Preferred Compensation is the term the life assurance industry has given to an arrangement whereby an employer invests an amount on a monthly basis on behalf of employee to establish a fund that is awarded to the employee after he or she has been in the service of the employer for a specified period, such as 5 or 10 years.

It provides an an alternative to Deferred Compensation which is not always that attractive to the younger executive. Preferred compensation holds the promise of the payment of a benefit long before retirement age. The whole arrangement is usually couched in terms of a restraint of trade agreement.