O P I N I O N
When considering a deferred compensation strategy for your ownership transition, keep these pros and cons in mind. Kicking the can down the road
T here are really four components to a successful internal ownership transition: the financial arrangements, the succession of leadership, the corporate governance or organizational structure, and the cultural continuity of the firm. Transition plans and the impact they have on the entire operational structure of the firm are oftentimes not fully understood. The initial focus is immediately on the financial implications. What is the value, how is the transaction structured, and how can I minimize taxes? Most transitions begin here.
What is not understood early enough in the planning is how the transition will happen with the next group of owners and what the implications are for the rest of the staff at the firm. And quite frankly this is not the top priority of the exiting shareholder in many cases. They are looking for a way to get out of their equity and management position and eventually retire. Though there are many different ways to execute a transition and the transactions associated with a changing of the guard, there are really three distinct paths for an internal transition. In a complete oversimplification of the options, here they are: you can buy and sell ownership as
true transfers of equity, you can use a deferred compensation structure, or you can use an ESOP. Here, I would like to focus on a few of the positives and negatives of using a deferred compensation strategy. For one, deferred compensation structures minimize the risks and barriers associated with ownership (good and bad!). People are given the opportunity to purchase equity for a fraction of its real value and are then rolled into a compensation plan that involves a pre-tax, pre- bonus contribution to a trust that holds these pre-
See WILL SWEARINGEN, page 4
THE ZWEIG LETTER MAY 18, 2020, ISSUE 1345
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