When it comes to understanding modern legal concepts, deferred compensation is an important piece of the puzzle, albeit a rather complex one. Deferred compensation refers to an arrangement between an employer and employee in which a portion of the employee’s salary or wages is paid at a later date. The money is “deferred” until a predetermined time frame or certain conditions are met. While slightly different from a traditional benefits package, deferred compensation can offer a number of advantages for both employer and employee.
How Deferred Compensation Works
Deferred compensation plans are often structured around specific circumstances, such as retirement, termination of employment, or another event. Depending on the terms of their plan, an employee who is promised deferred compensation may not be eligible to receive the money or benefits until they reach a certain age or terminate their employment. Some plans also allow employees to introduce options such as choosing when to receive their deferred compensation (for instance, taking payments over the course of several years or as a lump sum).
Why Offer Deferred Compensation?
From the employer’s perspective, offering deferred compensation as part of an employee benefits package can provide an economical means of rewarding and retaining employees in a long-term, cost-effective manner. It also provides an incentive for employees to stay with the company, in the expectation of greater gains down the road. In addition, deferred compensation agreements may include tax considerations for employers, depending on the structure of the plan.
From the employee’s perspective, deferred compensation can provide more flexibility and control over their own benefits package. By having the option to defer a certain portion of their salary and dividends, employees can leverage their financial planning, in some cases helping them achieve greater savings along with potentially higher investments.
Final Thoughts
Deferred compensation can provide a number of advantages to both employers and employees. However, due to the complexities of deferred compensation plans, it is important to understand the details of the plan in order to maximize its full potential. Before entering into a deferred compensation agreement, employers and employees are advised to consult a financial or legal professional to familiarize themselves with all potential implications in order to make an informed decision.