Driving Performance and Motivation: Why Your Business Needs a Deferred Compensation Plan

In a perfect world, every business team is highly motivated and produces outstanding work consistently. However, motivating employees to meet organizational goals is a challenging feat.

Employee motivation and job satisfaction are interrelated and significantly impact workplace performance. Managers must determine what motivates their employees and help them prioritize these drivers.

Reward for Success

Properly rewarding success will help boost morale and motivate employees to strive for excellence. This can be done in several ways. One of the most effective is through monetary incentives, such as bonus payments and profit-sharing schemes. These monetary rewards will fuel an employee’s ambition by creating a clear connection between their hard work and financial gain.

Another way to reward success is through recognition and appreciation. This can be done through public accolades such as awards ceremonies or employee of the month/year programs. It can also be done through non-monetary rewards, such as days off, flexible schedules, or perks like discounts on company products and services. However, it is important to note that rewards should be given out fairly and thoughtfully so every employee can succeed.

Lastly, deferred compensation can be used to help reward success and create an incentive for employees to stay with the company. This can be done through cash-based deferred compensation plans that can be adjusted for future performance or through phantom equity (also known as synthetic equity) plans that allow for the grant of an equity share paid upon termination. A deferred compensation plan can help align the interests of an employee with those of the business by providing the potential for a substantial benefit while limiting the risk to the employer by including clawback mechanisms in case an employee is terminated early.

Incentives for Performance

Employees want to feel that their efforts are appreciated. Incentives provide a powerful way to motivate employees and can be offered in many forms. They can include monetary incentives such as bonuses and commissions or non-monetary rewards such as flexible work schedules or additional time off. The incentives you offer must align with the values of your business. For example, commission-based bonuses may be appropriate if you want to increase sales. If teamwork is a crucial value, rewarding successful project completion may be more effective.

It is also important to clearly define the performance metrics upon which your incentive plan will focus. This will ensure that the goals are clearly understood and can be measured. This will prevent the plan from becoming a “reward in search of a problem” or an unwieldy compensation mechanism. In addition, it is a good idea to consider the impact of inflation and taxation on your incentive plan goals.

Incentives can be offered as an incentive payout at the end of the year or through a nonqualified deferral (NQDC) plan. Typically, NQDC plans are used as retention tools for high-performing executives or to encourage them to stay with the company long-term. These plans are sometimes referred to as golden handcuffs because the taxable amount of an employee’s distribution can be substantially reduced if they leave before a certain age.

Increased Employee Engagement

The idea of a financial security plan is a powerful incentive that can boost employee morale and increase overall job satisfaction. Adding a deferred compensation plan to your benefits package allows employees to save money for retirement, significant events such as new homes or college tuition, or life’s unexpected circumstances. This type of long-term reward is a great way to entice top candidates and strengthen an existing employee retention strategy. The type of deferred compensation plan you choose depends on your organization’s goals and employee preferences. Research the options to find what’s best for your business. For example, nonqualified deferred compensation (NQDC) allows your company to offer various investment options for an employee’s savings while not impacting their current tax status. This deferred compensation plan is a good fit for high-earning executives but may appeal to someone other than your other employees.

Other deferred compensation plans include severance packages and golden handshakes, which provide compensation upon termination, retirement, or a change in company control. These arrangements are commonly offered to key executives and employees to increase retention and help facilitate buy-in during transition periods.

Financial Security

Financial security is the ability to feel confident that you can cover expenses or manage money emergencies, even in the case of a job loss or health crisis. It combines short-term money tactics, like budgeting and consistent saving, and long-term financial goals, such as paying down debt and saving for retirement or children’s college tuition. Financial security also encompasses a sense of peace of mind, which results from knowing that you have a buffer for unexpected life events and the flexibility to pursue opportunities aligned with your values.

Offering a deferred compensation plan helps employees achieve financial security by allowing them to save for significant events—like retirement or a new home—on a pre-tax basis. Deferred compensation plans include employee stock options, pension, and profit-sharing plans. These savings can be invested in various ways, depending on the plan type and employer. For example, a traditional 401(k) invests pre-tax dollars that grow tax-deferred, while a Roth 401(k) uses after-tax funds and grows tax-free. These plans may also be tied to the company’s performance, which can increase or decrease the value of the savings, so employees need to monitor their investments regularly.

Nonqualified deferred compensation (NQDC) plans are often invested in company stock. This can benefit high-income individuals who want to diversify their investment portfolios. Still, it can also mean that the savings they build up in a nonqualified plan are at risk of losing value if the company fails to pay its debts.