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Executive Compensation

Michael S. Sirkin, Lawrence K. Cagney

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“In an era of making your own retirement happen by planning now, this book is an excellent resource for all attorneys.”   —Wisconsin Lawyer

Executive compensation has become one of the main targets of investors, and government regulators. Executive Compensation is an invaluable guide through the maze of rules, regulations and practices that governs this area. It is an essential resource for general counsel or attorneys representing companies, business executives, and human resource managers who are trying to identify and evaluate all of their options and make the best financial arrangements possible.

Among the topics covered in Executive Compensation the latest tax and securities law requirements; deferred compensation, including severance arrangements and stock options; ERISA obligations; the role of compensation committees; NYSE and Nasdaq rules on compensation for outside directors; equity-based compensation payable in stock; other cash incentive compensation; deferred compensation funding mechanisms; change of control arrangements; taxation of, and nondiscrimination policies for, fringe benefits; disclosure by public companies; compensation for exempt organizations; foreign employees; using life insurance in executive compensation packages; SEC rules under Section 16(b); and much more.

Book #00634; looseleaf, one volume, 1,086 pages; published in 1996, updated as needed; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN: 978-1-58852-071-5

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  • Availability: Available
  • Brand: Law Journal Press
  • Product Type: Books
  • Edition: 0
  • Page Count: 1086
  • ISBN: 978-1-58852-071-5
  • Pub#/SKU#: 634
  • Volume(s): 1

Author Image
  • Michael S. Sirkin
Michael S. Sirkin is a member of the law firm of Proskauer Rose LLP and is located in New York where he is a co-chair of its Employee Benefits and Executive Compensation Group and former chair of its tax department. He has been Chair of the Employee Benefits Committee of the Association of the Bar of the City of New York and is a frequent lecturer and writer on benefits and compensation issues. A graduate of Rutgers University and Columbia Law School, Mr. Sirkin has served as an Adjunct Assistant Professor of Law at New York University School of Law.


Author Image
  • Lawrence K. Cagney
Lawrence K. Cagney is a member of the law firm of Debevoise & Plimpton LLP and is located in New York, where he is co-chair of the firms Executive Compensation and Employee Benefits Practice Group. He is Chair of the Retirement Plans Committee of the Association of the Bar of the City of New York. A graduate of Fordham University and Georgetown University Law Center, Mr. Cagney has authored numerous articles on employee compensation and benefits.

CHAPTER 1
Introduction

§ 1.01 A Brave New World
§ 1.02 What Is Executive Compensation?
§ 1.03 The Logic
§ 1.04 The Interrelationship of Securities and Tax Laws

CHAPTER 2
Employment Agreements

§ 2.01 Purpose of the Agreement
[1] Advantages to the Employee
[2] Advantages to the Employer
[3] TARP CPP Limitations
§ 2.02 Basic Provisions of an Employment Agreement
[1] Introduction
[2] Term
[3] Duties and Obligations
[4] Compensation
[5] Termination for Cause or with Good Reason
[6] Termination Without Good Reason
[7] Severance
[8] Death and Disability
[9] Confidentiality
[10] Representation Regarding Past Agreements
[11] Noncompetition Agreements
[12] Equity Plans and Clawbacks
[13] Assignment of Patents and Other Intellectual Property
[14] Bad-Mouthing or Nondisparagement
[15] Arbitration
[16] Indemnification
[17] Legal Fees
[18] Assignment
[19] Guarantee of Obligations
§ 2.03 Severance Agreements
[1] General Considerations
[2] Release of the Employer
[3] Release of the Employee
[4] Confidentiality of Severance Agreement
[5] Other Provisions
[6] Tax Issues

CHAPTER 3
Section 162(m) Deductibility of Compensation

§ 3.01 Background
§ 3.02 Publicly Held Corporations
§ 3.03 Covered Employees
§ 3.04 Performance-Based Compensation
§ 3.05 Stock Options and Stock Appreciation Rights
§ 3.06 Compensation Committee
§ 3.07 Shareholder Approval Requirement
§ 3.08 TARP Provisions
§ 3.09 Health Service Provider Executives

