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Designing a Plan for Executives in Other Nations
A deferred compensation plan is an integral part of the compensation and benefits packages of U.S. executives. It is a way for them to defer tax on cash compensation, achieve capital accumulation and build additional retirement income. In addition, U.S. multinational firms increasingly provide deferred compensation plans to their executives located in other countries (i.e., local resident executives).
Recently, important issues have surfaced regarding deferred compensation arrangements both in the United States and abroad. First, U.S. multinationals heavily use employer stock in structuring deferred compensation arrangements. With the stock market downturn in recent years, there has been growing concern with the use of employer stock. Secondly, there has been little attention paid to making these arrangements tax-effective for the local resident executives. Local resident executives have begun demanding this compensation in a tax-deferred or tax-effective manner, with or without the use of employer stock.
These issues are prompting U.S. multinationals to explore other locally available alternatives in developing and implementing future deferred compensation arrangements for local resident executives. Unfortunately, there are no easy answers, given the fact that deferred compensation takes various forms around the world and is viewed differently in each country.
This article considers the challenges a company would face in designing a deferred compensation plan for local resident executives. A number of entities will be used to illustrate these challenges, including Australia, Belgium, Brazil, Canada, Germany, Hong Kong, Italy and the United Kingdom. This article also reviews the steps that can be taken to develop a worldwide-- deferred compensation strategy - a critical first step in any effort.
Global Differences
Under a typical U.S. voluntary deferred compensation plan, a U.S. executive elects to defer a portion of his/her salary or bonus for a specified time period or until retirement/ceasing employment. Appreciation during the deferral period might be at a fixed rate, linked to the employer stock or linked to the 401 (k) plan type options.
Other types of deferred compensation arrangements in the United States include top hat and excess benefits plans. These are nonqualified arrangements typically provided to executives at the employer's cost and typically designed to supplement or restore qualified retirement benefits that are reduced due to Internal Revenue Service...