What is deferred compensation?
Deferred compensation is a remuneration model that enables employees to postpone receiving a portion of their salary to a later date to secure beneficial retirement and investment plans, and reduced tax rates. In this payment option, the employer continuously withholds a fraction of the employee’s paycheck until the employee withdraws the cumulative amount on a pre-determined date. For example, an individual who earns $150,000 annually may decide to defer $20,000 every year for the next ten years. Employers can provide deferred compensation through:
- Retirement plans
- Pension plans
- Stock Market or mutual fund investment plans
There are two types of deferred compensation plans:
- Qualified deferred compensation is a secure savings method that follows the rigid regulations of the Employment Retirement Income Security Act (ERISA). All employees must receive this form of compensation and adhere to the limit on the amount of money they put in. The 401(k) and 403(b) are both in this category.
- Non-qualified deferred compensation (NQDC) is a non-secure plan that does not limit the amount of money employees can set aside. Usually, only the highest-paid individuals can utilize this option.
Why should HR leaders care about deferred compensation?
Deferred compensation functions as an incentive for employees. Employers implement it to:
- Boost loyalty
- Promote retention
- Aid in attracting new, desirable hires
High-earners can take advantage of qualified deferred compensation and NQDC at the same time– reaping financial returns from both the mandatory and optional deferred compensation plans.
What can HR leaders do to implement beneficial deferred compensation plans?
HR leaders can ensure that employees have access to and understand the information regarding deferred compensation. Here are several practices to support employees through this essential process:
- Adhere to the compensation plan. Follow the method that compensation management has designed to ensure that the deferred compensation plan aligns with other factors.
- Provide pertinent information. Rather than offering a generic explanation to employees regarding deferred compensation, HR leaders can distribute specially tailored materials that target each individual and their circumstances. Dividing the personnel into sections based on factors such as age, salary, and years of work experience helps distribute applicable information to each individual.
- Offer appropriate methods of communication. Using various ways of educating employees can promote their participation in deferred compensation planning. For example, when making important decisions regarding income planning or tax reduction, it’s preferable to consult a specialist, and, when introducing employees to the general concept of deferred compensation, online media may lead to better results.
- Target strategic employees. Identify which high-earning employees or positions should receive the NQDC, and how it will help attract and retain top talent.
How does deferred compensation improve company culture?
Strategically implementing deferred compensation can empower employees, helping them take ownership of their financial future. It strengthens a long-term relationship between employer and employee, thereby contributing to engagement, motivation, loyalty, and, ultimately, a positive company culture.