Tag Archives: executive compensation

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SEC Releases proposed compensation clawback rules

The Securities and Exchange Commission is considering new rules and regulations for compensation claw back policies. If the proposal is adopted, it will implement specific requirements from the Dodd-Frank Wall Street Reform and Consumer Protection Act, where companies listed with national securities exchanges and associations will have to develop and implement clawback policies.

In general, all listed companies must maintain a written claw back policy for the recoupment of certain compensation awarded to executive officers. Some of the specific terms of the executive summary include:

  • The claw back policy is triggered when an accounting restatement corrects a material error in a previous financial statement
  • The policy applies to incentive-based compensation granted within the preceding three years of the accounting restatement
  • Fault or lack thereof is irrelevant to the implementation of the clause

Under the proposal, the claw back clause must contain the following elements:

  • Description of the specific type of restatement that triggers the claw back clause;
  • Definition of what “incentive-based compensation” is subject to recovery under the claw back clause;
  • Statement of the specific time period covered in relation to when the compensation was received by the executive officer;
  • Explanation regarding who is covered under the clause;
  • Explanation about the amount of recovery authorized under the clause; and
  • Statement that recoupment is mandatory unless it is “impracticable.” meaning that the cost of recovering exceeds the total amount of recovered compensation.

For questions about this proposed regulation and possible implications for your company, contact our office to speak with an attorney.

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Employment Agreements: A Rundown of the Top 10 Pointers

Executive contracts often include a range of options, clauses, benefits, restrictions and obligations.  We represent employees at all levels in the negotiation process, and this post will share our thoughts on some of those provisions.

The range is broad:  non-qualified stock, incentive stock, incentive bonuses, pay for performance, deferred compensation, retirement plans, benefit plans, business expenses, choice of laws, arbitration clauses, non-competes, non-solicitations, confidentiality clauses, termination provisions, residency requirements, and post-employment cooperation agreements…to name a few of the more common provisions.

Below, we outline some of the main parts of employment agreements and answer some of the most common questions that we get asked. Of course, feel free to contact us with any other questions you may have.

  1. The general trend in executive pay is moving towards a proportionally lower base salary and higher pay-for-performance rewards. Expect to see more incentive based clauses.
  2. A second general trend in employment agreements is an effort to lock employees into long term arrangements or lock them out of the industry.
  3. Severance packages are back, but frequently misunderstood. These provisions should be negotiated at the outset with particular care to definitions of cause and good reason, as well as cure periods, conditions to payouts and post-employment obligations.
  4. Change in control provisions protect employees in the event a company is sold or new management takes over.  These clauses often provide for acceleration in compensation and equity vesting, and should be considered whether or not the prospect of such an event is immediate.
  5. Incentive Stock Options (ISOs) are agreements providing an employee the right to buy stock, ie. exercising the option. This also comes with a tax benefit, but there are several important limitations including the amount of stock that can be granted this way.
  6. Non-Qualified Stock Options (NSOs) are similar to ISOs, but they do not qualify for the same preferential tax treatment and the have fewer restrictions.
  7. Restricted stock is an actual share of stock owned by an individual, but subject to certain company mandated restrictions and repurchase rights. These restrictions usually lapse over time, with the employee’s rights in the stock vesting at each milestone.
  8. Phantom stock is not actual equity, per se, but it gives the executive the benefits of stock without owning it. For example, if the actual stock value increases, so will the phantom stock.
  9. Stock Appreciation Rights (SARs) are not actual stock, either, but these contracts typically result in a bonus or other payment equivalent to the increase in the price of an actual share.
  10. Employment at will is often the rule, but there are many rights depending on the contracts, if any, but there are also rights under laws protecting against discrimination, retaliation and whistleblowing, all of which merit a view.

If you’re negotiating an employment relationship, or termination, contact us today.

Call us today at 800-403-7755 to schedule a free consultation with our team of talented attorneys.

Click here to view Gordon Law Groups FAQs on executive compensation.

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8 Things You Should Know About Executive Compensation

1)      Companies are shifting towards long term, multi-year goals, and executive compensation is following suit, often setting compensation based upon long term success metrics.2)      Executive Compensation is varied.  It often consists of a combination of salary, bonuses, equity, benefits, and other perks, and it typically based on company performance, length of employment, benchmark data, market practices, individual performance, and other factors.
3)      Phantom Stock and Stock Settled Appreciation Rights are compensation varieties that allows companies to offer executives the benefits of stock without actually owning real stock. If the actual stock increases in value, then the phantom stock held by the employee also increases in value. Similarly, stock settled appreciation rights are where an executive receives a payment based on the amount the stock has increased.  4)      Dodd-Frank reform allows shareholders of a public corporation vote on executive compensation and recommend whether executives are receiving a fair amount of compensation. However, for the moment at least, this vote remains non-binding. 5)      Executives are covered by the same laws as normal employees.  Just as employees must be paid all wages earned, that is no different for executives. This does not include minimum wage or overtime laws but does include executive compensation.
6)      It is always important to understand and often actually negotiate your package.  Do this to ensure you get what you deserve, but you also might do this to demonstrate you’re the type of executive they’re looking for. Make concessions and design the package how you would like it to be, but also design your efforts to convey your work style.

