What Is Directors Deferred Compensation Plan Agreement
When an experienced senior employee like a director needs to be given an incentive in terms of stock option, retirement plans or pension, to remain with the company, a deferred compensation agreement is signed. The company wants to retain the services of such employees as they benefit in the growth of the company due to their experience and the company would not like such employees to join a competitor.
The employee agrees to let the company withhold a part of their remuneration, invest it and release it at a specified date in the future.
When Do You Need Directors Deferred Compensation Plan Agreement
A directors deferred compensation plan is required when a company wants to defer a portion of a director’s compensation and pay it at a future date. The director will have to remain with the company till the date the deferred compensation is due. If the employee decides to leave prematurely, then the remaining benefits will be forfeited.
The company and the director will have to sign this agreement to ensure that both parties fulfill their contractual obligations.
Inclusions in Directors Deferred Compensation Plan Agreement
The following information is included in the directors deferred compensation plan:
- Names of the parties to the agreement
- The effective date of the agreement
- The purpose of the plan – retaining the directors
- Appointment of an administrator for the plan
- The component of the deferred compensation: Cash and stocks
- Maintaining a separate account for recording the compensation
- Date of vesting
- Termination: Events leading to the termination of the plan.
How to Draft Directors Deferred Compensation Plan Agreement ?
While drafting this agreement, you can refer to a deferred compensation plan sample contract. The following points should be incorporated:
- Eligibility of both parties to the agreement
- Governing laws to be adhered to
- Dispute resolution clause: Whether arbitration or litigation
- Compensation: The details of the deferred payment plan including cash and stock components
- Terms of the contract: Fair to both parties
- Termination clause: Notice period for premature termination
- Confidentiality clause: Non-disclosure of proprietary information
Benefits of Directors Deferred Compensation Plan Agreement
The directors deferred compensation plan benefits both the company and the director. The director gets a share of the profits of the company through stock options and has an incentive to remain with the company. The company is able to retain a valuable resource that will help them to generate higher revenues and profits.
Even after the director leaves the company, they cannot join a rival company due to the non compete agreement. Any party violating the agreement has to face legal action.
Types of Directors Deferred Compensation Plan Agreement
There are 2 types of directors deferred compensation plan, qualifying and non-qualifying. The primary difference between a qualifying and non qualifying agreement is that the contribution made by the employer is not tax deductible for non qualifying plans while the employer can claim a tax deduction under a qualifying plan.
Nonqualified deferred compensation plans examples include employee stock options.
Qualifying plans are meant for all employees, while non-qualifying plans are intended for specific employees who are in the high-income bracket and the company chooses the employees.
Key Terms/Clauses in Directors Deferred Compensation Plan Agreement
The key terms or clauses in a directors deferred compensation plan are:
- Introduction: Purpose of the plan
- Administration of the plan: For maintaining records
- Deferred compensation: Details of cash compensation and stocks
- Accounts: Creating a separate account for recording the compensation
- Plan Earnings
- Vesting and distributions
- Termination of plan
- Amendment of plan
- General Provisions
What Happens in Case of Violation?
When you violate the directors deferred compensation plan, a notice is served to you by the company stating the exact nature of the violation. If there is no response, the following steps can be taken:
- Money Damages: In case of total breach of contract, money damages would include lost profits
- Rescission: For contracts based on fraud, rescission is used for cancellation of the contract
- Reformation: The court draws up a new contract if any party has resorted to fraud
- Specific performance: Under this remedy, the contractual obligation has to be fulfilled and money damages are not accepted
A deferred compensation plan may permit management, highly compensated employees or directors to elect to defer their current compensation until a later such as upon retirement or termination of employment.
Sample for Directors Deferred Compensation Plan Agreement
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