How Mid-Market Businesses Can Create Tax-Advantaged Compensation Without Increasing W-2 Income: SERPs vs. Executive Bonus Plans

Introduction

For mid-market business leaders, the “W-2 Trap” is a common financial hurdle. You want to reward a key leader, but a simple salary increase is inefficient: the executive loses nearly half to taxes, and the company gains no long-term stickiness or retention value.

To break this cycle, sophisticated business leaders use two primary vehicles: Supplemental Executive Retirement Plans (SERPs) and Executive Bonus Plans (Section 162).

The SERP: The “Golden Handcuff” Strategy

A SERP is a non-qualified retirement plan where the employer promises to pay an executive a set amount of income in the future, typically at retirement, provided they stay with the firm for a specific period.

• The Advantage: It creates a powerful incentive to stay (vesting).
• The Tax Play: The company pays nothing today. The executive is not taxed until they receive the benefits in the future.
• Best For: Companies focused on long-term retention of irreplaceable leaders.

The Executive Bonus (Section 162): The “Wealth Accumulator” Strategy

In this plan, the company pays the premiums on a life insurance policy owned by the executive. The bonus is taxable as income, but the policy grows tax-deferred.

• The Advantage: It is simple to implement and requires no complex IRS filing.
• The Tax Play: The company gets an immediate tax deduction for the bonus paid. The executive gains a portable, tax-advantaged asset.
• Best For: Rewarding high performers with immediate value and portable wealth.

Choosing the Right Strategy

The choice between a SERP and an Executive Bonus plan often comes down to the ROI of stability. While replacing a key executive can cost 150–300% of their compensation, these structured plans often cost a fraction of that while delivering stronger balance sheet protection.

Conclusion

The best strategy depends on your firm’s cash flow and your executive’s personal financial goals. At McInnes Group Financial Services, we help you run the numbers on both.

If you’d like a tailored analysis for your leadership team, you can schedule a brief conversation with our team by clicking the button below.