 7)      Know your value. Do some discovery work and try to find out what other executives at rival companies are worth. This will help you determine your value to your company.
8)      Consult an expert. We highly recommend talking to an attorney who has experience in executive advocacy. This will allow you to receive a fair and profitable package and avoid any messy situations that we see frequently, ranging from the taxation of equity to severance packages. If you have any other questions surrounding executive compensation, check out our FAQs page or contact us today.
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Median CEO pay passes $10 million

For the first time ever, median CEO pay among the Standard & Poor’s 500 topped $10 million annually, marking the fourth straight year that CEO compensation rose.

The rise in CEO pay can largely be attributed to the strong performance of stocks in the past 12 months. Because executive compensation is increasingly tied to company performance, the success of the S&P index resulted in the stock component of executive compensation packages propelling median CEO pay above the $10 million threshold.

With bigger money on the table via stock options grants and performance rewards, it is becoming increasingly important to keep up with and understand the labyrinth of CEO pay. If you have any questions about how your executive compensation works, or are negotiating a new deal, contact us at Gordon Law Group.

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Proposed legislation would raise base pay for executives

New legislation has been proposed that would increase the minimum salary basis level that employers need to pay as part of the requirements to avoid the overtime rules. Workers classified as executive, administrative or professional employees would have their weekly minimum pay more than doubled, and the floor for highly-compensated employees will increase too, by 25%.

Currently, executive, administrative or professional employees must earn a minimum of $455 per week (base salary) to be excluded from overtime rules. However, in the next three years the new proposal would incrementally increase that floor to a minimum of $1,090 per week, or else overtime must be paid.

Similarly, the floor for highly-compensated employees would be raised to $125,000 per year. This is an increase from $100,000 and would be periodically indexed for inflation.

If you have any questions about the legislation or any other overtime questions, contact us today.

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ISS Changes Methodology for Calculating Relative Degree of Alignment

    ISS (International Shareholder Services Inc.) has released its 2014 U.S. Policy updates, with a modification to the executive compensation section, changing the methodology of how they calculate the Relative Degree of Alignment (RDA). The RDA evaluates executive pay and performance relative to peers. Under the revised methodology, ISS will calculate the difference between the company’s total shareholder return rank and the CEO’s total pay rank within a peer group, as measured over a three-year period.

    Previously, ISS would take the difference between the company’s total shareholder return rank and the CEO’s total pay rank within a peer group, as measured over one-year and three-year periods (weighted 40% / 60%). The new methodology serves to simplify and smooth the process. This shouldn’t make too much of a difference for executives, but does continue the overall trend of executives being rewarded for long-term successes over short-term successes.

    The 2014 Updates were agreed on November 21, 2013 and have been effective for shareholder meetings on or after February 1, 2014.

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Taking the Long-Term Approach: How and Why More Companies Are Linking Long-Term Performance to Compensation

With large companies facing ever-increasing scrutiny over how much they pay executives, but with overall executive pay still rising in the Say-on-Pay era, many companies are looking to the long-term.

But why are they doing so? Clearly, long-term evaluation can be beneficial for both employer and employee: the employer is locking up precious talent, while ensuring that what they pay their executives is commensurate to the company’s overall success; the employee is still handsomely rewarded for his position, and with the added desire of wanting to see the company succeed.

There are, however, some important things to consider if you are negotiating a long-term performance compensation package:

1) Make sure the company shares the same goals as you.

2) Is the compensation package fair and achievable? Are some of the targets unattainable?

3) Consider the business model and life cycle and determine what the exact length of the “long-term” package should be.

4) Can you envisage yourself still working at the company in 5, 10 or even 15 years?

So, while a long-term deal can be beneficial for both parties, make sure you understand the terms and ramifications when agreeing a long-term compensation package. If you have any questions, you can contact us at Gordon Law Group.

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Dodd-Frank: A Rundown

The Dodd-Frank Wall Street Reform and Consumer Protection Act has been in place for nearly three years. We’ve provided a quick refresher of exactly how the Act works and how it affects you, the executive. 

