Deferred Compensation

Deferred compensation refers to a portion of an employee’s income that is earned in one period but paid out at a later date. Instead of receiving their full earnings immediately, the employee agrees to postpone part of their pay, often until retirement, the end of a contract, or a specific event such as a company exit or share sale.

This arrangement is commonly used as part of executive compensation packages, long-term incentive plans, or retirement strategies. It can also be useful for startups and global companies seeking to offer competitive benefits without upfront costs.

Non-qualified deferred compensation (NQDC)

These are informal agreements between employer and employee to delay payment of income. They’re not subject to standard retirement plan regulations, giving companies more flexibility but also more risk.

Example: A senior executive agrees to receive a $50,000 bonus five years after earning it, provided they stay with the company. The agreement is recorded in their employment contract but isn’t held in a separate trust.

Qualified deferred compensation

These are formal retirement plans regulated under national laws (such as pension schemes, provident funds, or government-approved retirement accounts).

Example: An employee contributes part of their salary to a pension scheme that meets government guidelines, and the employer matches the contribution. The plan is tax-advantaged and protected by regulation.

Stock options and equity awards

Instead of cash, employees receive shares or options that vest over time. These are common in startups and tech companies.

Example: A remote developer is awarded 1,000 company shares that they can access only after three years of continuous employment. If the company’s valuation increases, the deferred reward can be significant.

Phantom equity or share appreciation rights (SARs)

Employees don’t receive actual shares but are promised a cash bonus equivalent to the increase in share value over time.

Example: A manager receives phantom equity with a value based on the company's future growth, payable after five years.

Deferred compensation is typically documented in a written agreement that outlines the specifics of the arrangement. Key elements include:

• The amount of income being deferred
• The timeframe for payment
• The method of disbursement (e.g. lump sum or instalments)
• Conditions such as continued employment, company performance, or retirement

Employers may choose to:

• Set aside funds in a trust (known as a rabbi trust in some jurisdictions)
• Record it as a future liability in accounting
• Fund it later as part of annual budgets

Proper legal review is often needed, especially for international teams, as tax treatment, employment rights, and contract law vary by country.

"Think of deferred compensation as a win-win: a clever way to keep awesome talent around while helping them build a brighter financial future!" —Maja Krsteska, Head of HR admin at Native Teams

For employers

• Retains key talent: Employees are incentivised to stay long-term.
• Reduces immediate payroll expenses: Useful for cash-constrained or growth-stage companies.
• Aligns goals: Encourages employees to focus on company success and performance.

For employees

• Tax deferral: In some countries, tax is paid only when the income is received.
• Long-term savings: Helps with retirement or major future financial goals.
• Potentially higher future income: Particularly when tied to stock or business growth.

For employers

• Future financial obligation: The company must budget for and honour future payments.
• Legal and compliance complexities: Especially in multinational contexts with differing tax and labour laws.
• Reduced flexibility: Deferred compensation becomes a liability that can limit financial agility.

For employees

• Risk of forfeiture: If the company goes bankrupt or the agreement isn't enforceable.
• Delayed access to earnings: Not suitable for employees needing regular liquidity.
• Tax uncertainty: Cross-border employees may face unclear tax implications.

With teams spread across different countries, deferred compensation is gaining popularity as a way to unify reward strategies while adapting to local employment costs. It enables employers to:

• Retain overseas workers through long-term incentives
• Offer stock and equity in lieu of high cash salaries
• Spread financial obligations over time

However, localisation is critical. A plan that works in the UK may not be legal or tax-efficient in Germany or India. Deferred schemes must account for:

• Double taxation agreements
• Local labour rights and severance laws
• Cross-border fund transfers

Native Teams supports global companies by combining payroll and employment tools with local compliance expertise, making it easier to stay compliant when dealing with international teams.

Global payroll providers must be equipped to handle deferred income alongside regular wages. This means more than just delaying a payment - it involves:

• Accurately recording the liability in payroll systems
• Ensuring local tax compliance at the point of payout
• Syncing deferred plans with employment contracts and benefits
• Tracking vesting, forfeiture conditions, and milestone events

This complexity is why companies working across borders need robust, integrated systems like those offered by Native Teams.

Also read: Managing global payroll: A comprehensive guide for remote teams

Native Teams is a global work payments platform that supports companies in building compliant and flexible global compensation strategies. For businesses, our platform ensures that core employment and payroll functions are aligned and managed smoothly across borders. We help international employers with:

• Regular global payroll and bonus processing
• Employer of Record (EOR) services to legally employ staff abroad
• Multi-country salary disbursement, tax reporting, and documentation

By simplifying global workforce management, Native Teams enables businesses to confidently support long-term employee incentives.

• Deferred compensation allows employers to delay paying part of an employee’s earnings.
• It can benefit both parties through tax deferral, retention, and financial planning.
• Various types include pensions, stock options, and non-qualified plans.
• Global teams must ensure local legal and tax compliance.
• Native Teams helps businesses manage salary payments for their global teams ensuring complete compliance.