Equity & Executive Compensation

Our most successful clients seek to align their valuable employees’ motivators with their strategic plans and support that with the right mix of compensation and long-term incentive plans. They come to us knowing these plans are necessary to go beyond the benefits provided by most qualified retirement plans. We guide clients through the process of designing, drafting, and implementing competitive and creative compensation plans to reward and retain their vital employees.

The entire spectrum of these types of plans is considered in this process including:

• Stock arrangements
• Phantom stock
• Stock appreciation rights (SARs)
• Nonqualified deferred compensation
• Rabbi trusts
• Supplemental executive retirement plans (SERPs)
• Change in control/severance arrangements
• Plans for tax-exempt employers and governmental agencies (Code section 457 plans)

Equity Based Compensation Plans

Employees are looking for a stake in the outcome. Equity sharing outside of your retirement plan helps align the motivations and performance of your employees with the company’s strategic plan for long-term growth.

The available alternatives include true stock arrangements and stock-related plans (or quasi-equity arrangements) that do not provide employees with actual shares of stock, but with cash compensation tied to or determined by the value of the company’s stock. Often, a combination of plans is necessary to reach the right groups of employees. We can evaluate or help create:

• Nonqualified stock options (NSOs or NQSOs)
• Incentive stock options (ISOs)
• Restricted stock arrangements
• Stock-loaded rabbi trusts
• Stock appreciation rights (SARs)
• Phantom stock plans

Non-Equity Based Compensation Plans

Non-equity based compensation programs can also be used to attract and retain top talent. These types of plans include:

• Nonqualified deferred compensation—elective, nonelective or both
• Supplemental executive retirement plans (SERPs)
• Change in control/severance arrangements
• Financing arrangements using rabbi trusts

Plans can use a wide range of design features, limited only by certain statutory and regulatory rules. Some common options include:

• Simple vesting schedules or complex vesting schedules based on performance factors (e.g., tied to EBITDA)
• Class year vesting, where each year’s deferred compensation is subject to its own vesting schedule
• Possibility of forfeiture for violation of anti-competition provision or termination for cause
• Single-sum distributions or installment distributions, with or without participant elections
• An ability to treat each participant differently at the employer’s discretion under a single-plan document

Our experienced team knows the pitfalls that any non-equity program may face and how to avoid them. Some of these challenges include:

• Code section 409A compliance
• Determining if the plan is an ERISA “pension” plan and must be limited to the “top hat” group
• Code section 280G “golden parachute” penalties
• Reasonable compensation concerns for corporate governance
• Deductibility of benefit payments
• Employment tax issues

457(b) and 457(f) Plans

We can help any exempt organization or governmental entity that is subject to special income tax rules under Code section 457. Our expertise allows us to overcome and avoid common problems that may emerge during the life of a 457 plan, such as Code section 409A compliance for certain 457(f) plans, whether the plan is an ERISA “pension” plan and must be limited to the “top hat” group, reasonable compensation concerns, and all employment tax aspects.

Code section 457 governs two types of deferred compensation plans:

• 457(b) Plans: These are “eligible” deferred compensation plans that are subject to statutory requirements regarding how much can be deferred under the plan and when the benefits are payable to the participants. The participants are taxed on the benefits as they are distributed to them.
• 457(f) Plans: These are “ineligible” deferred compensation plans that don’t satisfy one or more of the statutory requirements applicable to 457(b) plans, often by exceeding the amount that may be deferred under the plan. The participants are taxed on the benefits as they become vested in those benefits (even though they are not distributed to them).

Employment Agreements

Employment agreements are a common tool for establishing clear provisions and expectations between employers and employees. Despite their ubiquity, they often include promises that can’t be fulfilled without causing adverse tax consequences. Our team helps you create employment agreements that avoid tax pitfalls and remain fully compliant with regulations like those found under Code section 409A. We can also evaluate an existing employment agreement and help make corrections that address any noncompliance.

Working with us helps avoid these common problems, among others:

• Deferred compensation that violates Code section 409A or 457
• Severance payments that are subject to Code section 409A without satisfying its requirements (e.g., through a faulty release provision)
• Medical reimbursements or retiree health that results in the full amount of the benefits received being taxable