October 2008

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NQDC: A Changed Market now that Simpler is Better

By Alistair Jessiman & David Chung

Non-qualified deferred compensation plans have for 30 years reflected the individualistic requirements of corporate compensation strategists, who have explored an endless variety of comp plans in their pursuit of talented executives that businesses value so highly.

In turn, the proliferation of deferred compensation plans that let top U.S. executives put off collecting a portion of their pay — and also defer accompanying tax payments — has provided handsome growth among plan administrators.

Dramatic change, however, is roiling the NQDC market as corporate employers turn away from sophisticated plans in favor of simpler arrangements. Obliged under new SEC disclosure requirements to publish the finer details of executive comp plans, for example, companies are shying away from sophisticated arrangements that may raise a red flag with investors. And the current investment environment is quite inhospitable.

This new trend strongly undercuts administrator strategies based on exotic, high-priced products and capabilities. In an emerging U.S. market where simpler is better, attributes such as scale-driven efficiency, brand strength and targeted marketing capabilities will be the determining factor in growth and market share — not financial rocket science.

The strength of this movement (and its potentially profound effect on pricing power) suggests an impending era of dislocation among NQDC plan administrators, to the point that some players may not be able to continue as standalone entities. Along with considering mergers, acquisitions and strategic alliances, providers also will need to revisit their product sets and marketing and sales strategies. Plan purchasers will have a stronger hand in negotiating lower prices for administrator services, yet should keep an eye out for dislocations as administrators consider their options in a soft market.

The exception to the simplicity trend lies with global companies wishing to include executives in foreign markets in their U.S. NQDC plans. Here, plan purchasers and administrators will continue to focus on more sophisticated NQDC options.

Quest for Executive Talent

The driving force behind NQDC plan complexity is the continuing corporate drive to attract, motivate, reward and retain executive talent. Indeed, NQDC plans appear to be the most popular means of paying top executives beyond base salaries.