For more than a half century Congress has recognized the important public policies served by allowing employers and service providers to defer the payment, and taxation, of compensation.
Supplements to Qualified Retirement Plans
401(k) benefits, and other qualified retirement plans, are limited. Service providers use deferred comp to supplement qualified retirement plans.
Attraction and Retention
Employers use deferred compensation to attract key service providers, and then to retain them for the long term. Noncompete clauses and other punitive techniques can be demotivating and are usually ineffective. Rewarding longevity and loyalty is a positive and effective way to retain top talent.
Without long-term compensation, "short-termism" sets in with moral hazard soon to follow. Deferring compensation, and putting it "at risk," over the period of service, is the antidote to short-termism. Many experts have observed, for example, that deferred compensation would have prevented, or at least mitigated, the subprime mortgage fraud.
Lower Financing Costs
Deferred comp is unreduced by taxation, thus providing a larger capital and collateral base. The result is easier borrowing at reduced cost.
"Note too that, once paid, bonuses are typically not recoverable later. This absence of any deferred compensation gives fund managers an incentive to focus only on the period to their next bonus. If the fund makes losses later, then that is not their concern (or, of course, their fault). The absence of deferred remuneration thus institutionalizes short-termism and undermines the incentive to take a more responsible longer-term view."
Moral Hazard and the Financial Crisis,
Kevin Dowd, Cato Journal,
Vol. 29, No.1 (Winter 2009):