Introduction to NQDC as a problem solver

• Author: Marla J. Aspinwall - Michael G. Goldstein
• Pages: 27-44

CHAPTER I

INTRODUCTION TO NQDC AS A PROBLEM SOLVER

I. INTRODUCTION

If clients had no problems, they would not need our help. There are a variety of

problems that may be encountered in practice that can be addressed by nonqualified deferred

compensation (“NQDC”) arrangements. As will be discussed in greater detail in this and the

succeeding chapters, a NQDC arrangement is essentially a compensation arrangement that

(i) provides for the payment of cash, property or benefits in a calendar year which is later than the

calendar year in which the services being compensated are performed, and (ii) does not come

within one of the categories of deferred compensation arrangements which are “qualified” under

applicable tax statutes. This first section describes a variety of problems for which NQDC can be

a solution.

A. Employee Problems.

The Retirement Gap. My annual social security benefits and qualified plan benefits

(such as pension or profit-sharing plans) after retirement will be small compared to my current

salary and will not provide me with enough annual income for retirement. What can I do?

My Qualified Plan Benefits Are Disappearing. The qualified plan rules continue to

change, and I am afraid that I will not be able to receive the level of benefits from my qualified

plan that I need to retire. How can I make up the difference?

My Faith in Social Security and Government Health Care Programs Is Shaken. In

planning for retirement, I always counted on receiving something from Social Security, and I

always thought Medicare would cover my health care costs. What if they collapse or simply fail to

provide the level of benefits expected?

Anticipate Future Expenses. I have elementary school age children who have no

athletic abilities and I am now concerned about how I will be able to pay for their college

education. How can I plan for this?

Burying Some Nuts - the Entertainer or Athlete. I am earning plenty of

compensation now and am paying a lot of taxes, but what will I be receiving at retirement? A lot

of famous people have ended up bankrupt. What can I do?

B. Employer Problems.

Key Employees Keep Leaving. Several of our key employees have quit and gone

to work for the competition. This is very expensive. For example, if a sales representative quits

we have to recruit a new sales representative who will need to be trained and introduced to the

sales territory and the customers, all while trying to keep the customers happy. How can we create

a financial incentive for our employees to stay with the company?

Enforcing Covenants Not to Compete and Confidentiality Agreements. After a key

employee retires or otherwise terminates employment with our company, it is very important that

the employee (1) not go to work for the competition, and (ii) not disclose any trade secrets,

marketing strategy, customer information, etc. We talked to our attorney who included a covenant

not to compete in all of our employment contracts with key personnel in states where this is

permissible, but even in those states the covenant is only for a limited period of time and only

applies within a limited geographic area. The attorney said the rules are not clear on when a

covenant will be enforced and to what extent it will be enforced. For example, although we

wanted the covenant to apply for more years and to cover a bigger geographic area, the attorney

said that even the time and distance terms set out in the employment contracts could be second-

guessed and deemed unenforceable by a court. The attorney could not give us any guarantees.

Furthermore, the attorney said that because of all the uncertainty surrounding covenants not to

compete, it can be expensive to try to enforce a covenant not to compete and that litigation often

occurs. This is an important issue for the company. Is there anything else we can do to protect our

business from competition from former employees?

Employee Recruitment and Retention. We want to recruit a key employee. We will

need to make a significant financial commitment to hire this person. How can we attract the

employee away from our competition and what can we do to make sure she stays with the

company long enough to justify our financial outlay? In some cases, we want to recruit a key

employee who we know will forfeit certain qualified plan or NQDC plan benefits or equity

interests upon termination from their current employer. What can we offer to make this up to

them?

Giving Employees “Skin in the Game.” We want our employees to have a financial

interest in the successful operations of our business. Their long-term compensation should be tied

to the long-term success of the company and be at risk if the company should go down. How can

we accomplish this?

Recruiting or Motivating Employees While in a “Cash Crunch.” We want to recruit

a key employee. As a start-up business we will be in a “cash crunch” for several years. How can

we put together a compensation package that will attract a high quality executive without draining

the company’s cash during the start-up period? Alternatively, the company is doing well but is at a

difficult stage. The company needs to keep expanding but the company is not big enough yet and

does not have a long enough history to “go public.” The company has already borrowed

substantial amounts from its bank and the bank is reluctant to loan more money for working

capital. The company wants to create performance incentives for its valued employees, but an

annual cash bonus program would be another cash drain on the company. How can we motivate

and reward the employees without exacerbating the cash crunch?

Returned Qualified Plan Contributions. Many of our key employees are receiving a

portion of their 401(k) contributions back because many of our rank and file employees chose not

to participate in our 401(k) plan. What can we do to avoid this problem?

The Hospital. A hospital has a fixed number of beds, and is faced with constant

competition and changes in the health care industry. Many other hospitals have been forced to

close. The hospital needs to develop long-term arrangements with physicians that will allow the

hospital to provide high-quality care to a consistent volume of patients. How can the hospital

cement its relationships with its doctors?

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