Transitions in Employment

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.

With Wall Street bracing for lower bonus payouts with respect to last year, it will be interesting to see how the firms structure the bonuses — cash vs. company stock?  We should see increased employee mobility, typical after bonus season.  In these unique times, it is always good to explore options and understand the documents you have signed with your employer.

While not always an available option, if practical, try to address bonus structure at outset of employment or when agreements are renegotiated.

Bank Pay to Be Lowest since 2008

With failure of MF Global in mind, David T. Harmon was interviewed by Jennifer Hoyt Cummings for MarketWatch, The Wall Street Journal, about what financial advisers should think about in case of bankruptcy.

Today is a Strategy Day.  Today’s strategy is “GET IT IN WRITING!!”

Seems obvious, but you would not believe how many individuals start employment without a writing.  This happens regardless of the law requiring offer letters in many jurisdictions.

While “GET IT IN WRITING” are words that you would expect to hear from an attorney, it really holds true.  You should not leave one job until you memorialize and both parties sign an agreement to the terms of the new job.

Bring as much clarity to bear as possible – make sure as much of the deal is spelled out in written form signed by both employer and employee.  Don’t forget specifics concerning financial terms, benefits, perquisites, equity, and the impact of different events of termination on those pieces of the package.

And by asking for the terms to be in writing, you will take the “employment temperature” of the prospective employer. You will learn a lot from the answer to your request for a written document.

How many of you have been in the predicament of starting a new job without the protection of a written agreement or offer letter?