Types of Non-Qualified Deferred Compensation Plans
Non-qualified benefit plans are a key tool to help you recruit, reward and retain top talent. While these plans are highly flexible and can be structured to match an organization’s specific needs, there are seven core plans that most corporations implement.
1. Restricted Stock
Restricted Stock is typically a common stock with guidelines regarding vesting and selling. The stock is granted to employees upon reaching predetermined milestones, and payment is not usually required. The holder of restricted stock cannot sell their shares until they vest. Additionally, a company typically retains the right to repurchase all unvested shares upon termination of the holder’s employment.
2. Stock Options
Stock options represent the right to buy a company’s stock at some future date at a price established now. The future value of high-growth companies can exceed current values by large amounts, meaning a potentially significant benefit for employee. Upon exercise, the recipient becomes an official shareholder.
3. Phantom Stock Plan (PSP)
In a Phantom Stock Plan, the company gives key executives/employees the value of the stock plus a benefit based on stock price. This gives them the benefits of stock ownership without diluting the shareholders.
4. Stock Appreciation Rights Plan (SAR)
As in a Phantom Stock Plan, SARs increase in value as the company’s stock price rises. Unlike stock options, the employee does not have to pay the exercise price, and receives only the amount of increase in price, typically in the form of cash upon exercising or a set date.
5. Restricted Stock Units (RSUs)
Restricted Stock Units (RSUs) are a commitment to give the value of a specific number of the company’s shares in the future. Payment is not usually required. Certain conditions, such as vesting, must occur before the holder of RSUs can receive the promised value. Settlement of RSUs can occur in stock or cash equivalent. If recipient is granted stock, they become an official stockholder.
6. Supplemental Executive Retirement Plan (SERP)
In a Supplemental Executive Retirement Plan, the company agrees to provide supplemental retirement income to the executive and his family if predetermined eligibility and vesting conditions are met by the executive.
7. Executive Deferred Compensation Plan (EDCP)
An Executive Deferred Compensation Plan is an agreement between the executive and company to defer a portion of annual income until a specific date in the future – often 5-10 years, or until retirement. Income taxes are deferred until the money is paid, and employers often invest the money and credit interest to the plan.
Employee Stock Ownership Plans
An ESOP (Employee Stock Ownership Plan) is an employee benefit plan that allows the owner of a closely held business to sell some or all of their stock to an ESOP Trust in exchange for payments from the ESOP for up to the Fair Market Value.
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