Pay for the Piper

By Dr. Geraldine Kaye

When looking at the remuneration package that comes with an executive directorship or any other position high up the corporate pecking order, one’s eyes naturally go to the headline salary quoted in the newspaper, by the head hunter or wherever.  But this is only one component – admittedly it is usually the biggest  – of the total on offer.  Often the monetary value of additional fringe benefits can add up to well over 50% of basic salary.

One of the most expensive ‘extras’ is membership of an occupational pension scheme.  If this is of the ‘final salary’ type (where benefits are expressed as a percentage of earnings at retirement), the cost to the employer will increase dramatically with the employee’s age.  There is currently a marked trend towards retiring earlier and earlier. Where executive directors and other senior employees are concerned, many employers offer more generous early retirement benefits than those set out in the pension scheme rules.  Much will depend on the financial state of the company pension fund – is it in healthy surplus or does it need topping up by the employer?

Pensions come with important fiscal incentives, for both employee and employer.  This is why the Government has almost a paranoia about the potential for tax planning manipulation, especially where high earning employees are concerned.  The earnings that can be taken into account in calculating maximum benefits and tax relievable contributions are now ‘capped’ at a maximum limit, which is set at £84,000 for the current 1997/98 tax year.  For earnings above the ‘cap’, an employer may offer membership of an ‘unapproved pension scheme’.  Although this type of arrangement does not have the usual tax advantages, there are still fiscal benefits to be had from it.

There are, of course, a whole range of other perks that can come with basic salary.  Company cars may be taxed more severely than in the past, but, even after allowing for the Inland Revenue’s take, the net benefit of a car is usually worth more than its salary equivalent.  The tax the employees pay will depend on the mileage clocked up on company business.  They should always try to ensure that they qualify for the highest mileage/lowest tax band that they can achieve in their particular role within the business.

Tax-free profit related pay is being phased out, but it will still be available until the end of 1999.  There are also share option schemes.  The value of such a facility will depend very largely on the success or otherwise of the business and its impact on the share price.  In their capacity within the company, that will largely be up to the executive directors and other senior staff who participate in the arrangement!

Most company pension schemes come with added life assurance cover.  The employer pays the premiums, which are tax relievable as an allowable business expense.  If the worst should happen and an employee should die before retirement, the lump sum benefit will normally be payable to people nominated by that individual and there should be no inheritance tax to pay.

A number of companies offer disability income replacement insurance for their employees.  Sometimes this is available to the whole work force and sometimes to only the upper echelons of executive staff.  The insurance company takes over responsibility for salary payments after a waiting, or ‘deferred’, period of usually between one month and two years.  The benefits continue until the individual is fit enough to return to work, leaves the company, dies or reaches retirement age – whichever should happen first.  The cost to the employer is normally a very small percentage of the employee’s basic salary.

Private medical insurance is an important benefit for the employing company as well as its executive staff.  Lengthy NHS hospital waiting lists are avoided, admission is at a time chosen by the patient (and employer) rather than the healthcare provider, and, with table, laptop computer and telephone, the individual is often able to carry on working in the private room provided.

Soaring headline rates of pay for executive directors of plcs has been attracting the attention of the media for all the wrong reasons.  The storm started with the packages awarded to people running recently privatised utilities, often in virtual monopoly situations.  But it has now spread to other parts of the public company spectrum.  One major difficulty is that these individuals may, with their gifts for organisation and generating profits for the business that employs them, actually earn their inflated salaries, but that message is not being communicated effectively to the outside world.

In the life assurance company sector, we have noticed that the key duties of  ‘appointed actuary’ are increasingly being carried out, not by executive directors but by outside consultants.  Could we see this tendency extend to other roles and other types of business?  It could be a way of circumnavigating the open disclosure of executive directors’ remuneration issue!

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