Deferred Compensation

Corrections or additions?

These articles were published in U.S. 1 Newspaper on November 17,

1999. All rights reserved.

In the print version, U.S. 1 wrote that PowerWorks will be

representing to the New Jersey Chamber of Commerce, the National

Federation of Independent Businesses, and New Jersey Newspaper

Association, among others, in negotiations with suppliers.

Correction: PowerWorks will be presenting to these

organizations.

Electric Power in Numbers

Power in numbers should be every consumer’s motto in

the newly deregulated energy market. Last week, when the New Jersey

Business & Industry Association announced that it cut a deal with

an electric power utility company to create a buying pool for its

16,500 member companies, businesses got a big wake-up call, says

Ray

Disch, an energy consultant and founder of Power Works LLC

(609-695-8100).

"Every day another aggregation is signed, the more data we

collect,"

he says. "We’re starting to get a sense that the additional

savings

is going to be about five to nine percent above the initial five

percent."

The NJBIA, which signed a bulk purchase agreement with the Arlington,

Virginia-based AES Corp., could see as much as 12 percent savings

in addition to the 15 percent cut already mandated by the Electric

Discount & Energy Competition Act. Earlier this year, Disch and other

experts in the energy industry had no idea where utility costs would

settle once the monopoly was broken and competition began to heat

up. Much as Disch predicted, though, the influx of out-of-state

companies

has forced New Jersey’s big utility companies (Rockland, PSE&G, and

GPU) to seriously consider negotiating with buying pools, or

aggregations,

formed by industry or trade groups.

Thus far, the big companies at least have a hold on the "do

nothing

customers," those who are happy enough with the 5 percent drop

in energy prices that was mandated last August 1 (U.S. 1, July 28).

Disch, whose company helps energy pools negotiate with suppliers,

saw a lot of that already. "In the late summer or early fall we

were signing up one or two clients a week, and then there was a little

tail off when that 5 percent cut came around," says Disch, who

founded the Triumph Brewing Company and has a BS in industrial

relations

from Cornell, Class of 1984. "When I had Triumph Brewing company,

I would have done the same thing. I would have looked hard at the

options, but when I got my bill in August, I would have pushed it

aside on my desk."

With three deals in one week between large buying pools and utility

companies, however, businesses and energy companies should be paying

attention. In addition to the NJBIA, the Chemical Industry Council

of New Jersey (which has Church & Dwight, among others) announced

that Allegheny Energy Supply, based in Pennsylvania, would supply

its members with 200 megawatts of daily power at nearly 12 to 20

percent

off current prices. "This has been a big week in the young history

of these aggregations," says Disch. "With the all the

publicity

on the success of the aggregations, we’re seeing more businesses

interested."

PowerWorks will be presenting to the New Jersey Chamber of Commerce,

the National Federation of Independent Businesses, and New Jersey

Newspaper Association, among others, in negotiations with suppliers.

It is in the interest of power companies to deal with blocks of

consumers,

even if it means offering much lower rates, Disch says. "It

reduces

the acquisition cost of individual customers, which is very attractive

to energy companies," he says. "It also increases your buying

power."

What pool you decide to join, says Disch, depends on "price and

politics," but every businesses should consider it. "When

you get to the national level, it’s a little tricky, but any

organization

at the state level should take a look at it," he says.

Or you can stay with your current supplier. By law, prices will drop

5 percent each year for the next two years, but after that, what’s

to gain may be more than monetary, says Disch. "PSE&G, as good

as they are at the pipes and wire things, haven’t been a breeding

ground for entrepreneurial people and they’re just having a difficult

time learning to compete, cut deals quickly, cut pricing, and add

new technologies."

Last week’s deals, in fact, could mean a loss of anywhere from $350

million to $500 million for the big companies, Disch estimates.

"Maybe

they think they’ll make it up in their franchises, but that could

start adding up," he says. "I suspect they didn’t like to

lose the NJBIA and Chemical Industry Council. I bet that went all

the way to the top floor in Newark."

