.
The man across the desk from me was the owner of a small firm and looked worried. "Kelly," he said, "I've been tinkering with the idea of a separate executive compensation program for over a year. But the more I look into the plans people are trying to sell me, the more confused I get. I've got a list of questions as long as my arm and I could use some straight answers. Can you help me?"
This owner's problem is typical of situations I run into time and time again. These men recognize the value of doing something extra for their key men and for themselves but they also know that such a program involves an investment which, over the years, will run into thousands of dollars. It's a decision which calls for solid facts. There's no room for confusion.
So the purpose of this concluding article is to sort out the most vital questions such a decision involves, and answering as many of them as space will permit. Let's begin.
"Must a firm be incorporated to install a tax-deductible pension or profit-sharing plan?"
This is a common question, because in the past partnerships and proprietorships assumed that they were not eligible for a revenue-approved plan. Actually, they were if the owners themselves did not participate. Today, this has all changed. A partnership, for example, can retain its present tax advantages, yet incorporate solely for the purpose of allowing the owners to enjoy the additional benefits of a company pension or profit-sharing plan. They can do this even if they are the only employees eligible to participate in the plan. The same applies to the sole proprietor.
"What are the advantages of a pension plan over profit-sharing?"
That depends. In some cases, profit-sharing may have the advantage. The proper choice depends on ages of the participants and, particularly, those of the key men and owner. If this group is relatively young in their 20's and early 40's profit-sharing may be the wisest choice. Why? Because younger persons have plenty of time to accumulate sizable profit-sharing sums.
Obviously, the opposite is true for executives in their 50's and 60's. In this situation, a pension plan works far better because it guarantees a specified percentage of income say 30% to 40% at 65. It also means that a much larger share of the firm's annual deposit can be credited to these key persons. In the case of an owner in his early 60's, it is not unusual in a small company for 70%, 80%, or even 90% of the pension money to go into his personal fund. It has to in order to produce the sum necessary to pay the stipulated pension on his larger salary.
"Should employees be required to contribute to the pension deposit?"
Many companies start out with the idea that this is desirable. I try to dissuade this. True, it is a means of reducing the company's cost (you can require an employee to put in as much as 40% of salary in order to participate) and it does give the employee a greater feeling of participation. But this is actually one of the drawbacks. The employee may feel he has as much say about the plan as the company does. Should you ever want to change reduce the benefits, for example you may run into serious trouble.
There's an even more significant reason, however, for having the company pay the full amount. When an employee contributes, his share must come from taxable income. In the case of the higher salaried executives, this often means that each $1 they pay (Continued on page 13)