Executive Compensation Best Practices

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