Group long-term disability policies define covered earnings exclusively as base salary and exclude incentive pay. That means relying on an employer’s disability policy for financial services professionals is exceedingly risky, because the majority of total compensation is bonus pay.
And that’s not such an unusual scenario. Around one in four 20-year-old workers can expect to be out of work for at least a year due to a disabling condition before retirement, according Social Security Administration data.
While Wall Street professionals may a higher risk tolerance than most top earning professionals, they are not immune to surfing, rock climbing, or ski accident. At $600,000 of total pay, base salary runs $250,000 to $300,000, so a 60% plan replaces $150,000 to $180,000 of an income the plan never counted in full.
The mechanism is neither hidden nor unusual. Every group plan states a replacement percentage, and every group plan applies that percentage to a defined term called covered earnings. A majority of the contracts examined for the Wall Street Income Protection Report define that term as base salary and then exclude incentive pay, bonuses, commissions and overtime by name.
Consider a mid-level VP in Manhattan with a mortgage on an Upper East Side apartment, private school tuitions, a nanny, a driver, maybe a place in the Hamptons. None of that survives on 60% of their base salary, and that’s the reality most of them are one accident away from finding out.
Covered Earnings Decide What Group Disability Coverage Replaces
That definition isn’t in the schedule of benefits. It’s in the definitions section, several pages away, under a heading that names the term instead of the number. Most people who check their coverage read the schedule, see the percentage, and stop.
A plan can insure 60% of salary, said Alan Johnson, managing director at Johnson Associates, “but that may be a very small portion of your total comp. So you need to understand that dynamic.”
Base salary on Wall Street is not a measure of what a person produces. It is an administrative band assigned by rank, and the band is deliberately narrow.
“An average investment bank is going to have a pretty tight window for a director,” said Mike Mittleman, a career coach who advises financial services professionals.
Two directors at the same firm can sit on the same base and earn wildly different totals. Mittleman described a mergers and acquisitions banker and a sales and trading colleague both carrying a base near $350,000, one clearing well over a million in total pay and the other closer to $600,000. “The bases are relatively consistent,” he said, and the plan cannot tell the two apart.
The design is deliberate.
“The firms do it to keep fixed costs down and to motivate people,” Johnson said, and “if you only get a moderate base salary, the idea is you’ll run faster because you’ve got so much at stake based on how you do.”
None of this is unique to Wall Street, and Johnson volunteered as much before he was asked. The exclusion “would be true in financial services, but that would generally be true in other industries as well, and incentives aren’t covered,” he said. What makes the sector different is not the rule but the arithmetic, because nowhere else does base salary make up so small a share of what a person earns.
Four Numbers Convert Bonus Pay Into Real Disability Coverage
The calculation takes four numbers and about ten minutes. Three of them are already printed in documents most people hold, and the fourth arrives on written request, because participants in an employer plan hold a right to plan documents under federal law that the United States Department of Labor states plainly.
- The defined number. Open the certificate to its definitions section and read what counts as covered earnings. Bonus, commission, overtime and equity compensation are usually excluded by name.
- The percentage. Apply the plan’s stated replacement rate to that defined number instead of to total compensation.
- The monthly maximum. Compare the monthly figure step two produces against the plan’s maximum monthly benefit and keep whichever is smaller.
- The share of actual pay. Divide the surviving annual figure by what was earned last year, bonus included.
Run it on a mid-career professional earning $600,000. Johnson puts that person’s base at $250,000 against $350,000 of incentive pay. Mittleman puts the same person at $300,000 and $300,000, which places base somewhere between 42 and 50% of total pay.
A 60% plan applied to that base produces $150,000 to $180,000 a year before any maximum is applied. Against $600,000 actually earned, that is 25 to 30% of income.
The plan has not failed. It has done exactly what the contract says, against a number the reader was never shown.
Step four carries a complication worth pricing in. Part of the excluded bonus is not cash at all, and Johnson put the cash share at 40 to 60% for senior people, with the remainder converted into company stock vesting over the following three years.
The ratio worsens with seniority, because base stops moving while incentive does not. “Once you get to be kind of a managing director or partner, your salary is pretty much fixed,” Johnson said. Mittleman put the same plateau at a $450,000 base holding flat from $1.5 million of total pay all the way to $8 million.
Benefit Caps Reduce Disability Insurance Coverage a Second Time
The earnings definition is the first reduction. The monthly maximum is the second, and the two compound in sequence instead of overlapping.
The definition decides which dollars count before the percentage is ever applied. The maximum then truncates whatever that percentage produces. Anyone who has run one of those two calculations and not the other is holding half an answer, which is why this publication treats the monthly ceiling a group plan places on a high earner’s benefit as a mechanism of its own.
Almost nobody in the sector carries a second layer above the group plan. Of the 2,912 financial services employers that filed a group long-term disability contract in the most recently disclosed plan year, 37 also filed a contract providing an individual layer above it, a count drawn from the annual filings every plan sponsor submits to the Employee Benefits Security Administration. That is 1.3%, and not one of the 37 is a hedge fund or a buyout firm.
The number that survives all four steps is the real one, and it is the only number worth planning against. Request the certificate, read the definitions section before the schedule, and run the arithmetic against last year’s actual total instead of the salary line. Whatever the plan leaves unreplaced is the figure a private policy is sized to cover, and it lands far above what most people carrying it expect.