Top Of Page
Deferred Compensation

Always craved a pair of golden handcuffs? If you are

in the banking business and yearn for the deferred pay that executives

in other industries are getting, you might consider the approach of

the newly opened corporate staffing regional sales office of Bank

Compensation Strategies at 3100 Princeton Pike, Suite I-D

(609-912-1121,

E-mail: pyoung@bcs-group.com). It provides supplemental

executive

and director benefit plans exclusively to the banking industry.

The 100-person, Minneapolis-based firm is a division of Clark Bardes

Holdings Inc. Patrick K. Young, the regional director, expects

the three-person Princeton Pike office will add two more staffers

next year. Young majored in finance and economics at East Carolina

University, Class of 1981, and worked for Merrill Lynch for 16 years

before joining Integrated Financial Services (IFS), when that firm

had a sales agreement with BCS to sell goods and services. Now the

former IFS employees in this office are all directly employed by BCS.

BCS not only helps design the compensation program, it will also get

you ready to present the program for approval by the board and help

with regulatory compliance. That’s what makes executive pay in the

banking business so crucial — the federal government is always

looking over the bank’s shoulder.

Nationally, says Young, BCS works with more than 5,000 bankers at

more than 1,100 institutions to provide more than $4 billion in

benefits.

"We don’t charge fees unless we successfully implement a plan

— after the board has approved it and the documentation is in

place," says Young. Fees run from $2,000 to $8,000 but are more

typically in the $5,000 range.

Banking is a tricky industry, not only highly regulated, but also

highly volatile. After a merger the human resource department is faced

with the task of aligning the salaries of executives from different

organizations.

"Two banks come together and you have to make the compensation

equal," says Young. "Sometimes that may mean reducing a

benefit

formula, usually not the actual salary." Another option is to

give the executives in the other organization a raise or compensate

them in another way. "We like to base everything on financial

performance and compensation, both relative to their peers."

First, BCS uses proxy statements to examine the salaries of other

banks in the area. Banks are unusual in that — unlike most

publicly

held companies — they must list the salary of everyone who makes

more than $100,000 and is on the senior executive level. In other

industries, only the top salary earners need be named.

"We try to understand what they have in place and look at what

other banks in the area are compensating their senior executives.

One of the things we often see is that they don’t have a deferred

compensation plan."

Young’s organization focuses particularly on the long term incentives

that are considered "non-qualified." These incentives can

be given to only 10 percent of the employees. In contrast, another

division of this firm, Bank Compensation Consulting, looks in detail

at "qualified" plans and the five elements of compensation

that can be given to all employees: salaries, bonuses, long term

incentives,

benefits, and perks. The qualified plans are subject to federal rules

and must be offered to everyone.

Young says the well-designed, executive deferred compensation plan

should do the following:

Give executives the opportunity to minimize taxation on

current compensation by shifting salary and bonuses into a

tax-deferred

environment.

Shelter deferred amounts from taxation until they are

actually received by the executive.

Give executives the flexibility to decide how — and

when — income is received.

Allow tax-deferred interest earnings on deferrals.

Provide an attractive earnings rate based upon an outside

index.

Allow distributions to be paid out in a lump sum or over

a fixed period of time, with interest continuing to be credited and

tax-deferred during the payout period.

Motivate increased performance by tying the bank’s

contribution

to the deferred compensation to Return on Assets (ROA), Return on

Investments (ROI) or other standards of bank performance.

Young says he tries to structure the compensation plans so that

the executive must stay with a company for 20 years of service before

getting the full award. What about someone who is fired? "If

terminated

for cause, typically you get nothing."

What about someone who is the victim of a merger? Those who have been

in place for 5 of 20 years will get one-fourth of their benefits.

Then, if they have a good plan, they will also get a lump sum payment

of a sum equal to 2.99 times the average salary for the prior three

years. "If the person averaged $100,000 you can pay an additional

$299,000 in a lump sum payment."

Young defends the salaries that may seem high to stockholders —

when and if they are tied to performance, as he likes to do. "The

amount that it costs you, relative to the executive’s performance,

is very low."


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