The Advisors' Blog

With the amount of annual compensation that executives earn, some people think that retirement benefits aren’t much of a competitive factor. However, this Meridian memo flags a real-life example “concerning the adequacy of retirement benefits involv[ing] a former CEO and current board chair of a Fortune 500 company.” The memo explains that a company can provide executives with a path towards retirement with well-constructed retirement vesting provision in equity awards, while still avoiding problems that can arise with accelerated awards or not treating similarly situated employees in the same manner. Here’s a short excerpt of Meridian’s step-by-step process in designing retirement provisions for equity awards:

– “Step 1: Defining Retirement Eligibility: Drawing a line in the sand somewhere is important, but the approach taken should consider your employee base, as well as your ability to attract and retain talent. Many organizations historically defined retirement simply as an “age-only” requirement (e.g., age 65). However, there has been a shift toward a “points system,” where each year of age and each year of service count as one point (e.g., age + service = 72, often with a minimum age requirement), or even a combination of the two approaches (e.g., 72 points or age 65). Combination approaches have the benefit of balancing rewarding those with long tenure, while still encouraging potential “late career” hires to join your organization.”

– “Step 2: Defining Retirement Qualification (“Good Leaver Policy”): …Companies should consider developing a “good leaver” policy as part of any retirement vesting provision. Under this policy, a retirement-eligible employee should provide ample notice (e.g., six months) to qualify for retirement treatment. This notice period should be established to allow for necessary succession planning. Retirement opens up opportunities for the next level of talent to advance in their career. If the next level of talent is not ready for the challenge, the notice period may provide enough time to hire an outside candidate. Additionally, some organizations require another qualifier in order to receive favorable equity vesting treatment upon retirement: a retirement-eligible employee must be employed for a certain period post-grant (e.g., six to 12 months).”

– “Step 3:Choosing Vesting Treatment: Calling for forfeiture of all outstanding equity upon retirement is probably too punitive, while full accelerated or continued vesting is often viewed as too generous. The answer likely lies somewhere in between. It is also important to consider standard vesting provisions for annual grants, in addition to vesting provisions for other forms of termination (i.e., retirement treatment should be equally or more favorable than not-for-cause treatment).”

– Emily Sacks-Wilner