HR+Survey Solutions Study Finds BCBS Health Insurance Companies Phasing Out Defined Benefit Plans as a Core Element of Executive Compensation Packages

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Recent study conducted by HR+Survey Solutions finds Defined Benefit Plans (DBs), once a core element of the executive compensation package at most Blue Cross and/or Blue Shield Plans (BCBS), are being phased out.

A recent study by HR+Survey Solutions (http://www.hrssllc.com), a compensation consulting and research firm, finds Defined Benefit Plans (DBs), once a core element of the executive compensation package at most Blue Cross and/or Blue Shield Plans (BCBS), are being phased out.

Based on a review of 27 Plans that participated in the study over the last ten years, more than 85 percent (23 of 27 plans) indicated that DBs have been provided; however, 65 percent (15 plans) of those with plans indicated that they have discontinued the use of DBs by freezing them to participation for new employees. This is up from only 17 percent (4 plans) that had discontinued their use in 2006. Of the 30 percent (7 plans) with active DBs, several have switched from Traditional Defined Benefit Plans or Pension Equity Plans (PEPs) to Cash Balance Plans (CBs). Overall, Traditional DBs have declined in prevalence from 74 percent to 29 percent, PEPs from 21 percent to 14 percent, while CBs have increased from 5 percent to 57 percent of a mix of plans offered in 2006 versus 2015. All of the BCBS Plans offering DBs (100%) offer Defined Contribution Plans (DCs).

DBs attractiveness to executives and the versatility of DBs in retaining talent has been steadily diminishing for decades. Whereas DBs reward longevity (aka “golden handcuffs”) which is especially important to executives nearing retirement with 20 to 30 years of service, they lack the portability (aka “golden parachutes”) of DCs which is more important to younger mobile executives (and other employees) who will have worked for several companies by the time they retire. On the other hand, DBs offer retirees nearly guaranteed income for life while the success of retirement planning is largely the responsibility of the employee with the DC plan.

DB distribution can be either a lump sum payout at retirement or an annual annuity. The participant can elect how they want the money dispersed. When combined with a Supplemental Executive Retirement Plan (SERP) the payouts can be quite large. For the CEO, the value of the lump sum can approach $10 to $20 million and for other top executives the lump sums can approach $5 to $10 million. These payments continue to garner national media coverage and spur public debate over executive compensation. It should also be noted that maintaining the funds for DBs requires actuarial teams and is much more regulated and can be more costly to the organization than DCs.

The findings are based on the annual Executive Total Potential Remuneration (TPR) Compensation, Benefits and Perquisites Survey, which assesses pay and other benefits for executive positions at a majority of BCBS organizations.

“DBs were once the most prevalent method for funding executive retirement plans. The issue is that the lump sum payments amount to an actuarially calculated “promise to pay from future profits” that can adversely impact the bottom line, especially if the investment of the funds underperforms,” says Judy Canavan, Managing Partner, HR+Survey Solutions.

“In most cases, DBs were an integral part of the pay package and it would be difficult for Boards to retain current top talent if the plans were eliminated altogether. However, companies are transitioning from these plans to the more nimble, less risky DCs to ensure that they will be able to attract the younger talent needed to remain competitive.”

Based on data from the BLS, Dept. of Labor and the Government Accountability Office, this trend lags that of general industry, which began phasing out DBs as early as 25 years ago, but is well ahead of the public sector which has yet to begin the transition. Additionally, unlike in the private sector where the primary motivation for establishing DC plans is economic, in the public sector the primary motivation appears to be political. (From the Social Security Bulletin, Vol. 69, No.3).

Other study highlights    

  • Median salary rates for the CEO have only increased by 15 percent over the past ten years.
  • Target Total Direct Compensation (TTDC) for the CEO has risen 22% and Maximum Total Direct Compensation (MTDC) has risen 31% over the same time period indicating a greater percentage of performance based incentive pay with higher potential payouts.
  • TTDC and MTDC increases for the COO and CFO for the period are 31% and 39% respectively.
  • Increases to TTDC and MTDC are higher for the smaller companies versus the larger companies indicating a trend to use more incentive pay in the mix to attract talent.

About the methodology
The 10th annual Executive Total Potential Remuneration Survey was published by HR+Survey Solutions in August, 2015. A total of 23 health insurance companies, of which 21 were BlueCross and/or BlueShield organizations, participated, with 38 positions covered. The Executive TPR Survey assesses compensation packages including salary, benefits, executive perks, long and short-term incentives, DBs, and severance agreements, among other values. If you are interested in participating in the 2016 Executive Total Potential Remuneration Survey, contact Judy Canavan at 866-252-6788 x902 [jcanavan(at)hrssllc.com ].

About HR+Survey Solutions
HR+Survey Solutions conducts annual industry and custom client surveys and provides organizations with expert advisory services focused on compensation plan design and assessment of appropriate compensation levels. Please visit http://www.hrssllc.com for more information.

**This study was conducted by HR+Survey Solutions, with no affiliation or sponsorship by the Blue Cross and Blue Shield Association or other Blue companies.

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Candice Warltier
Communication Strategies Group, Inc.
+1 773-991-1210
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