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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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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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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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