With the pandemic and associated business disruptions, employers are widely advised to take a hard look at executive compensation. If your executive compensation is determined on a negotiated contract basis, now is an excellent time to review it. Employers are reviewing details like salary, deferred compensation agreements, performance-based awards, non-compete agreements, severance packages, stock options, stock prices, retirement, and equity incentives.
Many businesses face extraordinary challenges in 2021. Last year was one that a lot of Texans and companies located in Texas would like to forget. This year has not been smooth sailing either. The February freeze, the personal suffering, and business disruption it caused made a rough start to the year for the energy sector and many companies in Texas. Uncertain remains the watchword, not just in the Texas economy, but also worldwide. CEOs and other top executives should prepare themselves with plans of their own. The best survival strategy may be information, planning, and negotiating based on experience and expertise.
Our Texas Employment Lawyers Help CEOs and Other Top Executives Negotiate Their Executive Compensation Packages
If your company has or may be planning to restructure your compensation arrangement, the Texas employment lawyers at Kilgore & Kilgore can help you assess your situation and craft the best possible package for the future. Click this link to learn more about our Executive Compensation law practice. Use this link to get the conversation started about your own compensation Contact Kilgore & Kilgore. Every situation is different, so there is no one strategy. Here, however are some of the challenges and opportunities we see on the horizon.
Salary Reductions and Strategies for Executive Compensation
A study by the Corporate Governance Research Initiative at the Stanford Graduate School of Business and the Rock Center for Corporate Governance at Stanford University reported that, among those surveyed, many companies have cut CEO salaries. A smaller percentage reduced either deferred salary payments or required or offered an exchange of salary for equity. Many a company receiving stimulus aid under the CARES Act were subject to significant limits on the compensation paid to officers and other highly paid employees.
Executives, appreciating that temporary reductions may not be avoidable, should still look for an end date and for plans to restore lost compensation. Employers, equally sensitive to the risk of losing key executives to competitors, may be willing to consider creative ways for top employees to earn back salary reductions through future incentive payments.
Bonus Awards and Incentive Payments – Moving the Measure in Executive Compensation
Annual bonus awards and longer-term incentive payments are generally dependent on the achievement of certain pre-set goals. The economic climate may have made some of these simply impossible; so, it may be to an executive’s benefit – at least for 2021 – to change the measuring stick used to assess performance.
To motivate and retain key executives, many companies have been willing to amend critical metrics – for instance, by changing financial performance metrics to strategic metrics, including the achievement of diversity, equality, and inclusion goals. Other companies agree to re-set goals later in the year or in on an adjustable scale that considers stock prices, revenue projections, and extraordinary events. Others may be willing to set a broader range for performance targets. When confronted with a lower maximum payout, executives may be able to argue for a decrease in the eligibility threshold for receiving a performance award. As uncertain as the economy may look, there may be work-arounds.
Stock Awards and Stock Options
Many executives have suffered significant losses because the value of their employer stocks dropped. Executives holding shares of employer stock cannot often sell their interest in company stock at will, so they are, in a sense, captive investors. Some commentators have suggested that it is unfair to expect them to bear these losses without mitigation of some sort, such as supplemental awards later. The rate at which an executive’s interest in equity vests is often performance-based, rather than time-based. Usually this works to an executive’s benefit. In extraordinary situations like a pandemic, however, negotiating for time-based vesting may be the better choice.
Change in Control and Severance Agreements
The grim truth, though, is that the financial challenges of 2020 will force some companies to face painful restructuring decisions. Others may have become acquisition targets. Unwanted as these changes may be, there is no need for them to be a surprise. Now may be the time for high-level employees to review their financial protections in the event of a change in control or termination. It may also be time to review the terms of non-compete agreements.
With respect to severance agreements, it is important to consider whether and how the benefit plans are subject to the Employee Retirement Income Security Act (ERISA) and Internal Revenue Service Code Section 409A, and, depending on how post-termination health benefits are provided, determine any continuing health benefits compliance issues under COBRA.
Our Employment Lawyers Can Help You Develop Personalized Executive Compensation Strategies
Those whose compensation is determined on a negotiated contract basis are challenged in 2021 because of the fluctuations in the 2020 economy. There is no assurance that the new normal will look much like the old one. For an evaluation of your compensation package and developing a negotiating strategy favorable to you, reach out to our employment lawyers at contact Kilgore & Kilgore.