What is Deferred Compensation?

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Deferred compensation is an addition to an employee's regular compensation that is set aside to be paid at a later date. In most cases, taxes on this income are deferred until it is paid out.There are many forms of deferred compensation, including retirement plans, pension plans, and stock-option plans.

Definition

Deferred compensation refers to additional employee compensation that is set aside to be paid at a later date. In most cases, the taxes on this income are deferred until it is paid. Deferred compensation can take various forms, including pension plans, retirement plans, and stock option plans.

Origin

The concept of deferred compensation originated in the mid-20th century as companies began to place more emphasis on employee benefits, particularly in the United States. During the 1960s, changes in tax policies led to the widespread adoption of deferred compensation plans as a common form of employee benefit.

Categories and Features

Deferred compensation is primarily categorized into three types: pension plans, retirement plans, and stock option plans. Pension plans are typically funded by both employers and employees, providing monthly payments upon retirement. Retirement plans are employer-established fixed benefit plans offering a steady income post-retirement. Stock option plans allow employees to purchase company stock at a predetermined price in the future, aligning employee interests with company growth. Each plan offers unique tax advantages and risks.

Case Studies

A typical example is Apple Inc.'s stock option plan, which incentivizes employees to stay with the company long-term and grow alongside it. Another example is IBM's pension plan, which provides employees with a stable source of retirement income, aiding in long-term financial planning.

Common Issues

Common issues investors face with deferred compensation include misunderstandings about tax implications and a lack of understanding of plan terms. It is advisable for investors to carefully read the terms of deferred compensation plans and consult financial advisors to understand the tax impacts.

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