Deferred compensation lets employees earn money now but receive it later. It’s like a strategic promise—one that keeps your best people invested in your company’s future while helping you manage cash flow today.
Why does this matter when you’re hiring globally? Because the rules change dramatically depending on where your people work. What flies in the U.S. might be a compliance nightmare in Europe. And those golden handcuffs you’re planning? They might need to be completely reimagined for your Tokyo team.
The basics break down into two camps. First, there’s qualified deferred compensation—the familiar stuff like 401(k)s in the U.S., pension plans, and profit-sharing arrangements. These come with built-in protections and standardized rules. Then there’s nonqualified deferred compensation (NQDC)—the custom packages typically reserved for executives and top earners. More flexibility, but also more risk since they don’t get the same regulatory safety net.
How deferred compensation works
A deferred compensation plan can look different, depending on the company’s size, structure, and location. Common elements of a deferred compensation plan are:
- A written agreement detailing the amount of compensation deferred
- The vesting or payment schedule (e.g., after five years, upon retirement, or following an initial public offering)
- The triggers for payment, such as an employee’s retirement, termination, death, or a change of company control
- Tax treatment of the deferred compensation defined by local laws (e.g., Section 409A in the U.S.)
Examples of deferred compensation vehicles
- Supplemental Executive Retirement Plans (SERPs). A SERP provides certain executives with additional retirement income beyond standard company retirement benefits.
- Stock appreciation rights (SARs). This type of deferred compensation gives employees the right to receive the monetary equivalent of an increase in the value of a specified number of company shares over a set period. Employees are not required to purchase the shares themselves.
- Phantom stock plans. A phantom stock plan is a type of deferred compensation arrangement in which employees receive the financial benefits of stock ownership, such as cash payouts, without actually owning company shares.
- Bonus deferral agreements. A bonus deferral agreement is a form of deferred compensation in which an employee elects to postpone receiving all or part of their bonus.
- Long-term incentive plans (LTIPs). An LTIP is a compensation strategy that rewards employees (often executives or key contributors) for achieving specific organizational goals over an extended period, typically three to five years.
Here’s what every deferred comp plan has in common: they keep your best people motivated and sticking around. Plus, they help your cash flow today while building loyalty for tomorrow. It’s strategic retention that actually helps your bottom line.
Deferred compensation vs. equity compensation
In contrast to deferred compensation, equity compensation grants employees an ownership interest or the right to benefit from the company’s share value (for example, through stock options). This aligns employees’ financial rewards with the company’s current and future performance in the marketplace.
Deferred compensation and equity compensation are both strategies that organizations use to attract and retain talent, but the levers they use to accomplish this differ, as the table below illustrates:
| Deferred compensation | Equity compensation |
|---|---|
| Paid in cash at a later date | Based on company ownership |
| Typically nontransferable | May appreciate alongside the company’s value |
| Can be guaranteed if funded | Subject to market risk or dilution |
| Often tied to employee performance | Often tied to company valuation or exit |
Employers may offer both forms of compensation (deferred and equity) as part of a layered total rewards strategy.
Why employers use deferred compensation
Talent retention
Employers use deferred compensation plans to keep talent by offering long-term financial rewards to keep employees around until their benefits are fully vested or paid.
A Principal survey on employers’ and employees’ feelings about deferred compensation showed that 66% of employers think that it is an essential component of keeping employees. A similar number (63%) of employees reported that a potential employer’s deferred compensation plan was one of the reasons they would accept a job.
Notably, employers use a variety of deferred compensation vehicles just for executives and other members of the C-suite as a strategic retention tool (sometimes referred to as “golden handcuffs”). SERPs and other similar plans help companies attract top talent in competitive markets by offering compensation packages that can supplement traditional retirement savings without the contribution limits.
That said, such deferred compensation plans for top executives have received negative attention for exacerbating income inequality within a company, with calls for “changing the incentive structure” to create more ethical organizations.
Cash flow management
Employers use deferred compensation to manage cash flow by putting off the payment of employees’ earnings until a future date. This reduces the immediate financial outlay required for payroll, which can be particularly helpful for small or growing companies with less cash on hand.
Deferred compensation schemes enable companies to allocate resources to investing in the business, on marketing campaigns, or on other endeavors that would have otherwise been spent on payroll.
Tax planning
Deferred compensation helps employers manage their tax burden. Because the company can delay paying out some employee earnings until a future date, it does not have to pay income tax on those amounts immediately. By spreading these payments over several years or timing them to match the company’s financial strategy, employers can better manage their cash flow and potentially reduce their overall tax burden.
For employees, deferred compensation means that they do not have to pay taxes on the compensation until it is received. This could reduce their tax burden by shifting income from high-earning years to retirement, when they may be classified in a lower tax bracket (and thus taxed less).
What you need to know before setting up deferred compensation
Setting up deferred compensation isn’t as simple as adding a line to the employment contract.
- Staying legal across borders. Every country has its own rules about deferred comp. The U.K. wants you to follow Pay As You Earn regulations. Germany has different requirements. Singapore? Different again. You’ll need legal help to navigate this maze, because getting it wrong means penalties (or worse, losing your top talent because their compensation got tangled in red tape).
- Making sure your team actually gets it. Deferred compensation can feel like financial alphabet soup to employees who aren’t finance experts. If they don’t understand what they’re signing up for—including the risks—you’ve defeated the whole purpose. Smart companies invest time in clear explanations, real examples, and honest conversations about what could go wrong.
- Working with an Employer of Record (EOR) service changes the game. When you’re managing employees across borders, integrating deferred comp with an employer of record partner like Pebl streamlines everything. Instead of juggling different payroll systems, tax requirements, and compliance rules for each country, you get one system that handles it all. We manage deferred compensation administration in 185+ countries, so you can offer competitive packages without becoming an international tax expert yourself.
Make deferred compensation work everywhere your team works
Ready to offer competitive deferred comp packages without becoming an expert in 185 different tax codes? That’s where Pebl comes in. We handle the complexity of deferred compensation across borders—from Singapore’s CPF requirements to Germany’s pension rules to U.S. Section 409A compliance.
You get to focus on building the packages that attract and keep your best people. We make sure those packages actually work (and stay legal) wherever your team calls home. No more losing great candidates because you couldn’t figure out their local deferred comp rules. No more compliance headaches when tax laws change.
Let’s talk about how to build deferred compensation into your global hiring strategy. We’ll show you what’s possible when you have the right partner handling the details.
This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
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