board meeting in bright room

How to Convince Your Board to Offer Nonqualified Deferred Compensation Plans

board meeting in bright room

As an employer contemplating implementing a Nonqualified Deferred Compensation Plan (NQDC) for your key employees, you may encounter resistance or skepticism from your board of directors. Concerns about cost, risk, complexity, and potential impacts on financial statements and shareholder value may arise. How can you communicate to the board that an NQDC plan is a strategic fit for your organization? Here are actionable tips and strategies to highlight the value and advantages of an NQDC plan.

1. Showcase Data and Trends

Convincing the board begins with presenting compelling data and trends supporting the need and value of an NQDC plan. Utilize statistics and surveys demonstrating the prevalence and popularity of NQDC plans across diverse industries and company sizes. Illustrate how these plans effectively address current market challenges and opportunities, such as the tight labor market, shifting workforce demographics, the decline of pension plans, and the increasing tax burden on high-income earners.

2. Highlight Benefits and Features

Another persuasive approach involves highlighting the benefits and features of an NQDC plan for both the company and key employees. Emphasize how the plan attracts, motivates, and retains top talent while aligning their interests with company goals. Articulate how NQDC plans empower critical employees to save more for retirement, reduce current tax liabilities, and diversify retirement income sources. Stress the flexibility and customization options available, including eligibility, contribution types, vesting schedules, investment choices, and distribution options.

3. Address Concerns and Objections

Effectively address the board’s concerns and objections about the plan’s cost, risk, complexity, and impact on financial statements and shareholder value. Assure the board of compliance with relevant tax laws, such as Section 409A of the Internal Revenue Code, through consultations with experts and advisors. Outline a funding strategy balancing cost and risk implications, utilizing general assets, corporate-owned life insurance (COLI), mutual funds, or a combination of these vehicles. Demonstrate adherence to accepted accounting principles (GAAP), including comprehensive modeling and stress testing of the plan design. Transparently communicate the plan’s details to shareholders.

4. Provide Examples and Testimonials

Enhance your case by presenting examples and testimonials from companies successfully implementing and benefiting from NQDC plans. Share case studies or stories from your industry peers, illustrating how NQDC plans have enriched compensation and benefits programs for key employees. Include testimonials or feedback from key employees expressing interest or satisfaction in participating in an NQDC plan.

Implementing an NQDC plan can significantly elevate your compensation and benefits program for key employees. By leveraging these tips and strategies, you can effectively convey to your board of directors that an NQDC plan is a strategic fit for your organization.

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