The challenges associated with offering creative and effective executive compensation programs have always loomed large for employers, but never more so than today when the combination of volatile markets, an uncertain economic environment, and the specter of expanded regulation have highlight the importance of nimble and responsive plan design.
PLANSPONSOR recently met with a team of experts from EWM Global, a firm that specializes in the design and administration of global executive compensation and investment plans. Participating in the discussion were Wolfgang Schroter, Head of EWM Global’s Executive Compensation Plan Administration business; Kelley Gustafson, who heads EWM Global’s Client Relationship and Account Management team; Rebecca Symonds, who leads the Client Services and Communication group at EWM Global and Lee Khandelwal, EWM Global’s Chief Technology Officer.
PS: The financial crisis has taken a toll on firms, large and small, worldwide. What trends do you see emerging with regard to offering competitive compensation programs?
Wolfgang Schroter: The financial crisis has brought the topic of internal control and audit to the forefront. Risk management practices are being scrutinized more than ever. Many employers who were previously handling plan administration in-house are now looking to third-party administrators in order to comply with external audit requirements. The impending increase in regulation or, as in the U.K., the regulation that has already been implemented, has caused an unprecedented drain on internal resources in the last 18 months. We understand that this may seem daunting to plan sponsors; we, however, see this as an opportunity for employers to reevaluate plan administration practices and look to someone like us to help streamline plan parameters and administration, to heighten efficiency, improve cost savings, and enforce credibility.
The increased scrutiny in this area also has put more emphasis on reporting. The reporting function has always been a key comment of plan administration services, but has suddenly risen on the importance scale. Plan sponsors are being required to provide more transparency than ever, especially with regard to compensation and, thus, plan administrators must be able to report this information to a wider variety of stakeholders in an even more timely and secure fashion than ever before. Our ability to respond ad hoc requests and to quickly customize reporting has really paid off in times like these. We recognize that our system-generated reports are not only targeted to HR and executive compensation executives, there is also a demand to meeting the growing needs of financial controllers, top management, and external regulators.
Rebecca Symonds: The increased focus on reporting is also extremely evident at the participant level. Participants are looking at their deferred compensation portfolios much more closely these days as a result of the market downturn. They are demanding more comprehensive information and want to have that information at their fingertips as soon as it is available.
Wolfgang Schroter: Important for the participant is that he has a clear overview of his deferred compensation plan allocations and can, at a glance, understand the impact of the crisis in order to more easily make informed investment decisions to maximize the value of his total portfolio.
PS: Are there any other trends that you see that have had a marked effect on the deferred compensation market?
Kelley Gustafson: Recently we have noted the reticence of firms to share information about their plan design with their competitor. Where plan sponsors used to be quite open about the various incentive plans they offer to their employees, we see them holding this information much closer to the vest today. Plan sponsors are looking to plan administrators to give them more guidance to help them make decisions. We have seen a marked decrease in the scope of compensation plan options employers are even able to offer.
PS: So, since there seems to be a lack of information flow between employers, what course of action would you recommend?
Kelley Gustafson: We have observed that some companies, at least from our experience in the financial services sector, actually are being very creative. There are others that are pulling back to remain as conservative as possible, in some cases going back to equity-only solutions. Obviously in the after math of the financial crisis, companies also are focused on offering cost-effective plans. We encourage employers to truly evaluate their options and to not necessarily assume that reverting to equity-only plans is the most efficient solution. They should keep in mind that, although equity-only programs align the compensation awards with the company’s share price success, they also are bound with risk in terms of diversification. New or revised programs can be designed to help mitigate and diversify this potential risk.
PS: Considering how much change is in the air, how do plan sponsors figure out what they should do to create compelling deferred compensation programs?
Lee Khandelwal: What is important now from a plan design perspective is that plan sponsors are being prepared for change, that they have an administration platform in place that allows them to creative consider and quickly respond if changes are required. At the same time, employers should consider plan design that allows them to cultivate an advantage over their competitors, especially those that are not adequately prepared. After all, we are talking about plans that are supposed to attract and retain key employees. This is where flexibility in plan design can be beneficial. The ability to revise the investment choices available to participants as well as the hedging structure behind the plan can be extremely valuable to both plan sponsors and their participants.
