At a time of the year when a company’s board of directors and its compensation committee are focusing on shareholder-related disclosures and summaries of the company’s compensation practices, they also should focus on the purpose, relative importance and value to employees and technical compliance oversight matters relating to the company’s compensation and benefit programs, given the likely changes in the demographics of company’s workforce and business during the recent economic decline as well as significant changes in the costs of benefits and regulatory compliance considerations. For example, the assumptions under which compensation and benefit programs were established may not continue to be valid in the current economic and business environment and current programs may not provide the same level of importance and incentive to employees as existed when the programs were established. A significant portion of a company’s revenue may be used to provide incentive compensation programs and employee benefit arrangements and it is important that those benefit programs and arrangements continue to produce the desired results for the company and cover the proper employees.
In making these determinations, the board or compensation committee should consider changing demographics of its workforce based on economic or product changes applicable to the company, the costs of each program relative to the actual and perceived benefits to employees and the manner in which the programs being reviewed for technical compliance from time to time. This review should include, for example, who is responsible for overseeing the timely adoption of required amendments for retirement plans intended to be tax-qualified and reviewing the investments offered under the plans if participants are given the opportunity to direct investments, the company’s health plan design and compliance with health care reform laws, including participant notices and nondiscrimination coverage considerations and HIPAA privacy and security rules, the application of Section 409A of the Internal Revenue Code to deferred compensation plans, including severance programs, in-kind benefits and reimbursements, employment agreements, bonus programs and awards of phantom stock and restricted stock units.
OUR TAKE: Proxy season is a good time for boards and compensation committees to ask management to identify each benefit and compensation arrangement by category, such as qualified retirement plans, non-qualified deferred compensation plan and arrangements, bonus programs, severance programs, health and welfare plans and stock and performance based compensation plans, not simply for shareholder disclosure purposes, but to determine with respect to each program the continued value to its employees, the cost to the company and the manner in which legal and operational compliance issues are being monitored.