CHAPTER 4
Non-Competes and Related Issues

§ 4.01 Introduction
§ 4.02 Restrictions Implied by Law
[1] In General
[2] Duty of Loyalty
[3] Trade Secrets and Confidential Information
[4] Intellectual Property Rights
[5] Sale of Business
§ 4.03 Uses of Restrictive Covenants
§ 4.04 Standards For Determining Enforceability Of Restrictive Covenants
[1] Reasonableness
[2] Protectable Interests of the Employer
[3] Burden on Employee
[4] Harm to Public Interest
[5] Adequate Consideration
§ 4.05 Types of Restrictive Covenants
[1] Nondisclosure Covenants
[2] Assignments of Invention and Copyright Provisions
[3] Nonsolicitation and Non-Interference Provisions
[4] Covenants Not to Compete
[5] Employee “No Raid” and “No Hire” Provisions
[6] Paid Non-Compete Periods at the Employer’s Election
[7] “Garden Leave” Restrictions
[8] “Clawback” and Damage Provisions
[9] Forfeiture Provisions and the “Employee Choice” Doctrine
§ 4.06 Issues Relating to the Particular Context of a Restrictive Covenant
[1] Restrictive Covenants in Connection with the Sale of a Business
[2] Restrictive Covenants During the Duration in Term Contracts
[3] Restrictive Covenants in Severance Agreements
[4] Restrictive Covenants in Partnership and Shareholder Agreements
[5]  Restrictive Covenants in Deferred Compensation Arrangements
§ 4.07 Other Possible Provisions in a Contract Containing a Covenant Not to Compete
[1]  Arbitration Clauses
[2]  Choice of Law Provisions
[3]  Forum Selection Provisions
[4] Liquidated Damage and Forfeiture Provisions
[5] Other Suggested Provisions
§ 4.08 State Statutes Governing Non-Competes and Other Restrictive Covenants
§ 4.09 Global Issues in Non-Competes
[1] Choice of Law, Forum Selection and Principles of Enforceability in Europe
[2] Key Principles in European Jurisdictions
[3] Litigating International Non-Compete Issues in the U.S.

CHAPTER 5
Equity-Based Compensation

§ 5.01 Overview
[1] Choosing an Equity-Based Incentive Program
[2] Retention vs. Incentive
[3] The Consequences of Variations
[4] Public vs. Private Companies
§ 5.02 Stock Options
[1] Description
[2] Tax Effects
[3] Securities Law Registration
[4] Section 16(a) Reporting and Section 16(b) Liability
[5] Accounting Treatment
[6] Exercise Techniques
§ 5.03 Stock Appreciation Rights (“SARs”)
[1] Description
[2] Uses
[3] Tax Effects
[4] Accounting Treatment
[5] Securities Law Issues
§ 5.04 Restricted Stock
[1] Description and Uses
[2] Tax Effects
[3] Accounting Treatment
[4] Securities Law Issues
§ 5.05 Deferred Issuance Stock Awards
[1] Description and Uses
[2] Tax Effects
[3] Accounting Treatment
[4] Securities Law Issues
§ 5.06 Stock Purchase Programs
[1] Description and Uses
[2] Public vs. Private Companies
[3] Financing the Purchase
[4] Tax Effects
[5] Securities Law Issues
[6] Accounting Treatment

CHAPTER 6
Other Cash Incentive Compensation

§ 6.01 Overview
[1] Introduction
[2] Tax Law Constraints on Design
[3] Addition of Stock Features
[4] Criteria for Program Selection
[5] Presentation in the Compensation Discussion and Analysis
§ 6.02 Short-Term Incentive Compensation
[1] Methodology of Bonus Determination
[2] Annual Bonus As Part of Basic Compensation
[3] Annual Bonus Based on Performance
§ 6.03 Long-Term Plans
[1] Choice of Objectives and Timetable
[2] Form of Program
[3] Vesting, Involuntary Termination and Retirement
[4] New or Recently Promoted Employees
§ 6.04 Delivery of Cash Plan Payments in Stock
[1] Design
[2] Regulatory Issues
§ 6.05 Cash Plans for Special Purposes
[1] Unit Plans or Special Purpose Programs
[2] Retention Bonuses
§ 6.06 Change of Control Issues
[1] Short-Term Plans
[2] Long-Term Plans
[3] Change of Control and § 409A

