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Individual bonus arrangements are commonplace today. They suit the company that does not want to commit itself to a high salary or whose bylaws do not permit it to pay salaries above a certain level. The president of a company who gets $ 400,000 a year in salary and $ 200,000 in bonuses is no longer an unusual figure on the corporate scene. Neither is the lower-echelon executive whose $ 90,000 per year compensation is made up of $ 60,000 salary plus $ 30,000 bonus.
There are many ways in which bonuses can be dispensed. If you are thinking of negotiating a bonus arrangement, you should be sure that you know which kind you want.
This is the simplest type. Generally, it is given annually, and is based on the company's profit or the executive's productivity. There may or may not be a written agreement between the executive and the company. Cash bonuses are taxable in the year they are received. They are thus not true estate builders but more like a salary raise; They provide additional spendable income, theoretically available for investment.
A stock bonus gives an executive a personal stake in the future appreciation of the market value of his company stock and thus is often a greater incentive to him. It also has an advantage over other stock plans in that the executive does not have to pay out any money for his investment.
A word of caution about stock bonuses: they are taxable income, so it's wise to arrange for a partial payment in cash to pay the tax.
A further word of caution: The accounting scandals of the early 2000s create a cautionary tale about staking one's future on the fortunes of any one company. The executive would do well to attach his goals for a secure retirement to a diversified portfolio of investments in qualified retirement plans and personal investments and savings. Any financial rewards that do materialize from appreciated company stock should come as windfalls that may allow for an earlier or more comfortable retirement than had been envisioned. This possible frosting on the cake still provides a tantalizing incentive for the executive to lend his talents to the future growth of the corporation, but should not be at the core of fundamental retirement planning.
One way to overcome the tax impact on a lump sum bonus is to arrange to have your bonus paid out on the installment plan. This is a particularly good idea if the bonuses are tied to profits and so are liable to be high in some years, low in others.
Will the corporation agree to defer bonus payments? The only reason for objection is that it cannot take its tax deduction until the bonus is paid out. But this objection is offset by the fact that the corporation gets the use of the bonus monies until the payout time arrives.
The government will not consider a bonus deferred, however, if the recipient can be said to have "constructively received" the whole bonus; that is, if he had the right to take it all immediately. In that case it demands an immediate tax payment on the full amount of the bonus.
The constructive receipt problem is a ticklish one. To make sure that your deferred bonus does not fall under it, you should make a written agreement with the company specifying that the payment of bonuses as earned will be deferred. This agreement can state that your right to the bonus is a conditional one, ie, contingent on your remaining with the company until the bonus is paid out.
Some companies prefer to create bonus arrangements that have various restrictions on when they can be activated. These generally take the form of such things as stock options (both non-qualified and qualified), warrants, restricted sale stock plans and phantom stock. All these are discussed below, explaining how they effect the executive and how they effect the company that offers them.