Archive for July, 2012
- Be Sure of the Meaning. An illustration of the importance of the meaning of the terms is found in the definition of “active working status.” We recently handled a negotiation for an executive who had received an employment agreement that provided that only employees who are in “active working status” on the bonus payment date would be eligible to receive a bonus for the prior performance year. Without fine-tuning the definition and its relationship to the termination provisions, the executive could have been denied compensation and benefits that had accrued during his years with his employer, regardless of the reason for termination.
- Review the Restrictions. Now, more than ever before, companies need to protect their trade secrets, confidential and proprietary information, property, customer and employment relationships through the imposition of restrictive covenants. Employers take various approaches to these covenants. These restrictions are in effect during the employment relationship and post-employment; sometimes only during the period in which severance is paid, sometimes regardless of whether the executive is on the sidelines for months, or in some cases, years. The goal for the executive is to limit the time and geographic range of the restrictions and confine them to certain competitors or customers. Essentially, the executive has to determine the extent to which he or she is comfortable with signing away post-employment flexibility should the employment relationship fail.
Negotiation of the compensation package can be the most significant part of a career move. Remember to examine the “fine print,” and seek counsel as needed, to understand the interplay of the provisions of the employment agreement, and accompanying equity and benefit plan documents, to ensure a successful employment relationship, or the best protection if things don’t work out.
The Wall Street Journal reported that thousands more banking and trading jobs will be cut. Some firms plan to cut experienced employees and replace them with more junior folks and utilize “campus hiring.” This is interesting. To save on expenses, the bank will eliminate more experienced employees, while keeping younger, less experienced, and, without question, less efficient employees. Therein lies the true cost of expense reduction.
- The Termination Scenarios. Defining the circumstances under which the employment relationship can be terminated is essential. Considerable attention should be paid to the definitions of “cause” and “good reason.” Not focusing on the details of the definitions can have costly ramifications. Employers seek a broad definition of “cause” to afford greater latitude in terminating an executive and avoiding an obligation to pay severance. In response, the executive strives for a narrow definition of “cause” that avoids discretionary and qualitative terms. On the other hand, the executive should strive for inclusion of provisions that enable him/her to trigger a termination for breach by the employer and still receive maximum contract benefits and payouts. This is typically referred to as a “good reason” termination. It is also helpful to consider how the executive will be treated in the event a change in control of the employer occurs. And all termination must be viewed against the backdrop of IRS Code Section 409A, creating a labyrinth of possible tax liabilities.
For steps 1 through 4, please see posts:
Part I: Negotiating the Employment Package That Is Best for You – The Fine Print Matters
Part II: Negotiating the Employment Package That Is Best for You – The Fine Print Matters
Part III: Negotiating the Employment Package That Is Best for You – The Fine Print Matters
What a deal!! Duke Energy inks an employment agreement with CEO (a deal that was contemplated in its merger agreement with Progress Energy) and one week later, he is terminated. Under his severance arrangement, he is slated to receive severance payments in the neighborhood of $44 million, including severance, cash bonus, special lump-sum payment, and accelerated vesting of his stock awards (see “Behind Duke’s CEO-for-a-Day,” Wall Street Journal, page B6, Friday, July 6, 2012). His lump sum payment is due provided he cooperates with Duke and does not disparage the company.
Were the parties acting in good faith? Did the Board meets its obligations? More to come, I am sure.
In Part I and II, I discussed getting an employment agreement in writing, understanding the salary component, and details of the equity. The next critical step to take in the negotiation of an employment package is:
- Don’t Forget the Fringe Benefits. Many executives overlook the value that fringe benefits and perquisites (“perks”) bring to an overall compensation package. These can be “found money” for the executive and a way for an employer to lure new talent into its ranks. Fringe benefits and perqs can take several forms and can add, in some cases, significant dollars to the compensation package. These include health, life, disability insurance, car payments/allowances, club dues, home security systems, executive physicals, and relocation expenses. The executive should also be mindful of the tax treatment afforded these benefits to avoid the surprise of incurring taxable phantom income.
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