How does a company keep a key employee from leaving? What incentives can be given to further motivate the employee? How can a benefits plan be structured to minimize impact on cash flow to the employer? What are the tax consequences to the employee of receiving deferred compensation? How can a deferred compensation package be used to attract desirable employees from other companies who may be hesitant to leave their current employment? These are all relevant questions that must be addressed by almost any business-and by many employees.

All of these are issues with which the investment professional should be familiar to adequately serve his or her clients. What if the investment professional is asked by the client to advise upon or even to implement a deferred compensation arrangement? While it may be unlikely that the client would expect the investment professional to implement a plan, the investment professional should be knowledgeable enough to be able to offer suggestions and alternatives and narrow down the list of potential options available in light of the client’s situation. It would then be up to the investment professional to seek professional assistance from an attorney to actually draft the agreement. In this case, it would be the investment professional’s responsibility to see that the final result of the arrangement meets the needs and objectives of the client.

Understanding a client’s qualified and nonqualified plans, as well as any additional compensation packages, is essential to being in tune with the entire financial picture of the client. A basic knowledge of compensation arrangements is extremely helpful in dealing with clients and employee benefits specialists. An investment professional who is conversant in these areas can form a very lucrative niche with referrals from professionals who deal with small business owners and executives of large corporations.

For the purposes of this module, nonqualified plans will be thought of along three lines: retirement funding, incentive compensation, and severance packages. All three areas can involve significant client dollars, thus representing attractive opportunities for investment professionals who understand the basics of these plans.

Author: Jennifer Coombs

Jennifer Coombs is an associate professor at the College for Financial Planning. Prior to joining the College, Jennifer spent a decade working in the financial services industry in New York City, with a special focus on equity research and analysis. She holds a Bachelor of Science degree in Finance and Political Science from Clarkson University. You can contact Jennifer at jennifer.coombs@cffp.edu.

Complexity Level: Intermediate