CHAPTER 7
Deferred Compensation: Design Issues and the Constructive Receipt Doctrine

§ 7.01 Overview
[1] Qualified Pension and Profit-Sharing Plans
[2] Role of Nonqualified Plans
[3] Nonqualified Plans Generally Available Only for “Top-Hat” Group
[4] Requirements for Tax Deferral
[5] Social Security
§ 7.02 Limitations and Drawbacks of Qualified Plans
[1] Benefit Limits (Section 415)
[2] Compensation Limit (Section 401(a)(17))
[3] Dollar Limit on Elective Deferrals
[4] Coverage and Nondiscrimination
[5] Vesting Requirements
[6] Distribution Rules
§ 7.03 “Top-Hat” Plans
[1] Exemption from Most ERISA Regulation
[2] Defining the “Top-Hat Group”
[3] Case Law
[4] The “Unfunded” Top-Hat Plan
[5] Scope of Top-Hat Exemption
[6] Minimizing the Risks of Challenge to Top-Hat Status
§ 7.04 Nonqualified Plan Design
[1] Make-Whole (Benefit Equalization) Plans
[2] Elective Plans
[3] Supplemental Executive Retirement Plans (SERPs)
[4] Design Issues
[5] General Miscellaneous Provisions
[6] Conforming Amendments to Other Plans
[7] Individual Contractual Arrangements
[8] Qualified Domestic Relations Orders
§ 7.05 Tax Constraints
[1] Constructive Receipt
[2] Elective Deferrals
[3] Deferred Compensation Subject to Section 409A
[4] Application to Bonuses
§ 7.06 Initial Deferral Elections
[1] General Rule
[2] Performance-Based Compensation
[3] Bonus and Incentive Pay
[4] Commissions
[5] First Year of Eligibility
[6] Later Elections for Short-Term Deferrals
[7] Irrevocability
[8] Evergreen Elections
[9] Recurring Part-Year Compensation
[10] Pay Period Spanning the Year-End
[11] Excess and Make-Up Plans
[12] Negotiated Severance Pay
[13] Window Programs
§ 7.07 Designation of Time and Form of Payment
[1] Elective Deferrals
[2] Nonelective Deferrals
[3] Compensation Subject to Forfeiture
[4] “Legally Binding Right”
[5] Different Elections for Different Payment Events
[6] Time/Form of Payment of Earnings
[7] Medium of Payment
§ 7.08 Allowable Payment Events
[1] Six Permitted Payment Triggers
[2] Separation from Service
[3] Change in Control Event
[4] Spinoffs Not a Separation
§ 7.09 Six-Month Delay for Specified (Key) Employees
[1] Required if Distribution Event is a Separation from Service
[2] “Specified Employee”
[3] Date/Period for Identifying Specified Employees
[4] “Compensation” for Identifying Specified Employees
[5] Corporate Transactions
[6] Payments After Delay Period
§ 7.10 Time-frame for Payment when the Trigger Event Occurs
[1] Event-Based Payments
[2] Permitted Differences in Payment Terms for Each Event
[3] Period Allowed for Payment at Time Specified
[4] Fixed Schedule
[5] Six-Month Delay for Specified Employees Measured From Actual Separation Date
[6] Payment Based on Vesting
[7] Multiple Payment Events
§ 7.11 Subsequent Changes in Time and Form of Payment
[1] General Rule
[2] Actuarially Equivalent Life Annuities
[3] Series of Scheduled Payments
[4] Implied Modifications
[5] Multiple Payment Events
[6] Early Change Election
§ 7.12 No Acceleration Rule
[1] Intervening Events
[2] Addition or Deletion of Payment Events
[3] Waiver of Plan Conditions (Acceleration of Vesting)—Care Required in Separation Situations!
[4] Changes of or by, or Otherwise Affecting Beneficiaries
[5] Plan Terminations
[6] Domestic Relations Order
[7] Limited Total Cashouts
[8] Conflicts of Interest
[9] Taxes
[10] Offset of Small Routine Debts
[11] Reduced Payments to Settle Bona Fide Dispute
[12] Correlation with Cafeteria Plan Elections
§ 7.13 Written Plan Document
[1] Must Contain the “Material Terms”
[2] Six-Month Delay for Specified Employees
[3] Deadlines
[4] Incorporation by Reference/Failsafes
[5] Form of Documents
[6] Documentation Not Required for Pre-2008 Rules
[7] No Plan Aggregation
§ 7.14 2007 Agenda
[1] Compliance Framework
[2] Fall 2007 Election Solicitations, Etc.
[3] Transition Relief
[4] Relief Based on Prior Good Faith Compliance
[5] Transition from Qualified Plan Elections
§ 7.15 “Grandfathered” Pre-2005 Deferrals
[1] Amounts Earned and Vested on December 31, 2004
[2] Amount of Exempt Deferrals
[3] Material Modification
§ 7.16 Severance Pay
[1] Limited Exemption From Section 409A
[2] Involuntary Separation
[3] Separation for Good Reason
[4] Window Program
[5] Exclusion Under the Short-Term Deferral Rule
[6] Combining Severance Payment Exception and Short-Term Deferral Rule
[7] Separation Pay Required Under Foreign Law
[8] De Minimis Payments
§ 7.17 Expense Reimbursements, In-Kind Benefits and Indemnities
[1] Exemptions and Ground Rules
[2] In-Kind Benefits and Payments Directly to Third Parties
[3] Medical Benefits
[4] Indemnification
§ 7.18 Qualified and Other Exempt Plans
§ 7.19 Penalties
[1] Penalty Amount
[2] Earnings Added to Penalty Base
[3] Similar Plans Aggregated
[4] Tax Indemnities
[5] Possible Amelioration
§ 7.20 Section 409(b) Funding Rules
[1] Prohibition Against Offshore or Financial Health Springing Funding
[2] Retroactive Application
§ 7.21 State Taxation
§ 7.22 Securities Law Considerations
[1] Requirements for Registration
[2] Exemptions from Registration
[3] Anti-Fraud Provisions

