Deferred Compensation

For those of you who grew up watching Popeye cartoons, you will remember a character named Wimpy. Wimpy’s favorite line was “I’d gladly pay you Tuesday for a hamburger today.” The idea of eating your hamburger today and paying on Tuesday is the essence of deferred compensation. In the Popeye cartoons it looked like Wimpy was a master of deferred compensation.  Unfortunately, all of the things you need to think about when setting up a deferred compensation agreement are not present in the simple statement “I’d gladly pay you Tuesday for a hamburger today.”  But, let’s first look at the ones that are.

First there is the Who. Every contract for deferred compensation should set out the parties. Here the parties are Wimpy and you. Then, there is the hamburger, and the hamburger represents product or a service that someone is willing to give now in consideration of payment at another time. So we have the What. But could the What be more clear. Is the hamburger – with cheese, without cheese, with extra pickle, how about bacon?

Do we have the When?  Every contract has to deal with when a product and service is supposed to be delivered and when payment will be made. With Wimpy, the concept of When is more or less clear. The product will be delivered today and payment will be made on Tuesday. What makes this not entirely clear is that some might argue that the term Tuesday is not specific enough?  Are we talking about this Tuesday, next Tuesday or Tuesday five years from now? When setting out a delayed compensation agreement, one has to be very clear about both the Who, What and both sides of the when.

Sometimes, as in this example, it is a particular date.  Sometimes it is when or after certain things transpire. For instance, “I’d gladly pay you for the rewrite on my script that he will deliver to me on December 23, 2013, when I raise financing to cover the production budget.”

If you are not using a payment date, then you have to be specific about what has to happen for payment to be made. In the example of payment on the result of the fully raised budget, you should be clear about the amount of the total budget, on whether or not all moneys raised are going to cover the budget (and not, for example, other development costs), and whether or not there are any provisions to be made if the budget is never covered.  For example, “I’d gladly pay you $2,500 for a script rewrite and one polish (that’s the extra cheese) when the production budget is raised, but not later than the first Tuesday of 2015.”

Most important for the hamburger makers is the How Much. How much will with the gladly pay you on Tuesday?

If you are a supplier of goods and services, and someone said, “I’d gladly pay you Tuesday for a hamburger today,” define the type of hamburger, pull out calendar to agree on the date or the payment event and then pull out your calculator to agree on the cost.

Take aways:

  • Define the product or
    service.
  • Make sure you agree on a
    fee.
  • Be clear about when the
    product or service must be delivered
  • Be clear about when the
    fee is to be paid.

- laverne