Deferred Compensation and Other Fringe Benefits
by LOYD F. ARMSTRONG Principal, Houston Office
Presented at technical conference of Houston Chapter of the National Association of Accountants—January 1961
DEFERRED COMPENSATION in its broadest form may be said to be any type of payment, regardless of the form in which made, that is earned, at least conditionally, currently but is payable at a future date. The exact conditions of a particular plan are almost as varied as the number of companies that have them. The form of payment may likewise be variable as to form and time.
The objectives of the various types of plans will also vary within each company. There are, however, several underlying reasons that contribute to the type of plan adopted in almost every situation. The sharply graduated rates of tax applicable to individual incomes have made it extremely difficult for the employer to compensate his employees
adequately, particularly those at the executive level. In order to provide adequate incentive for maximum effort it has, therefore, been necessary for the employer to attempt to devise means that will provide income to the employee either at the favored capital gains rates or at a later time when his rate of tax will be lower, or that will provide benefits that are not taxable at all.
Since most employees will also be interested in having an income after retirement, the employer must also consider plans that will give these benefits.
The primary objective of the employer will almost always be to retain the best possible personnel with the least possible turnover, and with the best possible safeguards for his trade secrets. In order to accomplish this, the employer may provide for future compensation that will be payable only in the event the employee remains with the company for a certain specified period and refrains from certain acts that the employer may consider as potentially harmful to his business.
Aside from accomplishing these employer objectives, the primary concern insofar as the employee is concerned is to make certain that the particular type of plan actually allows the employee to report for tax purposes at the subsequent date whatever benefit he derives; or in other language, there must be adequate safeguards against a contention
that a payment is constructively received by the employee before
the time actual payment is made. Certain types of these plans