A Review of Executive Compensation - It’s not just about Salary and Bonus anymore
by Rob Kimball, Financial Advisor

Many companies are meeting the needs of their key people by focusing on different forms of compensation versus the traditional approach of a salary and bonus arrangement. Executive/Owner compensation is comprised of the following forms of remuneration:

1) Salary
2) Bonus – short term incentives
3) Benefits
4) Pension Plans
5) Long Term Incentives

- supplemental pension
- stock options or purchase plans
- profit sharing plans

Given the high tax rates applied to salary and bonuses, it makes sense to consider other forms of compensation that in many cases provide a tax-deductible expense to the company and a non-taxable benefit to key employees. In this article we will highlight four of the most popular ways to reward people with Supplemental Benefits and Enhanced Retirement Savings.

Individual Pension Plans - IPP

When business owners and senior executives have incomes that exceed the income to maximize RRSP contributions, they may want to explore the advantages of an IPP.
An Individual Pension Plan (IPP) is a personal defined benefit pension plan where an individual can accumulate a greater amount of assets than in a RRSP. For example, an owner or executive over the age of 50, can enjoy an annual maximum that is at least $6000 more per year than the annual RRSP maximum. Contributions are fully tax-deductible to the corporation. There may also be an opportunity to take advantage of earnings from prior years to qualify for a large lump sum contribution that is fully tax-deductible as well. One other advantage is the creditor protection that comes with the pension legislation that you do not get with most RRSP plans.

Executive Long Term Disability Coverage

This is an area where disaster could strike and many employers and employees are unaware of how they are covered in the event of a sickness or an accident. There are two major problems with the way most traditional benefit plans are set up with respect to Long Term Disability (LTD). First, the owner and/or shareholder may have sources of income other than salary that are not covered by the group plan. Also, in the event of a disability the owner may continue to draw income from the company which would negate a disability claim. An executive group is vulnerable when their incomes exceed the group disability maximum. Often executives are unaware of this maximum and only find out when it is too late. There are special executive LTD plans available that address all the areas a traditional group plan doesn’t. They cover all sources of income, including annual profit of the company, income splitting, bonuses, and they can top up coverage to make up for the shortfall due to the limit on the group plan. These plans also come with a guaranteed premium to age 65, with superior definitions, and are totally portable to any other employment.

Critical Illness Coverage

One of the fastest growing benefits in the last five years is Critical Illness Insurance. This solution fits in between Disability Income and Life Insurance. Getting sick is not something any of us like to think about. But it can happen. In fact, your risk of being diagnosed with a critical illness before age 75 is higher than your risk of dying in that time. But thanks to improvements in healthy living and medical science, there is a good chance you can recover and get on with life. But getting better costs money. Treating and coping with illness can mean significant and often unexpected costs - costs that may not be covered by provincial or employee health plans. This is where Critical Illness coverage can help. A tax free lump sum is paid to you when you are diagnosed with one of the covered critical conditions. This money can be used anyway you want. For example, you may want to find the best health care available in the world, hire a nurse or caregiver to help you at home, replace lost income, protect your retirement plans, or take a vacation or reduce your workload to help you recover.

Cash Value Life Insurance with Shared Ownership

Many valuable goals can be achieved when the cost and benefits of a life insurance policy are shared between a corporation and a key person in the company. This arrangement is often used as a retirement planning tool for an owner or executive, to protect and reward a Key Person in the organization or to fund a shareholders agreement. This strategy works by having two different parties sharing the ownership of the policy. One party would own the tax free death benefit and the other would own the tax sheltered investment account. Upon retirement, the ownership of the policy could be transferred entirely to the individual, thereby acquiring an estate planning solution and an option for tax effective retirement income.

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