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Morgan & Morgan handles all forms of labor and employment litigation, including those related to executive pay. Specifically, we may be able to help executives with litigation related to bonuses, severance agreements, wrongful termination, equity and stock, perquisites, and more.
Upper-level managers hold the greatest degree of responsibility within an organization. They are the leaders of a company, accountable for guiding lower-level employees in their day-to-day responsibilities and steering the entire organization towards long-term success.
Executives who hold these prestigious and high-stress roles are awarded robust pay packages, otherwise known as executive compensation. These executive compensation packages are a complex combination of pay and benefits that compensate the manager for not just their hard work and time, but for their leadership and vision as well.
However, the financial and non-monetary compensation an upper-level manager receives is increasingly being subjected to scrutiny among shareholders and regulatory agencies, and companies may not eagerly award the same caliber of executive pay packages as they did in the past.
Some important components of executive pay, include:
- Deferred compensation
- Equity and stock
- Retirement benefits
In addition to a base cash compensation, executives are generally awarded an array of both short-term and long-term bonuses to compensate I cafor the demands of their upper-management role.
Bonuses are an important consideration in any executive compensation package, as for some executives, bonuses make up a sizable portion of their total compensation. These bonuses may include:
- Signing bonuses: A bonus guaranteed to an executive upon the signing of their job offer.
- Guaranteed bonuses: A bonus that an employer is contractually obligated to pay out to an executive.
- Discretionary bonuses: A bonus that is only awarded if certain performance goals are met.
- Retention bonuses: A bonus guaranteed to employees during times of potential company turmoil, such as when a company is in the midst of a mergers or acquisitions.
Severance Agreements & Exit Packages (“The Golden Parachute”)
Signing on with a new company is a risk for any executive. Severance agreements and exit packages help to ameliorate this risk by guaranteeing executives a gentle landing in the event their employment is terminated. That’s why these agreements and packages are most popularly known as the “golden parachute.”
However, the terms of these agreements can vary greatly in how and when the severance pay is paid out and when medical benefits are cut off, among other factors. In the case of an unsatisfactory severance agreement, or an exit package dispute, you may have legal recourse.
Just like any other employee, executives may sometimes be terminated without cause in violation of the terms of their contract, or worse in violation of state or federal law. When an executive is involuntarily terminated without cause, they typically receive severance. If they were involuntarily terminated with cause, however, they may not receive any severance.
Most employment agreements define cause as conviction of a crime, such as felony of financial fraud, although some companies also include a violation of the company code of ethics or poor performance. Most executives are not involuntarily terminated with cause due to the high standards that need to be met.
Deferred Compensation & Retirement Benefits
Most commonly, deferred compensation takes the form of popular retirement plans like 401(k)s and IRAs. However, some upper-level management and executives have access to non-qualified deferred compensation plans as part of their executive compensation package.
These non-qualified plans are a robust option for long-term savings that can be accessed before retirement — unlike 401(k)s and similar ERISA-regulated plans, which levy heavy penalties for pre-retirement withdrawal.
Additionally, NQDC are a unique opportunity for tax-deferred growth, as executives do not have to pay taxes on their compensation until the deferral is paid out, so the income could accrue interests or dividends before it is vested.
On the other hand, as your deferred compensation remains the asset of your employer until it is paid out, the compensation is subject to potential loss. This can make deferred compensation a somewhat risky proposition.
Equity and Stock
Equity packages, typically in the form of the company stocks, is another major component of executive compensation.
Restricted Shares: These shares of company stock are awarded to executives as part of their compensation package. However, they are subject to a vesting schedule, and so they cannot be sold by the executive until vested. Restricted shares are forfeited if the executive leaves the company before the stocks vest, and so they incentivize the executive to stay at the company for a certain period of time.
Performance Stocks: These shares are awarded to executives who meet or exceed specific performance goals.
Stock Options: Shares in the company stock that are set a particular, often favorable price for an allotted period of time. Executives are incentivized to push for improved company performance, as their stock prices will generally increase as a result.
Similar to bonuses, equity compensation can often make up a large portion of the executive’s total compensation, so it is important to be clear on the terms of equity compensation agreements.
Executive perquisites, or “perks,” are awarded to executives in recognition of the duties and responsibilities they hold above and beyond that of lower-level employees. These executive benefits can include anything from work from home privileges and a flexible schedule to drivers to and from work, a company vehicle, special parking, or even the use of the company’s private airplane for travel.
New rules have been passed in recent years requiring additional disclosure on perquisites, as there has been heightened scrutiny of such executive benefits. Therefore, it’s important to make sure your the executive perks that are part of compensation package comply with regulations and shareholder expectations.
There are a number of new regulatory laws that executives and employers alike must be cautious of when negotiating executive pay packages, including but not limited to:
Section 409A of the IRC, which pertains to the taxing of non-qualified deferred compensation plans, levies severe penalties onto those who fail to comply.
Section 280G & 4999 of the IRC, on the other hand, limits “golden parachute” payments to ensure that “excess” severance payments are not deducted for unqualified executives. Severance and “golden parachute” payments that fail to comply with these sections of the IRC may be subject to a nondeductible 20 percent excise tax.
The Dodd-Frank Wall Street Reform and Consumer Protection Act’s “Say on Pay” provision, which allows shareholders the right to vote on executive pay packages.