Non-qualified Deferred Compensation vs. Incentive Bonus Plans

In today’s employment environment, it’s increasingly more common for employers to provide enhanced benefits to remain competitive when recruiting and hiring. What we sometimes see missing from this equation is the enhanced compensation package fails to provide the same level of benefit for existing key employees. When this occurs, key employees may look for employment elsewhere just to receive the equivalent benefit of a new hire. No one wants to see their top contributors leave the organization. So, how do you bridge the gap between these two situations? Create a compensation package to attract new employees that can also be used to retain key employees.

This is where a non-qualified deferred compensation or incentive bonus plan can come into play and provide a solution. The first thing to determine, when considering these options, is the classification of employees you want to target with this benefit. Are you looking to only target your key executives? Or, are you hoping to establish a specific classification or subcategory for all employees? The answer to this will largely define the best solution.

Non-qualified Deferred Compensation Plans

A non-qualified deferred compensation program is designed to help you reward and retain key employees. This type of plan must separate a select group of employees. It provides both employer and employee deferrals, which remain subject to creditors. The plan is limited in that it does not let you focus on select employees that are critical to the company unless they are considered a highly compensated employee. This is often why many employers leverage an incentive bonus plan, as it allows you to be more creative and hand select employees for an enhanced compensation program.

Incentive Bonus Plans

A deferred compensation incentive bonus plan is a way to provide an enhanced program to reward and retain top employees. It can be used to target both highly compensated and non-highly compensated employees. As an employer, you can create various employee categories and offer incentives for reaching the set goals of each category. Further, goals can be different for each classification and can be based on attaining individual or team objectives. The contributions are made on a pre-tax basis for the specified employee, with the promise to pay the contribution plus earnings at a later date. You can also determine the vesting schedule, which can be up to a maximum of 10 years (however the most common vesting schedule is around five years).

In a competitive market, it’s important to not only focus on your recruitment and hiring strategies, but also your retention programs for key staff. A top benefit employers can offer is a compensation package that matches your employees’ contributions to the organization. Consider your options with a non-qualified deferred compensation or incentive bonus plan. And as you evaluate your compensation strategies, don’t hesitate to reach out to Sikich’s experts for support.

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