The most relevant part of the act for executives is the “Say on Pay” proposal. Subtitle E focuses on executives and states that, at least once every three years, a public corporation is required to submit to shareholder vote the approval of executive compensation. Shareholders may also disapprove golden parachute payments.

“Say on Pay” is a term used to describe the process where a firm’s shareholders have the right to vote on compensation afforded to executives. It is intended to limit compensation by not awarding executives too much money. The shareholders review the CEO, CFO, and the next three highest paid executives.

How does this affect me?

Executive bonuses will be subjected to periodical reviews by the shareholders. Potentially they can block executive compensation if they deem it to be excessive or if the company is underpeforming, although the shareholder vote is non-binding. However, for the most part, executive compensation has been approved by shareholders and Dodd-Frank has proved to be a fair system for rewarding the work of executives.

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Shares Explained

We are now firmly entrenched in the Say on Pay era and this means more varied forms of compensation than ever before. Companies will frequently offer their executives a variety of stock options – whether it’s a form of wages, give the executive a vested interest in the company or to reward management for meeting certain targets.

The type of shares issued becomes more varied and convoluted each year. An executive will have to not only understand the type of share or shares that they are receiving, but the conditions that come with these shares. From acceleration provisions to exercise dates and from strike prices to the benefits, there is a great deal to look out for and understand.

Here is a quick rundown of the 6 most common types of equity:

1) Incentive stock options (ISOs) can only be granted to employees and is the only equity option that offers favorable tax treatment. Usually, an employee is given the option to purchase stock at a predetermined price. This is the most common form of equity offered to employees.

2) Non-qualified stock options (NQSOs) are similar to ISOs but without favorable tax deductions. This means the employee is taxed on any profit made when purchasing the stock at its cheaper, predetermined price.

3) Stock Settled Appreciation Rights (SSARs) grants an employee payment in stock. The payment is equal to the amount which the value of stock has increased since the employer-employee agreement was made.

4) Phantom Stock is similar to SSARs, but the employee is paid in cash instead of stock. The payment is still equal to the amount which the value of the stock has increased, but the employee receives no actual stock.

5) Restricted Stock Grants are a fixed amount of shares that are given to the employee that are subject to a right of forfeiture or repurchase by the company.

6) Restricted Stock Units (RSUs) is when an employee is granted stock to be paid at a specified date in the future. These are also subject to forfeiture or repurchase by the company. RSUs are usually used by newer companies that are looking to grow.

Once again, it is necessary to stress the importance of understanding different types of stock. Too often, when an executive leaves a company for whatever reason, there is a messy and complicated severance package that is usually complicated by the shares owned by the executive. Clearly, it is beneficial to avoid a messy process!

If you have any questions about equity compensation, feel free to contact us today. Also, check out our FAQs by clicking on the link at the top of the page or at Gordon Law Group.

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Top 5 Ways to Improve Executive Compensation

  • Know your value — Start by gathering data.  What are other executives paid, in your own industry and your own company?  How has your company performed, compared to your industry peers as well as you own benchmarks?  How have you performed?  Are their particular compensation trends impacting your position?  If your company has been performing particularly well or if you are headhunted for a new executive position, you may be worth more than you think.

 

  • Don’t be afraid to negotiate, but align your interests — While base executive pay has been falling in recent years, more and more companies now offer “pay-for-performance,” and if you understand your value then you have room.  The key is aligning your interests with the company’s.  Ask yourself a simple question:  does your compensation package give you the incentive to achieve the company’s goals?  For example, a bonus plan targeted to increasing revenue may only encourage low-profit, high-revenue sales.  Is that your company goal?  Lofty goals prove similarly ineffective.  Better to work through your company’s strategic plan and approach your Board of Directors with an incentive package that has everyone facing the same direction.

 

 

  • Understand the terms — Frequently, even experienced executives fail to fully understand the terms of their own deal.  Between all the clauses and different types of stock, it can be a bit confusing.  But, small tweaks can yield significant results.  Look a bit more closely at your employment documents, and review our executive compensation FAQs here.

 

  • Take the long-term view — This applies to two separate areas of executive compensation.  First, when you negotiate the deal, try to see through the smaller, short-term stumbling blocks.  Are they important to your goals?  For example, if multi-year stock vesting troubles you, add accelerators.  If your starting salary is too low, add incremental pay raises tied to performance metrics or time.  Second, take note of the company’s realistic plans.  Are the stock grants truly valuable?  Are they buried under preferred stock, convertible debt or other senior obligations?

 

  • Get good advice — Your company’s lawyers and accountants look out for your company, much like you do, taking advantage of every chance to benefit the organization.  But who’s watching out for you?

 

If you would like to speak with one of our attorneys about any questions or concerns you may have, please contact us today.

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