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Hitting the Home Run in Deferred Compensation: How Small and Mid-Sized Companies Can Reward Key Employees

Bobby Bonilla Day rolls around every year on the first day of July. While you probably don’t have the date marked on your calendar, you can be sure that Bonilla, a former New York Mets third baseman, is celebrating.

Although Bonilla’s final year with the Mets was 1999, and his last year to suit up for any professional team was 2001, Bonilla is still collecting payouts under a well-designed deferred compensation agreement. Per the timing and form of his agreement with the Mets, Bonilla receives just under $1.2 million annually in a payout arrangement that commenced in 2011 and continues until 2025.

Going for the Win

Compensation reward agreements like Bonilla’s aren’t unique in major league sports. Ken Griffey Jr. reportedly deferred roughly 50% of his $112.5 million contract with the Cincinnati Reds, allowing him to draw $3.59 million annually between 2009 and 2024.

Former NBA power forward Kevin Garnett draws $5 million per year in deferred compensation that is being paid over seven years. Garnett’s compensation agreement is structured so that he continues to receive his annual payouts through 2024 despite not playing professionally since 2016. The agreement enables Garnett to add an additional $35 million to his lifetime pro basketball earnings without setting foot on the basketball court. It also potentially allows him to reduce his income tax liability during his peak earning years.

The deferred compensation agreements between many professional athletes and the teams they represent make the news because the players are fan favorites, and people are captivated by the hefty payouts involved. But deferred compensation agreements exist throughout the business world as an effective strategy to attract, reward and retain top leaders and talented workers.

When deferred compensation plans are thoughtfully designed to support the organization’s objectives as the plan sponsor and the long-term needs of the employee as a plan participant, they can be a slam dunk approach to a retirement savings homerun.

The Deferred Compensation Agreement in a Competitive Marketplace

Bobby Bonilla’s contract is among the most publicized nonqualified deferred compensation agreements in sports, making it easy to point to as an interesting but atypical example. For the Mets, the arrangement resulted in both positive and negative outcomes. On the negative side, Mets owner Fred Wilpon chose to invest the $5.9 million owed Bonilla, paying Bonilla instead on a delayed schedule in annual payments, per the terms of the agreement. Unfortunately, the financial advisor Wilpon hired to manage his investment was his long-time friend, Bernie Madoff.

Despite the organization’s loss when Madoff’s investment schemes collapsed, the Mets still realized an upside in the deferred payment arrangement with Bonilla. Before the implementation of the agreement, Bonilla’s declining performance had left Mets fans disgruntled and created distracting drama around the team. Releasing Bonilla from his playing commitment allowed Mets management to trade with the Houston Astros for Mike Hampton. With Hampton’s help, the team restored its fanbase support by claiming a National League Championship and going on to play the 2000 Subway Series against the New York Yankees, creating renewed support and profitability.

Today’s workforce marketplace is not all that different from the high-level competitiveness of sports teams seeking to attract and reward star athletes. The job market remains hot. Layoffs are at record lows while job openings are at near-record highs. Workers are asking for, and in many cases receiving, higher salaries, better benefits and greater autonomy in their roles.

Attracting and retaining exceptional employees for critical positions can be problematic and costly. However, the option to provide a deferred compensation plan is an enticing benefit that many employers can comfortably and effectively offer. For smaller organizations competing against larger employers for the same talent pool, nonqualified deferred compensation offerings can even help level the playing field.

The appeal of deferred compensation agreements includes:

  • Nonqualified plans can function like an “unlimited 401(k)” for employees who can maximize savings. While the cap on contributions to a 401(k) plan for most workers in 2022 is $20,500, there is zero cap on contributions that the employee or the company can choose to make to a deferred compensation plan.
  • Participants can defer taxes on current earned income and investment returns. Plan participants can then choose to receive the compensation incrementally and at a point in their lives when their salary has stopped or declined, and their tax bracket may be lower.
  • Participants can also choose to receive all or a portion of their payout at a predetermined time when a cash infusion is just what they need to purchase a dream vacation home or send their child to college.
  • Organizations have options for how and when they fund the compensation expense.

Deferred Compensation Agreements Afford Creative Design Flexibility

Deferred compensation agreements can be creatively customized to the unique purposes of the company and the individual objectives of the plan participant. They can be complex and detailed or defined by only a few targeted provisions. Either way, they may help fortify an organization’s employee retention strategy.
Vesting and using performance rewards are only two of many ways deferred compensation agreements help nurture employee loyalty and help employers build and keep their winning teams.

Want to read more about nonqualified deferred compensation? Check out these recent articles IRS Audits and the Nonqualified Deferred Compensation Plan and The Retirement Savings Gap for Executives is Real.

Investment advice offered through OneDigital Investment Advisors, an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

Phillip Currie is affiliated with Valmark Securities, Inc. Securities offered through Valmark Securities, Inc. Member FINRA, SIPC, 130 Springside Drive, Suite 300, Akron, OH 44333. 800-765-5201. OneDigital and Fulcrum Partners are separate entities from Valmark Securities, Inc. CA License #0A29734