CHAPTER 8
Funding Mechanisms for Nonqualified Deferred Compensation Plans and Arrangements

§ 8.01 Overview
[1] Introduction
[2] The Principal Types of Nonqualified Deferred Compensation Programs
§ 8.02 Principles Governing Taxation of Deferred Compensation
[1] Constructive Receipt
[2] Economic Benefit
[3] Section 83
[4] Tax Treatment of Nonqualified Deferred Compensation Plans
§ 8.03 The Application of ERISA to “Funded” Deferred Compensation
[1] In General
[2] Exemptions from ERISA Substantive Provisions
§ 8.04 Arrangements Toward Assuring Payment of Deferred Compensation
[1] Third Party Guarantees, Letters of Credit, etc.
[2] Nonqualified Trusts
§ 8.05 Employer’s Investment Alternatives to Provide for Payment of Deferred Compensation
[1] Company Owned Life Insurance
[2] Purchase of Annuities
§ 8.06 Form: Model Grantor Trust Under Revenue Procedure 92-64

CHAPTER 9
Change of Control Arrangements

§ 9.01 Overview
[1] The Need For Protection
[2] Defining a Change of Control
[3] Elements of Change of Control Arrangements
[4] The “Golden Parachute” Excise Tax
[5] Legal Standards for Adopting Change of Control Arrangements and Other Timing Considerations
§ 9.02 The Need for Protection
[1] The Impact of a Change of Control
[2] Protecting Executives, Protecting the Board
§ 9.03 Defining a Change of Control
[1] Introduction
[2] Stock Accumulations
[3] Change in Board Composition
[4] Major Corporate Transactions
§ 9.04 Elements of Change of Control Arrangements
[1] Change of Control Severance and Employment Agreements
[2] Severance Plans
[3] Stock-Based Compensation Plans
[4] Cash-Based Incentive Plans
[5] Pension Benefits and Deferred Compensation
§ 9.05 The “Golden Parachute” Excise Tax
[1] Introduction
[2] The Operation of Sections 280G and 4999
[3] Dealing with the Excise Tax
[4] Intuitional Investors and Excise Tax Gross-Ups
§ 9.06 Legal Standards for Adopting Change of Control Arrangements

