Don't Start Off On The Wrong Foot

Three Significant Executive Compensation Package Mistakes

First, the executive in most cases does not know with any certainty how the offered compensation package compares to the same or similar positions at peer companies. This is true because executives do not generally gather meaningful comparative compensation information before discussing the terms of the offer with the prospective employer. Worse, the executive often relies on compensation information assembled by the company’s compensation consultant. Obviously, this presents an unavoidable conflict of interest and may place a lot of emphasis on a hastily constructed “peer” group. The executive may have, at best, a sense that the compensation package seems appropriate, but on what information foundation does this feeling rest? Is there the right mix of cash and short-term and long-term incentives? Is the offered package too heavily weighted toward performance-based vesting or pay-outs? The executive (and his or her lawyer) often begin negotiations based on information that is more imperfect than it should be. Significant compensation may be left on the table or lost and, once negotiations are completed, it is very awkward (if not nigh impossible) to make adjustments in a way that is fair and equitable to the executive.

Second, the executive retains the wrong or ineffective legal counsel to guide and negotiate terms and to resolve issues correctly as they arise. The components and implications of any C-Suite compensation package are varied and complex, especially with regard to compensation components nuances, taxation, corporate ownership change and termination. Executives often rely on a recommendation or lawyer referral from people who are not familiar with the situation or what the executive’s (or the company’s, for that matter) critical needs are. For example, an executive compensation lawyer who represents executives primarily in the public company space probably does not have sufficient private equity portfolio company experience and vice versa. Some rely solely on a corporate lawyer or, worse, a generalist that they may have known (and trusted) for years. As someone once said, “What could go wrong?”

Third, the executive (and his or her lawyer) does not adequately (or at all) plan ahead for or fully comprehend at the outset the consequences surrounding a change-in-control of the employer at later points in time. Understanding the nuts and bolts of so-called “golden parachute” excise taxation is critical, especially in the public company context. In today’s institutional investor and private equity climate, where tax gross-ups are extremely difficult to obtain or are perceived as non-starters, planning to avoid a significant excise tax imposition (in addition to unavoidable income taxes) or compensation cut-back is critical. Failure to do so could lead to disappointment and frustration and/or taking aggressive positions with the IRS that may or may not be respected by Treasury. The good news is that there are strategies that can be employed up-front (or even during the executive’s tenure) to mitigate or even eliminate this danger. However, many executives wait too long to address or uncover relevant issues and adverse scenarios and unnecessarily put their compensation at risk.

Please contact us if you would like to discuss (and avoid making) any of these mistakes. We can help you plan your compensation package, guide you to the right legal representation and make sure you understand what will happen to your compensation if your employer is sold (and work with you to resolve favorably and fairly any issues uncovered).