An Introduction to Executive Compensation
This text analyzes package elements and, drawing upon practitioner and academic literature, leads readers through the development of optimal plans under varying circumstances.
TABLE OF CONTENTS An Introduction to Executive Compensation
Chapter 7: Deferred Compensation
I. INTRODUCTION
When an employee performs services in one period and receives payment in a subsequent period, the compensation is said to be deferred. The future payment can be in cash, for example, a pension or annuity, stock, or benefits (e.g., the employer continues to pay the employee's health insurance premiums after the employee retires). On some level, stock-based compensation granted in the current period can be considered deferred, as while the options and/or shares are granted in the current period, the executive does not have full rights to them until they vest in some future period. Furthermore with options, if the exercise price is greater than or equal to the market price at the date of grant, executives will not be taxed at least until the options are exercised. [1] Compensation may be deferred to a future period for a number of reasons including, but not limited to, incentives and taxation.
A. Pensions
The most common form of deferred compensation for most employees is their pension, whereby they earn benefits while working and receive payments after they retire. Pension plans fall into two categories, defined benefit and defined contribution.
1. Defined Benefit Plans
As noted in Chapter 2, all of the CEOs in the Standard & Poors' ExecuComp database participate in defined benefit pension plans. Defined benefit plans provide employees with guaranteed payments based upon predetermined benefit formulas, formulas that may take into account retirement age, length of service, and preretirement earnings. Formulas include those based on terminal...
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