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Human Resources

What Is Deferred Compensation?

When it comes to compensating your employees, it’s not always about cold, hard cash.

Wages and salary are only one form of compensation. Many employee benefits come in the form of deferred compensation. Particularly for a smaller business, deferred compensation can mean the difference between getting the cream of new talent and settling for second best.

What is Deferred Compensation?

Deferred compensation refers to any type of compensation paid out after the period where the income itself is earned. This generally does not refer to salary and wages, even though they are paid out after the time worked, i.e. on payday. Commissions are likewise not considered deferred compensation, though bonuses might be depending on the specifics of the bonus program.

Types of Deferred Compensation

There are a variety of deferred compensation forms. Knowing the different kinds will help you know what your business can afford, helping you to optimize your human resources budget to attract the best talent you can.

Some forms of deferred compensation include:

  • Pensions and retirement plans: These are the ultimate forms of deferred compensation. Employees are getting paid for much later in life, often times decades later. This can be an especially effective method of luring top talent, particularly if you offer a pension. Nearly no one has pensions anymore, which guarantee income after retirement.
  • Stock options: Stock options are not the same as equity in a company, the latter of which would probably not be considered deferred compensation. Stock options allow employees to purchase a certain amount of stock at a preferred price every year. This not only gives employees deferred compensation at little or no cost to you, it also provides companies with a very real and tangible sense of ownership when it comes to your firm.
  • Some types of bonuses: Again, whether or not a bonus is deferred compensation or not depends on the program. Some companies offer bonuses specifically as a form of deferred compensation, such as giving employees larger bonuses for taking them later rather than sooner.

Benefits of Deferred Compensation

Benefits of deferred compensation are many. Some benefits for your business include:

  • Reduced overhead: When offering stock options, you are radically reducing your overhead by making your employees partners. While this might be highly beneficial to the employee (think in terms of Apple or Microsoft), it comes at very little comparative cost to the employer. Deferred compensation can significantly improve your company’s reach in terms of compensating top talent in the field.
  • Emotional equity: Particularly when it comes to stock option programs and pensions, employees become more invested in your company. This sense of ownership can lead to lowered turnover at your firm.
  • Tax benefits: There are a number of tax benefits for deferred compensation. Talk to your accountant about what form of deferred compensation maximizes tax benefits for your company.

Deferred Compensation

Deferred compensation isn’t a magic solution for attracting top talent. It will, however, allow you to extend something to early and mid-career professionals that you might not be able to provide them in wages and salary.

 
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