Question

Taxation of Executive Compensation

Discuss the concepts of forfeitable versus non forfeitable benefits and what the main differences here are between the two.

Answer 1

The concepts of forfeitable versus non forfeitable benefits and what the main differences here are between the two.

1. Companies and it's Board Of Directors usually seek to maximize tax deductibility for shareholder on their respective executive compensation.

2. 'Non forfeitable benefit' generally refers to the 'Pension benefit' which means a 'a claim obtained under an unconditional pension plan by a participant/beneficiary to that part of an immediate or deferred benefit, for his participation service which is legally enforceable against the pension plan'.

3. 'Forfeitable benefit' generally refers to 'the additional benefits which can be terminated and forfeited by the employer due to the voluntary/sudden retirement of the employee due earlier than what he is promised to settle down for.'

4. Suppose, an employee is promised to pay 100 units of stock as additional bonus to him as 25 units of stock for 4 years but when he voluntarily retires at the end of the 3^rd year, the employer forfeits the remaining 25 units offering him only the remaining 75 units of stock.

5. The difference is employer has no right to forfeit or retain the benefit from the employee in 'Non forfeitable benefits' where it's possible in 'Forfeitable benefits'. These two topics form the basis in the retirement plan benefits of a company.