says, "Put 25% of my money in large cap stocks", that is a much broader parameter. Taxation In an ERISA-qualified plan (like a 401(k) plan), the company's contribution to the plan is deductible to the plan as soon as it is made, but not taxable to the participants until it is withdrawn. So if a company puts $1,000,000 into a 401(k) plan for employees, it writes off $1,000,000 that year. If the company is in the 25% bracket, the NET contribution is $750,000 (because they did not pay $250,000 in taxes - 25% of $1M). This is because the cash flow is still $1M to the Plan to be withdrawn later by the employees - then when tax returns are filed, since the taxable profit is $1M "less", there is an on paper "savings" at the 25% tax rate. In a non-qualified deferred comp plan, the company does not get to deduct the taxes in the year the contribution is made, and they deduct them the year the contribution becomes non-forfeit-able. For example, if ABC company allows SVP John Smith to defer $200,000 of his compensation in 1990, which he will have the right to withdraw for the first time in the year 2000, ABC put the money away for John in 1990, John paid taxes on it in 2000. If John keeps working there after 2000, it does not matter because he was allowed to receive it (or "constructively received") the money in 2000. Other circumstances Most of the provisions around deferred compare related to circumstances the employee controls (such as voluntary termination); however, deferred comp often has a clause that says in the case of the employee's death or permanent disability, the plan will immediately vest, and the employee (or estate) can get the money. Deferred compensation as an incentive "When agents remain with an employer for a long period of time, there is no necessary reason why the employer should pay the worker his expected marginal product in all periods; instead, workers could be paid better in some periods than in others. One aspect of this that has attracted both theoretical and empirical interest has been 'deferred compensation,' where workers are overpaid when old, at the cost of being underpaid when young. From this perspective, part of the reason why older workers are better paid than younger workers is not that they are more productive, but simply