Wolfgang Schroter: Plan design should never be limited by the administrative capabilities of your provider. In some situations, the employer’s creativity is restricted by programming constrictions that have no relevance to their plan. There are also situations where an administrator may push investment products that employer neither wants nor needs. The plan sponsor should always select an administration service that supports flexibility in plan design and product. It is all about having choices.
PS: What kind of choices do employers have?
Lee Khandelwal: We pride ourselves on being able to offer a full range of service on all levels. EWM Global supports a broad array of plan types that are global in scope from Standard Cash, Leveraged and Incentive Alignment plans to Carried Interest plans. EWM Global also offers unlimited support for investment choices from money market and mutual funds to alternative investments and private equity. We understand the benefit of having the flexibility to include hedge funds and private equity on plan menus where longer-term investment makes sense. With regard to edging options, we are product-agnostic. Our focus is administration, not product sales; so, if a sponsor wants to use COLI (corporate-owned life insurance), we can certainly implement that. However, we also support many other hedging and funding solutions from a total return swap option to funded trust options, and even a combination of hedging options within a single plan. Our goal is to help clients to maximize efficiency and minimize cost while minimizing their workload.
Wolfgang Schroter: It is not any different from when you, as a private individual, look through your insurance coverage and decide that you need the help of someone who can give you advice; you want that advice to be objective, not limited by the products that adviser has available to sell you. You want to be offered a choice and not be tied to a particular product set.
PS: How does flexibility play a role in designing programs with a global scope?
Wolfgang Schroter: Every large company has employees based around the globe, and it is clearly important to be aware of the dynamics and requirements in those markets too. Beyond that, it makes sense to look at other jurisdictions and to draw from what other countries are doing. Sometimes, creative ideas come to the forefront, which plan sponsors may not even consider as they become blinkered by their own market. This, in turn, could give companies the competitive edge. However, to design and administer such programs, particularly if you have multinational workforce, requires the consolidation of data and workflows to support a seamless experience for the participant and a manageable process for the employer. The second plan sponsors start thinking a little bit globally, they automatically move to a level of flexibility that allows them to be a lot more creative with their plan design. Essentially, selecting a vendor who can offer you more than a domestic administrator can drive a much more creative, innovative, and far-reaching approach.
PS: What have the changes in the market environment meant for providers?
Rebecca Symonds: Some companies are being forced into action and to react very quickly. A common theme has been merger and acquisition, forcing the sponsor to react immediately. In these situations, companies are expected to merge certain types of plans, which may have had different incentives, and to realign the newly merged design with t he current needs of the market. This is where we can help and specialize in this field to support smooth transition and alignment of legacy and merged plans.
We are also seeing a trend of vendor consolidation. Global firms would prefer to have a “one-stop-shop” for administration in order to provide more consistency in the services provided to both plan sponsor stakeholders and plan participants. There are various reasons for this trend. The need to administer a large variety of plans with a limited number of in-house resources motivates employers to look for a single solution. The need to accommodate employees who move around the globe also plays a part. The requirement for full transparency with regard to the cost of running the plans is also a driving factor. Whatever the reason, we find that employers increasingly seek a single solution to meet their goals.
Kelley Gustafson: A global player in administration really can help to achieve all of the goals that Rebecca outlined. For example, to accommodate the sponsor’s requirement to run their plans with more limited resources, we are able to provide payroll reports in any currency and in a secure format that can be fed directly to any payroll company, significantly reducing the resources required to process payroll.
PS: What makes the EWM Global approach distinctive?
Wolfgang Schroter: We have established a very diversified team with different backgrounds, career paths, and nationalities. We are based in Europe and in the U.S. Our dynamic open-architecture approach to investments and plan design allows us to be creative in crafting unique solutions.
Lee Khandelwal: Despite that breadth of background, we’re still a fairly small company, which gives us the flexibility to think out of the box. We really are focused on our core business. The people that we have on our team are truly dedicated and passionate about what they do, which is clearly evident in the solutions we offer our clients.
Wolfgang Schroter: In a time of uncertainty, employers need the flexibility to respond to change, if and when it happens, in the comfort of knowing that they can respond, even if they don’t ever need to. Plan sponsors need a partner who can help them to come up with better solutions to their existing plans and plan structure, or who can help them to design new plans. Don’t let administration drive your plan design; let plan design drive your administration.