Executive Compensation Best Practices demystifies the topic of executive compensation, with a hands-on guide providing comprehensive compensation guidance for all members of the board. Essential reading for board members, CEOs, and senior human resources leaders from companies of every size, this book is the most authoritative reference on executive compensation.
Table of Contents:
Preface xi
Acknowledgments xvii
CHAPTER 1 Introduction 1
Should the CEO be Rewarded or Punished for Events Beyond the CEO’s Control? 1
Warren E. Buffett on Executive Compensation 3
CEO Compensation Theories 4
CEO Forced Exit Packages 6
Private Equity Compensation 8
Entertainment and Sports Celebrities 8
Benefits of Good Corporate Governance 9
CHAPTER 2 Motivating Executive Performance 13
Tying Performance to the Strategic Plan 15
Unintended Consequences 16
Firm Expansion and CEO Pay 19
Equity-Based Compensation 20
A New Role for CEOs 21
Satisfying Investor Expectations 22
Minimum Equity Ownership Requirements 23
CHAPTER 3 Peer Groups and Benchmarking 25
Adjusting the Peer Group 28
Peer Groups for Different Levels of Executives 30
Benchmarking 31
Lake Wobegon Effect 33
Benchmarking with Medians 34
CHAPTER 4 Competing With Private Equity Funds 35
CHAPTER 5 Explaining Executive Compensation to Shareholders 43
Introduction 43
Reconstructing Executive Compensation Disclosure for Shareholders 50
CHAPTER 6 Compensation Committee Ordinary Operations 57
SEC Action Against Tyson Foods 62
Earnings on Deferred Compensation 64
Practical Steps for Compensation Committees 65
Compensation Committees of Non-Profit Organizations 67
CHAPTER 7 Negotiating Executive Employment and Severance Agreements 71
Negotiating with New CEO Candidates 71
Negotiating with Existing CEOs 76
Best Practices Applicable to New and Existing CEOs 77
Council of Institutional Investors 78
Gross-Up Clauses 89
Retirement Arrangements 94
The Grasso Case 95
Section 409A of the Internal Revenue Code 96
Other Best Practices in Negotiating Employment or Severance Agreements 96
CHAPTER 8 Compensation Committee Structure and Process 99
Creating Incentives for Good Corporate Governance 108
Disney Litigation 110
CHAPTER 9 Equity Incentive Choices 113
Overview of Equity Incentives for Key Employees 113
Dilution 114
Stock Option versus Stock Appreciation Rights 114
Restricted Stock versus SARs or Phantom Appreciation Plans 120
Phantom Plans 121
ISOs versus Non-ISOs 122
The Advantage of ISOs 124
Non-ISOs with Tax Reimbursement 125
The Tax Benefit to the Company 127
CHAPTER 10 Option Granting Practices 129
Option Granting Practices 135
The Council of Institutional Investors 142
Equity Retention Practices 143
CHAPTER 11 Director Compensation 145
Retainer and Differential Pay 147
Minimum Equity Requirements 148
Director Compensation Procedure and Process 149
Shareholder Approval 151
Perquisites, Repricing and Exchange Programs,Change in Control, and Severance Payments 151
Disgorgement 152
CHAPTER 12 Negotiating for the Executive 153
CEO Turnover 154
New Candidates for CEO or Other Executive Positions 154
Employment Agreements with Private Equity Buyers of CEO’s Business 161
CHAPTER 13 Executive Compensation and Section 409A of the Internal Revenue Code 163
Background 166
Plans That Do Not Provide for the Deferral of Compensation 168
Nonqualified Deferred Compensation Plan – Plans that Provide for Deferred Compensation 172
Special Rule Applicable to Specified Employees 173
Change-in-Control Events 174
Change in the Ownership of a Corporation 175
Change in the Effective Control of a Corporation 176
Change in Ownership of a Substantial Portion of a Corporation’s Assets 177
Structuring the Payments upon an Event Payment Trigger 178
Specified Time or Fixed Schedule 179
Equity-Based Compensation 179
Section 409A Compliance 181
Appendix A Compensation Committee Charter 183
Appendix B Corporate and Securities Update:SEC Adopts Sweeping Overhaul of its Executive Compensation Disclosure Requirements (September 2006 and revised December 2006) 189
Appendix C Employment Agreement 213
Appendix D Public Company Equity Incentive Plan 233
Appendix E Search Terms Typically Required to be Researched by Public Company in Option Backdating Investigations by the Securities and Exchange Commission 285
Appendix F What an Employee Should Know About His or Her Stock Options 289
Index 309
About the Author :
FREDERICK D. LIPMAN is a senior partner with the international law firm of Blank Rome LLP and also the President of the Association of Audit Committee Members, Inc., a nonprofit organization. He was a lecturer in the MBA program at the Wharton School of Business and at the University of Pennsylvania Law School. A graduate of Harvard Law School, he has more than forty years' experience in areas of corporate governance, M&As, private equity, and IPOs. Mr. Lipman is the author of ten other books including Audit Committees and Wiley's recent Corporate Governance Best Practices. He has appeared on television programs on CNBC, CNN, and Bloomberg as a national commentator on initial public offerings, venture capital, mergers and acquisitions, and stock options. He has been quoted in the Wall Street Journal and other publications and is located in the Philadelphia, Pennsylvania office of Blank Rome LLP.
STEVEN E. HALL is founder and Managing Director of Steven Hall & Partners, a compensation consulting firm located in New York City. He has over thirty years of experience in rendering advice to organizations in both the public and private arenas on a broad array of topics, including executive compensation, board remuneration, and governance issues related to the compensation committee. Mr. Hall is also a member of the faculty of the National Association of Corporate Directors (NACD), where he teaches courses focused on the responsibilities of board members in the areas of executive compensation and corporate governance. He is a frequent author and speaker and has appeared as a commentator on CNBC, CNN, and other national networks. He has also been quoted in the New York Times, the Wall Street Journal, and other U.S. and international periodicals.
