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Non-Qualified Deferred Compensation (NQDC) plans emerged because of the cap on contributions to Qualified Retirement Plans. High-income earners are unable to contribute the same proportional amounts to their tax-deferred retirement savings as average or low-income earners. Therefore, NQDC plans are a way for high-income earners to defer the actual ownership of income and avoid income taxes on their earnings while enjoying tax-deferred investment growth.
NQDC plans can be established for selected officers and other key employees as a form of fringe benefit not available to the company’s other employees. They are often used as a "golden-handcuffing" device by which key executives will be handsomely rewarded in the future if they remain with the company for a specified number of years, or until retirement age.
You cannot achieve these goals through a traditional retirement plan (assuming you want the tax advantages) because the laws require you to provide benefits that are uniform and that do not discriminate too much in favor of key executives. The best arrangement for accomplishing your goals may be through a NQDC plan.
*By "non-qualified," we mean simply that the plan is not subject to certain federal pension law provisions, such as the ones on nondiscrimination, eligibility, funding, and vesting. As a result, it does not get as many tax breaks as regular pension plans do. You should not be lulled into believing that non-qualified plans are not subject to any of the provisions that govern qualified plans; they are, in fact, generally subject to all of the provisions except those mentioned above.