Executive compensation plans
Executive compensation plans can help save money on taxes by allowing executives to defer or lower their taxable income and take advantage of certain tax benefits. Here’s how these plans work:
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Deferred Compensation Plans
How It Works: Executives can choose to receive part of their salary or bonuses at a later date (such as in retirement) instead of right away.
Tax Savings: By deferring income, the executive avoids paying taxes on that income now, potentially pushing it to a year when they're in a lower tax bracket (such as after retirement). This lowers the total amount of taxes they pay.
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Stock Options
How It Works: Companies may give executives the option to buy company stock at a lower price (called stock options), but they don't have to buy it until a later time.
Tax Savings: Instead of receiving cash compensation now, which is taxable, executives can benefit from the stock price going up over time. They only pay taxes when they sell the stock, which could result in lower capital gains taxes, compared to income tax rates.
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Restricted Stock Units (RSUs)
How It Works: Companies may grant executives restricted stock units, which are shares that become available after meeting certain conditions, like staying with the company for a few years.
Tax Savings: Since RSUs aren’t taxed until the shares are actually vested (available to the executive), they help defer taxes and potentially allow the executive to manage when they pay tax, possibly in a lower tax bracket.
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Executive Retirement Plans
How It Works: Some companies offer non-qualified retirement plans (different from regular 401(k)s) that allow executives to defer more income for retirement.
Tax Savings: Contributions to these plans reduce taxable income now, and taxes are paid when the money is withdrawn during retirement. If the executive is in a lower tax bracket during retirement, they save on taxes.