PLC What's Market: Negotiating Executive Employment Agreements: Elements of Compensation | Practical Law

PLC What's Market: Negotiating Executive Employment Agreements: Elements of Compensation | Practical Law

A discussion of the compensation and benefits provisions of an executive employment agreement, including a PLC What's Market comparison report with summaries of the respective compensation and benefits provisions from recently filed executive employment agreements.

PLC What's Market: Negotiating Executive Employment Agreements: Elements of Compensation

by PLC Employee Benefits & Executive Compensation
Published on 19 Feb 2013 • USA (National/Federal)
A discussion of the compensation and benefits provisions of an executive employment agreement, including a PLC What's Market comparison report with summaries of the respective compensation and benefits provisions from recently filed executive employment agreements.
The compensation provisions of an executive employment agreement can have significant consequences for both the employer and the executive. When negotiating these provisions, an employer should consider the aggregate value of all of the elements of compensation to be provided during the employment term. The employer should also consider how a termination of employment or change in control will impact each element of compensation. This helps public company employers avoid shareholder dissatisfaction and negative publicity.
In addition, the employer and the executive must carefully structure the agreement to avoid unintended tax consequences for:
The elements of compensation included in an executive employment agreement, as well as the degree to which each element is specified, vary based on each employer's circumstances. However, the elements that are frequently included in employment agreements are:
  • Base salary. An executive employment agreement usually specifies an executive's annual base salary, which can be subject to discretionary or automatic increases or adjustments throughout the term.
  • Annual bonus. The specificity of any annual bonus terms included in an employment agreement varies. The employer must balance its need for flexibility with the executive's need for certainty in the executive's compensation arrangements. To give the executive more certainty and to emphasize pay-for-performance, employment agreements frequently provide that payment of the executive's annual bonus is based on achievement of performance goals. Public company employers should consider that the performance goals and targets that apply to the compensation of their named executive officers will likely need to be disclosed in the employer's proxy statement, and the rationale for these goals and targets will be subject to shareholder scrutiny. In addition, annual bonus provisions and provisions addressing payment on termination of employment must be carefully structured to avoid adverse tax consequences for the executive under Section 409A and, for public company employers, Section 162(m). For more information, see Practice Notes, Section 409A: Deferred Compensation Tax Rules: Overview and Section 162(m): Limit on Compensation.
  • Signing bonus. Signing bonuses are generally provided only under unique circumstances, such as if the executive relocated or forfeited a significant amount of unvested compensation from his previous employer to take the current position. For signing bonuses paid to named executive officers, public company employers generally must disclose both the signing bonus amount and the employer's rationale for providing the signing bonus. Public company employers should therefore consider how to disclose any signing bonuses it agrees to provide.
  • Equity awards. If grants of equity awards are included in an employment agreement, then the employer should ensure that the terms and conditions of the awards (including treatment on termination of employment) are consistent with the employer's existing equity plans and that its equity plans have enough shares reserved for issuance to make the grants provided for in the employment agreement. The employer should also analyze all employment agreement provisions addressing the awards as well as any applicable terms and conditions set forth in the employer's equity plans and confirm that the awards are:
    • either structured to fit within one of the exceptions under Section 409A or comply with Section 409A's requirements; and
    • consistent with the requirements for performance-based compensation under Section 162(m), if a public company employer intends for the awards to be deductible as performance-based compensation.
  • Perquisites and participation in benefit plans. To preserve flexibility, employers often vaguely describe these benefits in employment agreements by stating that the executive will be eligible to participate in the employer's benefit plans and will receive any perquisites provided to similarly situated executives. However, executives may seek to include specific benefits and perquisites in the employment agreement. Under these circumstances, the employer should consider whether the benefit or perquisite is taxable and how the employer intends to satisfy any tax withholding obligations. Public company employers should also consider how the perquisites will be perceived by shareholders.
For a comparison chart summarizing compensation provisions of certain publicly filed executive employment agreements, see Recent Executive Employment Agreements.
For more information on negotiating and drafting the terms of an executive employment agreement, see Practice Note, Negotiating and Drafting an Executive Employment Agreement.

Recent Executive Employment Agreements

The following is a sampling of recent executive employment agreements contained in PLC What's Market with summaries of their respective compensation and benefits provisions.
To view the full summaries, which also include the treatment of compensation on termination of employment and a change in control, select the link for the employer name below or visit PLC What's Market, which includes a continuously updated database of publicly filed executive employment agreement summaries.
EMPLOYMENT AGREEMENT
Bunge Limited
Chief Executive Officer
June 1, 2013
Limited Brands, Inc.
Chief Executive Officer of Victoria's Secret
November 30, 2012
Williams-Sonoma, Inc.
President and Chief Executive Officer
September 6, 2012
ANNUAL RATE OF BASE SALARY
$1,000,000, subject to adjustment for increase, but not decrease.
Section 3.1
$1,400,000, subject to annual review for increase.
Section 3
$1,300,000, subject to adjustment. 
Section 3(a)
ANNUAL BONUS AND CASH INCENTIVES
Annual target bonus is 140% of annual base salary, payable under the employer's annual performance bonus plan and subject to satisfying applicable performance criteria.
Section 3.2
Participation in the employer's incentive compensation plan at a target level of 180%, subject to the terms and conditions determined by the board from time to time.
Section 6
Participation in the employer's incentive bonus plan. 
Section 3(b)
SIGNING BONUS
None specified.
None specified.
None specified.
SIGN-ON EQUITY GRANTS
An equity award with a fair market value of $3,891,667 will be proposed to the board in March 2013 in accordance with the employer's standard annual grant process. $2,000,000 of the award will be in the form of restricted stock units, subject to time vesting in full on the third anniversary of the grant date. The remainder of the award will be in the form of performance-based restricted stock units and stock options, subject to the same terms and vesting and performance conditions as applicable to the employer's senior executives.
Section 3.3
The employer granted to the executive on March 30, 2012 restricted shares of the employer's common stock, subject to the terms and conditions of the employer's stock option and performance incentive plan. 
Section 4
None specified.
ONGOING EQUITY GRANTS
Eligible to receive awards under the employer's equity incentive plan.
Section 3.3
Eligible for discretionary equity-based awards commensurate with the executive's position and performance.
Section 4
Discretionary equity awards.
Section 5
BENEFITS AND PERQUISITES
All employee benefits, including health, welfare and retirement benefits, available to the employer's senior executives.
20 business days' vacation per year, subject to increase, but not decrease.
Relocation benefits according to the employer's relocation policies, including reimbursement of all reasonable costs incurred in relocating the executive, his family and their possessions from St. Louis, Missouri to the New York metropolitan area.
Section 4
All employee benefits available to, and on the same basis and terms as, senior executives generally. 
The employer will maintain term life insurance coverage on the executive in an amount equal to $3,000,000, the proceeds of which are payable to the executive's beneficiaries.
Paid time off according to the employer's policies as established by the board for similarly situated executives. 
Section 5
Section 7(a)
Section 8
Employee benefits available to senior executives, including health, welfare and vacation benefits.
Reimbursement (or direct payment) of an amount up to $10,000 for legal fees incurred in connection with reviewing and documenting the executive's exit arrangements on her termination of employment. 
Section 4