Four Key Considerations for Compensating Top Lending Talent

February 28, 2023

In today’s mortgage market, it’s not only harder to compete for top lending talent but more expensive. You could just keep throwing money at the problem, but that’s not a sustainable strategy.

You need a compensation strategy that rewards top talent in meaningful, not just monetary, terms –one that boosts morale and helps attract and retain the best employees.

Where to Start

First, consider what type of compensation plans you’ll offer: equity-based or non-equity. Essentially, the decision comes down to how much ownership you’re willing to give up.

Compensation plans also come with administrative burdens. Will you need to hire someone to help manage the plans or can you absorb the added responsibilities with existing staff?

Timing of benefits is another factor. Defer the benefit and for how long? What about vesting? Common vesting schedules are three to five years.

Finally, think through how many employees will benefit and how much to offer. Qualified plans require extending benefits to everyone albeit in limited amounts. Non-qualified plans are unlimited but benefit only top performers or executives.

Four Equity-Based Options

If you’re leaning toward equity, your choices fall into four areas.

1. Restricted Stock. There are two types: Restricted Stock Awards and Restricted Stock Units.

Restricted Stock Awards issue stocks on day one but are not vested. They treat awards as outstanding stock with voting rights. Any dividend paid is considered compensation before vesting. Or if vested, it’s compensation if the employee hasn’t made an 83(b) election.

Restricted Stock Units are issued only after vesting.

2. Stock Options. Stock options come in two flavors: incentive and nonqualified.

Incentive stock options allow employees to purchase corporate stock at an agreed-upon price within a specified time period subject to vesting of the option. Upon exercise, employees receive no income and employers, no deduction – unless there is a disqualifying disposition.

Nonqualified stock options have a vesting period and may be granted to employees or non-employees. You’ll have to issue them with an exercise price equal to the stock’s fair market value (FMV) on the grant date or risk a Section 409A violation and up to 20% in penalties.

3. Employee Stock Ownership Plan (ESOP). An ESOP is a qualified defined contribution employee benefit plan (ERISA) and is designed to invest in the stock of the sponsoring employer. Employees receive ordinary income for distributions of cash or stock while the company can take a tax deduction for contributions of shares (or money to purchase shares).

4. Profits Interest (Partnerships). No initial equity upon issuance. Employees have a right to earn equity or receive an interest only on future profits. Profits interest offer employers many benefits, an incentive to boost the company’s profitability among them.

Six Non Equity Options

If you’re not ready to give up ownership, consider one of these six non-equity incentive compensation plans.

1. Nonqualified Deferred Compensation Plan (NQDC). The most complex of the non-equity options, NQDCs defer payment of compensation earned in one tax year to a subsequent year. You can extend NQDCs to both employees and non-employees or confer eligibility only to executives and key employees.

2. Stock Appreciation Right (SAR). A form of NQDC, a SAR is an employee bonus equal to the appreciation of a company stock over an established period that provides for vesting but must comply with 409A. It’s similar to stock options, but employees don’t have to pick up income upon exercising the option.

3. Phantom Stock/Unit Plan. Another form of NQDC, phantom stock offers a way to tie incentive compensation to increases or decreases in company value without awarding actual ownership. Vesting is permitted, but a few rules apply. Payouts are typically deferred until a future date or the end of employment.

4. Discretionary Bonus Plan. A compensation plan that awards bonus compensation above and beyond base salary and can be combined with NQDC.

5. Production Bonus Plan. A plan designed to drive individual and team production of units.

6. Qualified 401k Retirement Plan. A 401k plan features non-discrimination rules for elective deferrals and employer matching contributions. Employers must satisfy certain contribution, vesting, and notice requirements.

The bottom line: The right compensation strategy to attract and retain top talent will help you gain tax efficiencies not just now but years from now. To learn more, call (303) 721-6131 to speak with a Richey May tax expert or email us at

Josh Ratner

Mortgage Banking Tax Partner
About the Author

Josh Ratner serves as a Tax Partner in the Mortgage Banking practice, specializing in financial services, real estate and federal and state tax income tax issues. In addition to concentrating on tax compliance and tax consulting matters, he leads the Richey May research and technical writing team that focuses on developing whitepapers on various accounting topics, specifically in the mortgage industry. His research areas include: Compensation Strategies, Accounting for Derivatives, Accounting for Mortgage Servicing Rights and Tax Treatment on the Sale of Mortgage Servicing Rights. Josh also works closely with the Richey May business development team in order to smoothly transition clients into the tax team relationships that will handle the client’s tax matters. Josh grew up in Dallas before attending Vanderbilt University for his undergraduate education. After college, he obtained his Juris Doctorate and LL.M. in Taxation from the University of Denver, Sturm College of Law. He enjoys being outdoors with his two dogs, playing golf, snowboarding, camping, and watching football.

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