Deferred compensation is a type of employee compensation that depends upon the performance of the employee. The arrangement of deferred compensation depends upon the time period for which it is being calculated. For example if a deferred compensation is being calculated for the current time period in which employee performance is measured the cost of compensation is accrued for that particular period.
On the other hand if the deferred compensation is based on the current and future time period of the employee performance the compensation of the current time period must be accrued and the future one must not be accrued. The current portion of the deferred compensation must be accrued as an expense. This means that the business or the firm must accrued or calculate the present value of all the compensations and benefits that are to be given to the employees in the future based on his performance.
For example a company ABC prepares a deferred compensation arrangement for their CEO and according to the contract the CEO will become eligible of all the compensations and benefits after five of completion of the contract. This means that the CEO of the company will be eligible for the compensations and benefits after giving five years of services to the company. Thus in this way the ABC company has accrued the compensation expense of the CEO contact that are going to be intervene in the coming five years.
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