Wednesday, June 20, 2012

Compensation Risk

I was reading Mike Melbinger's blog today about compensation risk assessments (if you want to read online legal analysis of compensation issues, I strongly recommend his blog) and I got to thinking that oftentimes, the people who may be assisting clients with this assessment may not know much about risk. You see, in evaluating compensation risk (and the SEC doesn't really tell us what that means), companies are to look at all elements of remuneration for both executives and for other employees. So, that includes things like deferred compensation which includes both qualified and nonqualified retirement plans.

I've written a lot about risk in retirement plans from the employer standpoint. How much cost variability is there? Does this benefit properly align with corporate goals? In an enterprise risk framework, where do these plans fit in? Is there compliance risk? Is there risk associated with having retirement benefits that are so large that you can't get employees to leave when you'd like them to? Is there risk associated with not having a defined benefit plan when some of your competitors for talent have them?

That last question is confusing, isn't it?. But, think about it. Defined benefit plans to favor older workers, not because they are discriminatory, but because of the shorter discount period until retirement date. So, if you sponsor a generous 401(k) plan and your top competitor sponsors a generous defined benefit plan, then a knowing employee might work for you until they get to be about 45 and then just when they really know the business, take off to your competitor who has a generous defined benefit program. It just makes sense.

So, compensation risk isn't only what you probably think it is. If you want to do a really thorough analysis and consider all of your rewards programs, consider people who have sufficient expertise to help you through the process. You might just learn something about your programs that you hadn't thought of before. And, it might be really useful.

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