If your business is thriving in today’s competitive business marketplace, it’s likely because of a few mission-critical players in your organization. You know the types: the go-getters, the winners, the difference makers, the keepers, the next generation of owners, the best-of-the-best employees, the ones that are hard to get and even harder to keep. Current compensation and benefits keep them happy, productive and motivated. But what keeps them there for the long run? The company needs to offer them a powerful incentive such as a benefits package based on performance, stability and even ownership.
Non-qualified deferred compensation (NQDC) arrangements can help you attract, retain and reward your most valuable and “mission-critical” employees. They are designed by the company to help their key employees grow and flourish with the company. They can also allow for flexibility and customization. The “art” of designing company compensation arrangements is in understanding the laws of taxation, the power of tax deferral and the power of tax-deferred investing.
Unlike a tax-qualified arrangement, which is non-discriminatory, a non-qualified arrangement can be discriminatory. A company should select only those key employees they want to protect and reward, designing payment schedules that emphasize those aspects of compensation they wish to incent. A Non-qualified Deferred Compensation (NDQC) plan is an arrangement where an employer promises to provide compensation to an employee in the future, typically at retirement. The employer can use the plan to provide extra benefits to key employees over and above the limitations on qualified plans such as 401k and profit sharing plans. These arrangements provide “golden handcuffs” on the key employees to the extent that employees who terminate prior to vesting are not entitled to any benefits under the plan.