Deferred compensation is payment, usually for services or work, that is delayed until a later date rather than paid at the time of the job. The most common types of deferred compensation include company stocks and retirement plans. Profit-sharing payments and bonuses are also sometimes considered to fall in this compensation category.
Many companies offer employees some type of retirement plan as part of their compensation packages, making this one of the most popular forms of deferred compensation. Such plans can come in a wide variety of forms. In some businesses, particularly governmental entities, employee participation in a company-sponsored retirement plan is mandatory. In others, participation is completely voluntary.
Employees generally pay a certain percentage of each paycheck into these plans. Often, employers also contribute funds to the plan, sometimes at the same rate as the employee and sometimes at a set percentage of the employee contribution. In this case, the total employer contribution is usually capped.
The employee contribution to a retirement plan may or may not be considered deferred compensation, depending on the plan, because it is drawn from the employee's regular compensation. In most cases, however, the portion contributed by the employer is considered deferred compensation because it is earned in addition to the employee's regular salary or wage. If, however, the employer contribution is not part of a safe harbor plan, it may not be considered income for tax purposes until the employee is vested.
Company stocks or shares may also be offered as deferred compensation. The employee usually accepts a lower rate of pay in exchange for earning a certain number of shares for a given period of service. This often happens at start-up companies that have limited ready cash but anticipate returns in the long run. It is also a popular strategy for compensating senior executives at privately held corporations.
Depending on how they are set up and paid, profit sharing and other bonuses may be considered deferred compensation because they are generally paid at less-frequent intervals than the employee's regular salary. Employees often receive bonus pay for work performed several months prior or for cumulative work over a period of months. Many economists, however, would argue that, while this meets the technical definition of deferred compensation because it is, indeed, delayed, it is not the type of payment usually implied by the term. The exception would be companies that feed profit-sharing proceeds into a company-sponsored retirement fund.