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Global Work Glossary

Lost in a maze of global employment jargon? Find your way out with our handy collection of work and HR terminology

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Deferred compensation

What is deferred compensation?

Deferred compensation is a compensation model where a portion of an employee’s earnings is withheld and paid out at a later date. Most often this is as part of a retirement or incentive plan to provide tax benefits and help with long-term financial planning.

One common form of deferred compensation is the use of retirement savings plans, such as 401(k) or pension plans. In these cases, employees contribute a percentage of their income to the plan, and the employer will match those contributions. In many cases, these funds are not taxed until the employee reaches retirement age at which point they will likely be in a lower tax bracket and pay less.

Deferred compensation can also take the form of executive bonuses. For example, an employee might receive stock options as part of their compensation package, but only be able to access them after a certain number of years or if the company achieves specific goals. This can act as a motivational driver for employees.

Companies often use deferred compensation as a benefit to attract talent. It can also be structured in a way that encourages employees to stay with the company for an extended period therefore improving retention rates too.

Despite these benefits, however, deferred compensation does come with risks. To properly manage this model, it’s best to use a payroll solution such as Multiplier which will stay on top of compliance and tax considerations.

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