Deferred Compensation
The simplest deferred compensation programs defer a specific amount or percentage of compensation to a period after the death, disability (permanent) or retirement of the individual. Unless these programs are tied to longevity and productivity, it is one-sided and only favors the employee.
However, programs may be tailored especially to producers and to managers to relate the amount of deferred compensation to individual, or agency productivity, growth and profitability.
Deferred Compensation amounts are liabilities to the agency. The agency promises to reward the producer for production efforts made during the producer’s career with additional compensation paid to the producer or to the producer’s estate for some period of time after the producer terminates employment as a reward for loyalty and exemplary performance. Most Deferred Compensation awards are made for producers who retire, die or must leave the agency due to permanent and total disabilities and acts as a retirement benefit. We recommend against deferred compensation agreements that reward producers who voluntarily terminate employment and move to another agency because the host agency may end up rewarding former employees who become active competitors. For this reason a deferred compensation agreement is invalidated by employees who leave the agency voluntarily for any reason besides death, disability or retirement from the business of insurance.
The exception to this rule is the payment of deferred compensation to producers who are terminated by the agency in sponsorship for non-piracy, non-solicitation agreements. If the former employee takes accounts in violation of his agreement, it would invalidate the deferred compensation Program and would terminate further payments from the deferred compensation agreement.
The source of deferred compensation is a dollar amount based on the producer’s earned production either during his term at the agency or in his final year at the agency or a percentage of the producer’s earned book of business based on growth incentives.
The deferred compensation agreement should be crafted to sponsor the non-solicitation and non-piracy clauses of a producer contract. To that end the deferred compensation is terminated if the producer accepts any agency policy in defiance of the non-competition, non-piracy or non-solicitation sections of their contract. For that reason, the term of the deferred compensation program should be, at minimum, the term of the non-solicitation agreement in the contract and has been utilized to functionally extend the term of non-solicitation because of the penalties involved.