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 these 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 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 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 shareholder 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, this 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.