Executive Compensation Design

Deferred Compensation Design: Your Ultimate Guide

Far gone are the days where you can retain a top employee with a once annual holiday bonus! Whether your bank is going through a merger, sale, or substantial transaction, it is essential that you create deferred compensation plans that aid in retaining your top talent and senior leadership. So, on behalf of Newcleus’ Bank Advisors and Compensation Advisors, we welcome you to Deferred Compensation Design: Your Ultimate Guide.

Identify Your Objectives

The specific objectives of any deferred compensation plan will vary on a case-by-case basis; however, there are four objectives that typically remain the same when designing deferred compensation plans.

  • Attract executives
  • Incentivize executives
  • Retain executives
  • Minimize employer’s after-tax cost

When you set concrete objectives like these, the process of designing a compensation plan that aligns with your company and its goals becomes much simpler.

Deferred Compensation Design: Your Ultimate Guide

Designing a Compensation Plan: The Elements

When it comes to compensation design and packaging, there are a variety of benefits that can be bundled together—all with varying attractiveness and effectiveness. Most commonly, however, deferred compensation plans, at the least, consist of four elements:

  • Base salary
  • Short-term incentive (typically an annual bonus)
  • Long-term incentive
  • Additional benefits and perquisites

A lot of behind-the-scenes work goes into determining which elements should be included in an executive’s compensation plan. For example, organizations typically conduct competitive pay analyses and research company culture, industry practices, and compensation philosophy to propose an executive compensation package.

The beauty of compensation plans, however, is that no two compensation plans are exactly the same. Compensation plans are designed to boost an executive’s performance or efficiency in their role, through the use of compensation components—which can be modified occasionally or on an annual basis.

Deferred Compensation to Improve Performance

According to the Center on Executive Compensation, “Executive pay packages differ substantially from… typical employee pay [because] the vast majority of an executive’s pay is contingent compensation and structured only to reward the executive for actual, positive company performance and growth in shareholder value.” In other words, many executive benefits are conditional.

For this reason, deferred compensation plans strategically require employees to perform at a certain level. Aside from non-financial measures, an employee’s performance can be measured through project completion, quality control measures, and customer or employee satisfaction surveys.

When designing your deferred compensation plans, be sure to cater the metrics to your company’s unique goals and specifically, areas that the executive has a direct influence on.

Seek out a Professional Opinion

The cost of turnover is extremely high. Built In estimates that losing an employee can cost an employer 1.5-2 times the employee’s salary, so retention through deferred compensation is key. When it comes to deferred compensation design, however, there are many details to consider, and it is often best to seek the advice of a professional. 

At Newcleus Bank Advisors and Compensation Advisors, we stand ready to provide advanced consulting and support services related to designing top-level deferred compensation. Our experts bring a deep and thorough knowledge of robust financing solutions and alternative funding opportunities. Contact us today to learn more!