Transitions in Employment

Employment deals require that the attorney think and serve as a strategic advisor, as the consigliere (akin to the Tom Hagen model from Coppola’s The Godfather).  One must see the “big picture,” as well as the details, all in line with the overall strategy.  And one MUST listen to the client and address his/her goals, being reasonable about what can and cannot be accomplished.  Determination to deliver by the attorney is key to a successful deal.

The compensation package of Eugene Isenberg, former CEO and now chairman of Nabors Industries, Ltd., including a proposed $100 million termination payment, illustrates the far extreme of executive compensation.  While institutional shareholders brought suit to challenge his compensation, wasn’t there due diligence before investments were made?

Nonetheless, an intriguing angle on this is how the $100 million will be treated.  Can Mr. Isenberg merely waive the payment and not be taxed since, in effect, the $100 million may have been constructively received by him by contract?

The Company’s press release indicates that it entered into an agreement with Mr. Isenberg whereby Isenberg voluntarily terminated his employment effective December 31, 2011, remaining as Chairman through June 2012. It also states that Mr. Isenberg will receive “no cash compensation in connection with the termination and waives all claims he might have had against the Company in connection with his employment agreement, including any claim that the October 26, 2011 appointment of a new chief executive officer constituted constructive termination entitling him to [the] $100 million payment.”

In another interesting side note, Mr. Isenberg’s severance amount may constitute deferred compensation, depending upon the terms of his employment contract.  It is unclear what, if anything, Mr. Isenberg received (or will receive) in exchange for his agreement to forego receipt of this severance amount.  News reports suggest that his estate will receive a $6.6 million payment upon his death. However, if any amount payable to Mr. Isenberg (or his estate) in exchange for this agreement occurs after the date upon which he would have otherwise received his severance payment, the negotiated amount could constitute a substitute payment with a deferred payment date, which may be an impermissible subsequent compensation deferral in violation of Code Section 409A. When dealing with deferred compensation (as with many other tax provisions), you can’t do indirectly what you can’t do directly.

The $100 Million Giveback

This post was co-authored by Charles A. Bruder, a Member of Norris McLaughlin & Marcus and Co-Chair of its Executive Compensation & Employee Benefits Group. Charles is experienced in all aspects of defined contribution and defined benefit plans, deferred compensation arrangements, stock option plans, employee stock ownership plans, and other incentive and equity-based compensation arrangements.

The critical concept in the negotiation for the renewal of an executive employment contract is LEVERAGE. The answers to the following questions will determine if the individual has leverage in renewal negotiations. How valuable is the individual to the enterprise? What is the executive’s track record, either there or at prior companies? What has been offered to the executive or the person in the same position in the past? What are the comparable packages in the industry? The executive should keep in mind the words of Mahatma Gandhi; “if you don’t ask, you don’t get.”

Wall Street compensation does not appear to be the only target these days as foundations are coming under increased scrutiny.  Handsome severance packages have been provided within the four corners of executive employment agreements.  The Wall Street Journal reports such is the case at the National September 11 Memorial and Museum.  Query whether the net impact of these packages will be a reduction in funding and/or contributions in the non-profit arena.

Second Severance Deal at 9/11 Group

The jury’s decision in favor of Donald Drapkin, former employee of MacAndrews and Forbes, highlights the nuances of contract language - distinctions between substantial performance and material breach.  To avoid cases like these, why not allow for a reasonable period within which to return company property, and not penalize the employee if items are discovered months if not years after the severance has been paid, provided good faith can be shown on the employee’s part. We will have to see if the judge sets aside the verdict.

