Deferred Compensation versus Current Support Obligations

• Author: Aaron M. Franks
• Pages: 273-289

Deferred

Compensation

versus

Current Support

Obligations

Aaron

Franks

A.

INTRODUCTION

Optimal corporate

and tax

arrangements

are

rarely well-aligned with sup-

port objectives.

In

fact,

it is

more

often

the

case that optimal arrangements

from

a

corporate

or tax

perspective

lie at the

other

end of the

spectrum

from

optimal support arrangements.

The

reasons

for

this

are

threefold:

1.

People

do not

like

to pay tax and

will usually

do

what they (legally)

can to

minimize

or

defer

tax

obligations.

2.

Valid

and

rational compensation objectives

at

many

of

Canada's

largest

corporate institutions attempt

to, at

least

in

part,

tie

manage-

ment/executive

compensation

to

future

corporate performance.

3.

Support

is

paid

out of

"current income,"1

and the

effect

of (i) and (2)

is to

defer

income into

the

future.

This paper considers

the

tension between common corporate compensa-

tion strategies

and

objectives,

and the

determination

of

income

for

sup-

port purposes.2

Aaron

Franks,

partner,

Epstein

Cole

LLP,

Toronto.

Child

Support

Guidelines,

SOR/97-175,

as

amended

[Guidelines],

s.

2(3);

Lee v.

Lee, [1998]

N.J.

No. 247

(C.A.); Dickie

v.

Dickie, [2001] O.J.

No.

2885 (S.C.J.).

For

present

purposes,

it is

assumed

that

"income"

for

spousal

support

purposes

is

the

same

as

"income"

for

child

support

purposes:

Brophy

v.

Brophy,

[2002] O.J.

No.

3658 (S.C.J.),

aff'd

[2004] O.J.

No. 17

(C.A.).

273

i

2

274

AARON

FRANKS

B.

DEFERRED

INCOME PLANS

Corporations must

do

what they

can to

maximize shareholder value,

and

part

of

maximizing shareholder value requires attracting

and

retaining

top

managerial

and

executive talent. Both objectives

are

achieved

by ty-

ing a

significant portion

of

executive compensation

to the

future

per-

formance

of the

corporation.3

By

way of

example,

a

review

of the

recent proxy circulars

from

some

of

the

"Big

5"

Canadian banks4 reveals

a

variety

of

deferred compensa-

tion programs meant

to

align

the

interests

of

senior management

and

shareholders. Although these deferred compensation programs come

in

many

different

shapes

and

sizes

and

with

different

monikers,5 they

all

include provisions

for

short-, medium-,

and

long-term deferred compen-

sation. Many medium-

to

long-term incentive plans also have compensa-

tion components

(often

called "deferred share

units"

or

"DSUs") that

are

not

paid

out

until retirement

or

that have deferred vesting schedules

(so

that

the

deferred compensation vests over some

set

schedule between

the

grant

and

retirement).

It is

also

a

common

feature

that senior man-

agement must

own a

prescribed number

of

shares

in the

company.

Fi-

nally,

many programs also require that employees

defer

some

of

their

short-term compensation (such

as

bonuses) into long-term compensation

(such

as

deferred

or

restricted share units).

3 For

example,

in its

"Overview

to

Executive

Compensation,"

a

recent

Management

Proxy

Circular

for one of the

Canadian banks notes that "Compensation

is one

of

the

primary

tools

used

by the

Bank

to

attract,

retain

and

motivate

employees

with

the

skills

and

commitment

needed

to

enhance shareholder value."

Similarly,

as

stated

in its

2006

Proxy

Circular,

the

objectives

for

executive

compensation

at

The

Walt

Disney Company

are "to

ensure that executives

are

provided incentives

and

compensated

in a way

that advances both

the

short-

and

long-term interests

of

shareholders while also ensuring that

the

Company

is

able

to

attract

and

retain

executive

management

talent."

4

Bank

of

Montreal,

Bank

of

Nova

Scotia, Canadian

Imperial

Bank

of

Commerce,

Royal

Bank

of

Canada,

and

Toronto-Dominion

Bank.

5 For

example,

CIBG:

Base

Salary,

AIP

(Annual

Incentive

Plan),

STIP

(Short-Term

In-

centive

Plan),

EPP

(Equity

Participation

Plan),

ESOP

(Employee

Stock

Option

Plan),

RSA

(Restricted

Share

Awards),

PSU

(Performance

Share Units);

TDCT:

Base

Salary,

Annual

Incentive

Awards,

DSU

(Deferred

Share

Units),

RSU

(Restricted

Share

Units),

Stock

Option Plan;

RBC:

DSUP

(Deferred

Share

Unit

Plan),

Stock

Option

Plan,

SUP

(Share Unit Plan).

For

simplicity,

I

refer

to all

medium-

and

long-term

deferred

compensation plans

as

"deferred

compensation"

or

"deferred

compensa-

tion

units."

The

niceties

and

detailed

tax

treatment

of

such plans

will

be

reviewed

in Mr.

Freedman's paper.