Page 90 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 3

Current versus Deferred

Compensation

T he five compensation elements described and defined in the previous chapter
will each be explained in greater detail in subsequent chapters. When the com-
pensation is received is an issue in each instance. Will it be received when earned
or deferred to some future date? The first situation is very simple. The latter is
not. This chapter will discuss the implication of current vs. deferred compensation, setting the
stage in subsequent chapters for the what and how unique to each of the five elements.

INTRODUCTION

In order to understand the five compensation elements covered in subsequent chapters, it is
important first to understand the implications of current vs. deferred compensation. The
subject is presented early in order to avoid repetition in later discussions.
Deferred compensation is an agreement between a company and an individual employee
that all or a portion of compensation will be paid at a future date. Distribution options typi-
cally include lump sum, installments, and annuity payments. The amount under installments
is determined by the number of payments, the amount under annuity is typically determined
by mortality tables. The period of deferral can be either short or long term in nature.
Deferred payment is similar in result to restricted compensation plans where the executive
has to earn out the full rights to ownership, unless the benefits are nonforfeitable. The latter
is usually done for the executive’s benefit, whereas the former is a form of golden handcuffs
benefiting the company.
The objective of deferrals is to shift income from current to future years in order to max-
imize personal income needs. One should clearly understand that deferring or not deferring
is an investment decision, but only after it is determined that money is not needed currently
for personal or family obligations (e.g., education and housing). Included in the decision to

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