Perelman’s MacAndrews & Forbes Loses $16 Million Drapkin Verdict

Credit Suisse and Bank of America both recently announced changes in their annual bonus arrangements. Given the state of the economy and the cash crunch that many business are facing, companies are becoming more creative in the funding of these bonus arrangements – with a greater portion of annual bonuses are being funded in restricted stock or other investment vehicles. While these arrangements can sometimes provide a potential benefits to their recipients, knowing the details is critical.  Credit Suisse’s arrangement, for example, offers no upside to the executives and could theoretically (according to the Wall Street Journal) result in lower payouts.  Stock grants provide both potential increases and decreases in value, but often such shares are “restricted,” meaning that executives cannot sell these shares if things go bad and deferred stock arrangements can have unintended income tax liabilities associated with them.  As bonus arrangements become more complex and creative, executives will need to engage in more planning – financial, cash flow, and income tax – to properly manage their incentive compensation.

BofA’s New Twist on Bankers’ Cash Bonus

Credit Suisse’s Elaborate Bonus Ritual

David Harmon co-authored this post with Charles Bruder.

What does the dispute between MacAndrews & Forbes and Donald Drapkin, its former Vice Chairman, indicate to other executives who sign severance agreements? That company property should be returned and confirmation of such return should be obtained by the executive, that companies should have solid procedures in place to monitor the possession of confidential information by employees, and that post-employment obligations are enforceable — depending on how they are drafted and the particular facts of the case. This case should be interesting as it presents specific contract clauses and evaluates the conduct of the former executive. We will see what the jury finds regarding whether the company was justified in withholding payment under Drapkin’s severance agreement due to its claim that he failed to comply with his post-employment obligations, including returning company property and soliciting an employee.

Perelman’s MacAndrews Faces $18 Million Back-Pay Trial ‘About Fairness’

Great title for the Wall Street Journal‘s article “Wall Street Pay Gets Even Trickier to Figure” — executives be wary as company consider modifying deferred comp arrangements. If not done properly, IRS Code 409A liability can be triggered with the executive bearing the unintended financial responsibility.

This post was co-authored by Charles A. Bruder, a Member of Norris McLaughlin & Marcus and Co-Chair of its Executive Compensation & Employee Benefits Group. Charles is experienced in all aspects of defined contribution and defined benefit plans, deferred compensation arrangements, stock option plans, employee stock ownership plans, and other incentive and equity-based compensation arrangements.

According to the Wall Street Journal, Morgan Stanley plans to significantly reduce bonuses and will defer cash payouts over $125,000 until the end of 2012, noting that “[s]ome top executives will receive nothing now, deferring their 2011 payouts until the end of this year.”  Deferred compensation is becoming more prevalent in similar situations where companies do not have adequate cash on hand.

This, in fact, is a change of the compensation structure, which raises Section 409A concerns.  Adequate consideration has to be given to the labyrinth of Section 409A of the Internal Revenue Code — it has to be carefully navigated.

Keep in mind that if a portion of your compensation consists of deferred compensation, your employer may have a limited ability to change your payment schedule without entering into new plans and agreements.  While this modification addresses 2012 compensation, there may also be staggered deferred arrangements that pay out in the current year.  Since the IRS imposes the 409A tax liability on the individual, plans and agreements should be carefully reviewed.

Bonuses Are Sinking at Morgan Stanley

This post was co-authored by Charles A. Bruder, a Member of Norris McLaughlin & Marcus and Co-Chair of its Executive Compensation & Employee Benefits Group. Charles is experienced in all aspects of defined contribution and defined benefit plans, deferred compensation arrangements, stock option plans, employee stock ownership plans, and other incentive and equity-based compensation arrangements.

I was recently asked when you should retain counsel in connection with termination of your employment. The answer depends on your individual situation.

If you are experiencing difficulties in your current position or anticipate being fired, counsel can be a helpful behind the scenes guide. Strategies can be implemented to help achieve better than initially expected results in the event of a termination of employment.

If you are planning to leave, counsel can provide guidance in marshalling the documents that govern your employment and advise as to the impact of resignation on the agreements (including non competes, non solicitations and garden leave agreements), offer letter, and compensation and benefit plans.  The analysis is always about leverage.  However, one should always have the agreements in place with the new position before resigning from the current one (see “GET IT IN WRITING!!”).

The bottom line is that employment advice involves assessing risk and reward under employment documents and evaluating leverage to maximize the reward and minimize the risk.