To Defer or Not to Defer
To many people, the idea of deferred compensation is simple and obvious: in a deferred compensation plan an employee agrees to delay receiving compensation until some date in the future. However, not unlike many other "obvious" things, this understanding is so oversimplified as to be simplistic.
The term "nonqualified deferred compensation" encompasses two fundamental plan designs, known as:
"True" deferred compensation plans, and
Salary continuation plans
At bottom, the difference between the two types of deferred compensation is whose money is funding the plan benefits.
A true deferred compensation plan is one that is consistent with the common understanding of the term: the participating executive agrees to delay the receipt of a portion of the compensation to which he or she is entitled. Typically compensation is delayed until the executive retires.
In contrast, a salary continuation plan -- the other deferred compensation design -- does not require that the executive defer any compensation at all. Instead, the employer agrees to fund the benefit entirely. Although true deferred compensation plans continue to be used, it should come as no surprise that they are far less popular among executives than salary continuation plans. These plans are often known as SERPs -- Selective Executive Retirement Plans.