Deferred Compensation
What happens when deferred compensation breaks under the pressure of low early productivity and high workforce mobility
For much of the 20th century, the relationship between employer and employee rested on an unwritten contract. Work hard, stay loyal, and in time, you will be rewarded. That reward wasn’t necessarily tied to what you produced at any given moment. Instead, it was structured around a concept economists call deferred compensation.
In this model, younger workers are deliberately underpaid relative to their productivity. They put in long hours, bring fresh skills, and often carry outsized workloads—all for a paycheck that doesn’t quite reflect their marginal value. But the promise is implicit: stick around, and your compensation will eventually exceed your output. When you reach middle age or beyond—when family expenses rise and job mobility falls—you'll be overpaid relative to your productivity. The early years were a down payment. The later years are the payout.
Economists have long illustrated this with a simple chart: two curves tracking productivity and compensation across a career. Productivity rises quickly, peaks in mid-career, and eventually declines. Compensation, meanwhile, lags behind early on, then climbs steadily upward. The gap flips over time: first you give more than you get, then you get more than you give. Canice Prendergast, an economic and professor whose class I took in grad school, has discussed this concept beautifully in the context of incentive design and labor market dynamics. In fact, Prof. Prendergast’s class on management opened my eyes to the importance of understanding how to navigate workplace dynamics to maximize value. But that’s an aside.
The deferred compensation structure worked, in part, because it solved a problem. Many jobs—especially those with hard-to-measure outputs—can’t rely solely on real-time performance evaluation. Employers can’t always see who is truly pulling their weight. Deferred compensation offered a self-policing mechanism: it created an incentive to work hard and stay, even when the link between effort and reward wasn’t immediate.
But what happens when the assumptions that held this system together begin to erode?
Pay at the Curve
In contrast to deferred compensation, some roles have always operated under a different mode, which is pay tied directly to output. Sales is the most prominent example. Sell more, earn more. Compensation is tightly tethered to performance and delivered on a short feedback loop. These roles exemplify what we might call pay at the curve — compensation that closely follows marginal productivity throughout a career.
The reason is simple: sales output is legible. You can count deals. You can attribute revenue. And because performance is measurable, compensation can be matched to it in near real-time.
But this isn’t the case everywhere. In cost centers like HR, legal, and operations, output is diffuse, delayed, or difficult to quantify. These roles rely more on relational capital, institutional knowledge, and cumulative contribution—elements not easily priced on a quarterly basis. As a result, they default to deferred compensation models. Pay is time-based, not task-based.
This divide isn’t about merit. It’s about visibility. Where contribution is visible, the organization pays at the curve. Where it isn’t, traditionally, it pays on a lag.
Cracks in the Model
In theory, deferred compensation is elegant. In practice, it may be losing its viability. I feel like I see this across our clients every single day. Several workforce dynamics are putting strain on the model, including:
Shorter tenure - Younger workers are staying for fewer years, especially in white-collar roles. If they leave before the "overpaid" phase begins, the incentive structure fails.
Demand for immediacy - Workers increasingly expect compensation that reflects their current value, not their long-term potential.
Weakening productivity early in career - There is some data suggest that younger workers may not be as productive early on as past cohorts, perhaps due to flatter training structures, hybrid (or remote) work models, or shifts in cultural norms.
Declining credibility - When promotions slow, pensions vanish, and cost-cutting targets older employees, the promise of future rewards becomes harder to believe.
The result is a fraying of the social contract that once governed career trajectories. If young workers no longer overperform early, and don’t stick around to be overpaid later, the whole structure collapses.
Rethinking the Contract
The broader question is whether a modern workforce, with its emphasis on fluidity, transparency, and autonomy, support a model built on patience, opacity, and delayed rewards?
Some organizations are experimenting with alternatives. These include:
More immediate performance-based bonuses.
Market-based salary benchmarking and dynamic adjustments.
Equity grants and profit-sharing schemes that reward contribution without relying on tenure.
Transparent career ladders with measurable milestones.
These approaches shift the balance away from trust and tenure and toward accountability and alignment. They attempt to bring more roles closer to the curve—rewarding output when and where it happens.
Deferred compensation was never just about money. It was about structure, loyalty, and long-termism. But those values now compete with new priorities, which look a lot like agility, transparency, and compensation in the present. If the old contract is indeed broken, the challenge isn’t just economic. It’s cultural.
The question now is whether organizations can build new systems of motivation and trust that reflect the realities of today’s workforce—or whether we’ll continue pretending that the old chart still holds.
What a weird and wonderful world,
Quick PSA
On a different note, I wanted to share something personal with you all. This year, I’m running the Chicago Marathon on behalf of the American Cancer Society. Cancer has impacted so many lives, including my own, and I’m honored to be running in support of research, treatment, and patient care.
If you’ve enjoyed this newsletter and want to support a great cause, I would truly appreciate any donation toward my fundraising goal. Every contribution, big or small, makes a difference.
Thank you for your support—it means the world to me!