Deferred shares are a form of stock that is sometimes issued to key people
within the issuing company. Usually, executives or directors of the company are
eligible to receive deferred shares of stock. As part of a deferred share
issue, the holders of the shares may not redeem them as long as they are in the
employ of the company.
Because a deferred share strategy
involves issuing shares of stock that are essentially locked from active
trading by the recipients, they tend to provide larger dividend payouts than
either common stock or preferred stock.
In the event that the company is doing well, the dividends can lead to a
substantial nest
egg
for the employee. However, it is not possible to participate in a deferred
share stock program once employment is terminated for any reason. When the
employee is no longer with the company, the shares are converted to preferred
or common shares at the current market
value.
Another important aspect of a deferred
share stock program has to do with when the stocks are honored in the event of
a liquidation or bankruptcy of the company. All
obligations must be met before the shareholder will see any return on the
deferred share account. This means that not only will creditors be paid off
first, investors who hold preferred or common shares of stock will be paid
before the deferred share holder receives any type of compensation.
In times past, a deferred share did not
actually represent a share of stock in the usual sense. Instead, the share was
more along the lines of a bookkeeping entry. A certain
amount was credited to an employee deferred account for each pay
period,
with the balance being subject to the performance of any common and preferred
shares issued by the company. From time to time, dividends were also applied to
the balance. When the employee left the company, the balance in the account was
converted into actual stock or was cashed out and forwarded to the former
employee.
Today, the deferred share strategy is
not utilized as often as in the past. More commonly, companies provide
executives and other key employees with the opportunity to participate in
shareholding plans that revolve around preferred stock options. Still, the
structure of a deferred share plan is a viable option for a retirement program
and can work very well for smaller companies.