What is Deferred Compensation? 

When an employee agrees to receive a portion of their pay at a later date, we call it deferred compensation. 

Usually, this would refer to post-retirement compensation or at a specified future time rather than receiving it on a regular paycheck. 

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Why do Employers Offer Deferred Compensation?

Employers use this compensation method to encourage employee retention and reward long-term company loyalty. If employees know they will receive part of their pay at a later date, they’ll be more likely to stick around. 

You can use several forms of deferred compensation, depending on your company's policies and the specific agreement with the employee. 

These include things like:

• ‍Retirement Plans: Many companies offer retirement plans like 401(k)s in the United States or other pension plans, where employees can contribute a portion of their salary on a pre-tax or post-tax basis. These contributions are invested and grow over time, giving the employee a source of income during retirement.
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• Stock Options: Employees may be granted the option to purchase company stock at a predetermined price later. This allows employees to benefit from any increase in the company's stock price over time.
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• Restricted Stock Units (RSUs): RSUs are a form of equity-based compensation where employees are awarded shares of company stock that vest over time. Once the RSUs vest, the employee can sell the shares or hold onto them, depending on their preference.
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• Bonuses and Incentives: Some companies may offer bonuses or incentives paid out later, typically based on the employee's performance or the company's financial success.
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• Deferred Bonus Plans: These plans allow employees to defer a portion of their annual bonus into a separate account, which is then paid out at a specified future date.
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Deferred compensation can offer several benefits to both employers and employees. For employers, it can help attract and retain top talent by providing long-term incentives. For employees, it offers a way to save for retirement or future financial goals while taking advantage of tax benefits.

It's important to note that deferred compensation arrangements often come with specific rules and restrictions, and the tax treatment can vary depending on the country and the type of plan. As such, it is advisable for employees to thoroughly understand the terms and tax implications of any deferred compensation plan before participating in it. Consulting with a financial advisor can help make informed decisions regarding deferred compensation options.

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How Can Borderless Help?

Managing a remote team is tough. At Borderless, we understand the ins and outs of global employment, including tricky topics like deferred compensation. We’re here to ensure you understand how deferred compensation impacts both your payroll responsibilities as an employer and your legal compliance requirements.   

In over 170 countries, we can help you understand the different work cultures worldwide and act as your guide through your employees’ entire tenure with your company. 

Book a demo today to find out how we can help.