In some situations, special compensation considerations can be extended to executives and other key employees as an incentive to remain with the company. Because of the key role played by such employees, it often makes good business sense to reduce turnover among this group of employees as much as possible.

Consider an up-and-coming software firm that is concerned about losing one of its top engineers to a competitor who has offered a substantial increase in salary. The firm cannot afford to match the salary offer. What other benefits could the firm offer to keep such a valuable employee from leaving?

The company could establish a nonqualified deferred compensation plan (where it could discriminate in favor of highly compensated employees). Under a typical arrangement, the employer promises a benefit at some point in the future, provided that the employee is still with the company. This leaves the employee somewhat at risk in that if the terms of the agreement are not satisfied, the employee forfeits the right to receive the promised benefit.

Unlike a qualified retirement plan, the employer does not get a tax deduction until the employee has access to the deferred compensation, usually at the executive's retirement. One common funding mechanism is a life insurance policy applied for by the employer who owns and is the beneficiary of the policy. When the agreement has been satisfied, the employer can either use the cash value of the policy to pay the promised benefit or pay it from current earnings and subsequently recover this amount from the policy's death benefit.