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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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Early Data for 2013 shows rise in CEO compensation

By now, you’ve heard all about Pay for Performance – executives’ bonuses are not predetermined anymore but instead based on the performance of the company in both the long and short-term. But by and large, shareholders have supported executives and paid them accordingly.

Here are some key statistics that show data in 2013 compared to 2012 (data from http://www.capartners.com):

  • Shareholder support at 97%, up from 95%
  • Median CEO bonus 100% of target in 2013 compared to 97% in 2012
  • 51% of executives rewarded with more than 100% of target bonus (meaning they exceeded target), compared to 47% in 2012
  • 49% of bonuses related to long-term incentives, up from 45%
  • 50% of companies modified the peer group
  • So what does the data tell us? It seems pretty evident that executive pay is rising, predominantly through meeting targets. Executive pay is also increasingly tied to the long-term success of the company, with executives rewarded for meeting long-term goals (usually over a three year period).

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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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    5 Major Executive Comp Trends for 2013

    Pay for Performance…

    …Most companies now use pay-for-performance looking at an executive’s performance over a three year period.

    Say on Pay…

    …Shareholders overwhelmingly support say on pay.

    Annual Incentives…

    …These appear down slightly versus 2012, with new financial and non-financial metrics used to measure performance.

    Long-Term Incentives…

    … Restricted Stock Units, Stock Appreciation Rights and performance awards continue to dominate executive incentive pay.

    2013 Merit Increase Budget…

    …Incremental growth continues consistent with previous years.

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    Executive Trends – 2011

    As the first year of Dodd-Frank comes to a close, we recap the major trends in executive compensation from the previous year:

    • Focus on structure, design and stability of executive contracts as economy begins to pick up
    • Closer communication with shareholders
    • Significant concern with external governance and pay for performance
    • Emphasis on accurate goal-setting and formula to measure performance

    Predictions for 2012 and beyond:

    • Pay for performance will continue to be the flavor of the day, taking up a higher percentage of overall compensation
    • Continuing efforts to streamline and improve formulas and metrics to measure performance
    • Deeper reliance on peer groups and focus on long-term incentives
    • Further attempts to eliminate inefficient pay practices
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