Good employees are hard to find, particularly in the construction industry. If your business has struggled to attract and retain top talent, a nonqualified deferred compensation plan (“NQDC plan”) may be the tool you have been missing.
Compensation packages in the construction industry typically combine a relatively low rate of base pay with substantial project-based commissions or bonuses. While effective at rewarding productive employees upon completion of key projects, such compensation packages leave the door open to poaching by competitors once annual bonuses have been paid.
Adding a NQDC plan would enable the employer to introduce an additional element to the compensation package: time. For example, instead of offering a $50,000 annual cash bonus, a NQDC plan might offer a $200,000 cash bonus that is payable only if the employee remains with the employer for four years. Making a significant amount of compensation dependent on future services encourages retention and incentivizes employees to take the long-term financial success of the company into account.
A well-designed NQDC plan offers the following features and advantages:
- Participation can be limited to only a few key employees, with no requirement to offer similar benefits to the workforce at large.
- Any benefit amount is allowable, and benefits can differ from participant to participant.
- Benefit determinations can be discretionary; formula-based (for instance, a specified percentage of revenue or profits); or a combination of the two.
- Vesting provisions can extend as long as the employer desires. (Typical vesting schedules include a rolling four-year vesting schedule applied to each annual benefit, or, for employers looking to encourage longer-term retention, a graded 10-year vesting schedule with the bulk of vesting delayed until the later years).
- Accelerated vesting and/or early payout can be provided in certain circumstances, such as death, disability or a change in control event.
- Benefits are not required to be pre-funded by the employer.
- Benefits are taxed to the employee and deductible by the employer in the year paid (i.e., not until after vesting).
A NQDC plan can also be designed to include “phantom equity” features that mimic the economic impact of business ownership. A phantom equity plan measures benefits not in terms of cash, but rather in terms of hypothetical shares that mirror the value of the enterprise or even the employee’s specific division. As the company grows, so does the value of the participant’s account.
Reach out to a member of the Schneider Downs Retirement Solutions team to learn more about how your company might benefit from a custom-tailored NQDC plan.