CHAPTER 10
Taxation of Fringe Benefits

§ 10.01 Introduction
§ 10.02 Fringe Benefits under I.R.C. Sections 132 and 119
[1] No-Additional-Cost Services
[2] Qualified Employee Discount
[3] Working Condition Fringe
[4] De Minimis Fringe
[5] Qualified Transportation Fringe
[6] Qualified Moving Expense Reimbursement
[7] On-Premises Athletic Facility
[8] Employer-Provided Meals
[9] Employer-Operated Eating Facility
§ 10.03 Specific Benefits Not Enumerated under I.R.C. Sections 132 or 119
[1] Transportation
[2] Housing
[3] Lodges, Boats, and Entertainment Facilities
[4] Club Dues
[5] Professional Services: Legal, Financial, Tax
[6] Loans
[7] Travel and Entertainment
[8] Frequent Flyer Miles
[9] Insurance
§ 10.04 Corporate Responsibility and SEC Disclosure
[1] Required Corporate Action: The Fiduciary Duties of Directors
[2] SEC Executive Compensation Disclosure

CHAPTER 11
Compensation and Benefits of Non-Employee Directors

§ 11.01 Overview
[1] Historical Perspective
[2] Stock Based Plans
[3] Criteria for Program Selection
§ 11.02 Fee Deferral Arrangements
[1] Section 409A
[2] Basic Fee Deferral Arrangements
[3] Deferrals and Phantom Stock
§ 11.03 Stock Compensation

CHAPTER 12
Executive Compensation Disclosure: 8-K Requirements and the Proxy Disclosure Rules

§ 12.01 Overview of Executive Compensation Disclosure
[1] The Securities Acts of 1933 and 1934
[2] Form 8-K Disclosure
[3] Disclosure Rules for Proxies and Registration Statements
§ 12.02 Form 8-K Disclosure Regarding Executive Officers and Directors
[1] Disclosure of Departures and Appointmentsv [2] Disclosure of Compensatory Arrangements
§ 12.03 Whose Compensation Must Be Disclosed?
§ 12.04 Explaining the Rationale and Showing the Bottom-Line
[1] Pay for Performance
[2] CD&A
§ 12.05 The Summary Compensation Table
[1] Column A: Name and Principal Position
[2] Columns C/D: Salary and Bonus
[3] Column E: Stock Awards
[4] Column F: Option Awards
[5] Column G: Non-Equity Incentive Plan Compensation
[6] Column H: Change in Pension Value and Nonqualified Deferred Compensation Earnings
[7] Column I: All Other Compensation
[8] Grant of Plan-Based Awards
[9] Outstanding Equity Awards at Fiscal Year-End
[10] Option Exercises and Stock Vested Table
[11] Pension Benefits Table
[12] Nonqualified Deferred Compensation Table
[13] Severance and Change of Control Benefits
[14] Director Compensation Table
§ 12.06 Additional Disclosure in Special Circumstances
[1] Corporate Governance Disclosure
[2] Related Party Transactions
[3] Compensation Plans Subject to Shareholder Approval

