Page 95 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 3. Current versus Deferred Compensation 81

4. How far in the future is deferral permitted? Deferrals are essentially of two types:
short term and long term. The first is for a lump-sum payment or a period of several
years, whereas the latter typically either goes to retirement or begins with retirement.
5. When must election be made? Prior to 2004, the safe harbor rule for nonqualified
plans required deferral decisions to be made before the first day deferral amounts could
be earned. Typically, the executive would make a determination each year on the
amount he or she would like deferred and the amount of payment for each year of pay-
out. This rule was codified with the 2004 American Jobs Creation Act. Exceptions
include 30 days from date of eligibility for a new hire and no less than six months before
end of 12-month-or-longer measurement period for a performance-based compensa-
tion plan. Conversely, the company may mandate the amount to be deferred each year.
6. When is the decision made on payout form of the deferral? The same rules
described in item 5 apply for nonqualified plans.
7. What conditions will be imposed to receive deferred pay? Must the individual be
on the payroll at time payments are to begin? Since these are payments on monies
already earned it seems unfair to impose additional requirements for payment.
8. What appreciation formula will apply to the deferral? Deferrals that are expressed
in shares of stock or stock units have a built-in appreciation factor (hopefully). But cash
deferrals will erode in value over time because of lost investment opportunities.
Therefore, it is logical to either build in a prescribed appreciation factor or permit the
executive to select among a list of possibilities.
9. Will the deferral be secured and funded? The company may choose to fund the
deferrals through a number of different ways (e.g., stock purchases, insurance contracts,
or other purchases), or it may decide simply to keep it on the books as an unsecured
liability.
10. What reports will the executive periodically receive on deferral status? It is
important the executive receive at least annually a schedule of the current status of
deferrals, including scheduled payment dates and amounts.

Forfeitable vs. Nonforfeitable
A forfeitable benefit is one that the employee must earn. Typical arrangements would call for
a time period—either a stated number of years (e.g., five) or upon retirement. In addition,
some plans will require that the employee not engage in any activity that could be viewed by
the company as being in competition with its lines of business. “Substantial risk of forfeiture”
typically means the amount is forfeited if the person does not provide the specified services
for the stated period of time or a specified performance event takes place. A nonforfeitable
benefit is one in which the executive is completely and immediately 100 percent vested.

Combinations
Now, let’s examine the essential characteristics of each of the eight combinations listed in
Table 3-1 to determine their degree of plausibility and attractiveness to employer and
employee. Note that the numbers below coincide with those on Table 3-1.
1. Funded, qualified, forfeitable plan. This type of plan, due to its qualified nature, has
very definite limitations on the degree of forfeitability. By definition it cannot be any
more severe than that allowed by ERISA (see the section on retirement in Chapter 6,