Deferred Compensation

Blake Miller, CPA, CFE, Partner

Deferred Compensation arrangements are often entered into with executive leadership to enhance their compensation package and keep key individuals at the Company.  These contracts defer compensation today to be paid out sometime in the future and thus also deferring the tax obligation until received by the individual.  

Many times, the Company will set aside the funds (sometimes through a Rabbi Trust) in some type of investment vehicle (i.e. stocks, bonds or life insurance contracts) to avoid a large cash outflow in later years.  Although these investments are set aside to fund the payments to these individuals, they are not owned by the individual yet.  These investments are technically still owned by the Company, otherwise they would be compensation to the individual. These investments should be accounted for as any other investment at the Company. 

The Company will also be recording a liability for the payout that would be owed to the employee.  If the deferred compensation is for past performance, the amount will be accrued for and recorded in compensation cost.  If the arrangement includes compensation for future performance, the obligation will be recognized over a systematic and rational manner until the employee has reached full eligibility of the plan.  The recording of the obligations will be specific to the terms of the arrangement.

Be aware when setting up a deferred compensation arrangement that you will likely be adding an asset and a liability to the balance sheet.  Details of the plan are not disclosed in the financial statements but some items like accrual methodology and deferred compensation costs can be included to better inform the readers of the financial statements.