The Future of Deferred Compensation

Deferred compensation is competing with several devices for the limited supply of total compensation dollars. These instruments include: 1. 401(k) qualified deferrals, 2. supplemental executive retirement programs, 3. employee stock ownership plans (ESOP) and payroll-based employee stock ownership plans (PAYSOP), and 4. long-term cash incentives. The main advantage of deferred compensation to the executive is the likelihood that it will be taxed at a lower rate in future years. During the 1970s, the incentive to defer compensation until after retirement decreased. The interplay between the corporate accounting and tax treatments of deferred compensation causes more confusion than any other facet of these plans. Another advantage to deferring compensation is to create ''golden handcuffs'' that require the executive to earn out the compensation over a vesting schedule. Thus far, however, benefits of the golden handcuff have proved elusive. Deferral compensation can be expected to increase in complexity in response to the changing investment and tax environment.