Certified Treasury Professional 2025 – 400 Free Practice Questions to Pass the Exam

A company would prefer balance compensation to fee compensation primarily because earnings credits on collected balances are not taxable. This distinction offers a significant financial advantage, as the lack of taxation on these credits means that the company can effectively retain more of the earnings generated from its collected balances, enhancing its overall cash flow.

In contrast, fee compensation typically involves direct payments to the bank for services rendered, which can reduce the company's available cash and may be subject to taxes. Therefore, the tax-exempt nature of earnings credits serves as an incentive for companies to favor balance compensation, as it allows for better financial management and optimization of resources.

The other aspects, while relevant, do not convey the same direct financial benefit. For instance, while balance compensation may have implications for budgeting visibility or risk, these factors do not strongly outweigh the tax benefits associated with earnings credits. Similarly, the risk associated with the earnings credit rate and its comparison to other investment interest rates may not be compelling enough as a primary reason for choosing balance compensation over fee compensation.