CHAPTER 13
Executive Compensation for Tax Exempt Organizations

§ 13.01 Overview
§ 13.02 Background
[1] Introduction
[2] Section 457(f) Arrangements
[3] Historical Reasons for Section 457(f)
[4] Section 409A
§ 13.03 Substantial Risk of Forfeiture
[1] Definition
[2] What Is Covered Under Substantial Risk of Forfeiture?
[3] Alternative Compensation Arrangements
§ 13.04 Exceptions
[1] Exception for Churches and Church-Qualified Organizations
[2] Exception for Bona Fide Severance and Similar Plans
[3] Grandfathering Provisions
[4] Buyout Provisions
[5] Other Exceptions
§ 13.05 Use of Section 457(f) Plans
[1] General Rules
[2] Elective Deferred Compensation Arrangements
[3] Top-Hat Rules
§ 13.06 Other Arrangements
[1] Section 401(a) Plans
[2] Section 403(b) Plans
[3] Section 457 Eligible Employer Plans
[4] Section 403(c) Plans
[5] Death Benefit Plans
§ 13.07 Other Limitations in Designing Compensation Packages
[1] Private Inurement
[2] Intermediate Sanctions
[3] Form 990

CHAPTER 14
Multinational Executives

§ 14.01 Overview
[1] Introduction
[2] International Compensation Policies
[3] Coordination and Integration
§ 14.02 Incentives to Accept Foreign Assignments
§ 14.03 Allowances and Reimbursements
[1] General
[2] Relocation
[3] Housing
[4] Cost-of-Living
[5] Dependent Education
[6] Home Leave
[7] Tax Equalization
§ 14.04 Immigration and Tax Residence
[1] In General
[2] Immigration Status
[3] Tax Residence
§ 14.05 Income Tax Treatment of U.S. Citizens and Residents
[1] In General
[2] Income and Housing Exclusions
[3] Foreign Tax Credit
§ 14.06 Income Tax Treatment of Nonresident Aliens
[1] In General
[2] Sourcing Rules and Applicable Rates
[3] Withholding and Split Payrolls
§ 14.07 Social Security Coverage and Totalization Agreements
[1] Multinational Social Security Issues
[2] Impact of Totalization Agreements
[3] Social Security Strategy
§ 14.08 Retirement and Other Benefits
[1] In General
[2] Pension and Termination Indemnity Benefits
[3] Health Care and Welfare Benefits
[4] Other Benefits and Perquisites
§ 14.09 Tax Treaties
§ 14.10 Form: Company A—Expatriate Policy Including Third Country Nationals and Former Inpatriates
§ 14.11 Form: Company A—International Assignment Letter
§ 14.12 Form: Company B—Sample Tax Totalization Agreement

CHAPTER 15
Using Life Insurance in Executive Compensation

§ 15.01 Overview
§ 15.02 Bonus Plan
[1] In General
[2] Policy Terms and Ownership
[3] Tax Treatment
[4] Group Coverage and Bonus Plan “Carve-Out”
§ 15.03 “Death Benefit Only” Plan
[1] The Promise and Its Funding
[2] The COLI Policy
[3] Tax and ERISA Treatment
[4] Summary
§ 15.04 Nonqualified Deferred Compensation Funding
[1] The Promise and Its Funding
[2] The COLI Policy
[3] Tax and ERISA Treatment
[4] A Cautionary Tale: A Death Benefit Plan as Deferred Compensation in Disguise
§ 15.05 Other Insurance Benefits
[1] Annuities, Including Longevity Insurance
[2] Long-Term Care Insurance and Combination Products
[3] Welfare Benefits Funded with Life Insurance

CHAPTER 16
Compensation Committees

§ 16.01 Introduction
§ 16.02 The Business Judgment Rule, the Ovitz Cases and Case Law Developments
§ 16.03 The Role of the Compensation Committee and Corporate Governance
[1] The Role and Functions of the Compensation Committee
[2] Compensation Committee Charters
[3] Compensation Committee Interlocks and Proxy Voting Requirements
[4] Other Corporate Governance Considerations
§ 16.04 Independence of Compensation Committee Members
[1] Requirements Under IRC Section 162(m)
[2] Requirements Under the Securities and Exchange Act
[3] NASDAQ and NYSE Requirements
§ 16.05 Shareholder Advisory Votes on Executive Compensation
[1] Say-on-Pay Proposals
[2] Proxy Advisory Companies
[3] Responding to a Negative (or Less than Overwhelming) Say-on-Pay Vote
[4] Conclusion
§ 16.06 Chart of Relevant Independent Director Requirements

Index