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What's Market: Corporate Turnaround through New Leadership
Practical Law Legal Update 9-569-1587 (Approx. 7 pages)
What's Market: Corporate Turnaround through New Leadership
by Practical Law Employee Benefits and Executive Compensation
| Published on 27 May 2014 • USA (National/Federal) |
A review of compensation practices used by companies hiring new chief executive officers, including Zynga Inc., RadioShack Corporation and Yahoo! Inc., based on executive employment agreement summaries published by What's Market.
A struggling company often hires a new chief executive officer to revitalize the company's image and implement a corporate turnaround. A few companies that have recently adopted this strategy include:
This type of corporate shake-up is a gamble for the executive and for the company, and it requires the parties to draft an employment agreement that appropriately addresses each party's goals and concerns.
At any given time, a top executive likely has a large amount of unearned incentive compensation or unvested equity in his or her employer because of current compensation practices. In most instances, that unearned or unvested compensation would be forfeited if the executive were to resign without good reason to pursue another opportunity. And, accepting a new position would require the executive to leave his or her presumably secure position to publicly tackle a challenge in unfamiliar territory.
To lure the executive to accept a new position despite these risks, the company often provides sign-on compensation. Typically, sign-on compensation is in the form of cash or equity and serves the following two functions:
- Making the executive whole for forfeited amounts. The company usually picks up the tab for any compensation the executive forfeits to accept the position by granting the executive a make-whole award.
- Providing an extra incentive to accept the position and encourage stellar performance. A company often makes an inducement award to act as an extra incentive for the executive to accept the position and achieve corporate goals.
The circumstances surrounding each negotiation are unique to the company's performance issues and depend on the particular executive's situation. However, reviewing various publicly filed employment agreements provides an insight into market practices.
Make-whole awards are often not subject to performance-based vesting conditions and usually vest in full on a termination without cause. Therefore, the company should be prepared to bear the full cost of the make-whole awards even if the company is ultimately dissatisfied with the executive's performance. Some companies temper that risk by requiring the executive to repay all or a portion of the make-whole award if the executive is terminated for cause or resigns without good reason within a certain period of time (typically one year) after the executive's start date.
For example, when Best Buy hired its current Chief Executive Officer to improve its market share, it awarded him a $3.5 million cash signing bonus and an equity award with a grant date value of $3 million. The executive gets to keep these amounts even if his employment is terminated without cause. However, if the executive had been terminated for cause or if he had resigned without good reason within his first year of employment with Best Buy, he would have been required to repay those awards to the company.
Best Buy also granted him restricted stock units with a grant date fair value of $6 million, options with a grant date Black-Scholes value of $3.75 million and performance share units with a grant date target value of $3.75 million. The restricted stock units and options vest over three years from the grant date and the performance share units vest based on performance conditions. On a termination without cause, the restricted stock units and options accelerate and the performance share units vest on a pro-rata basis based on performance through the termination date. The performance share units act as an extra incentive to achieve corporate performance goals.
To incentivize the executive to perform, inducement awards are often subject to both time-based and performance-based vesting conditions. For example, when RadioShack hired its current Chief Executive Officer to revitalize its image and business model, it granted him 500,000 restricted shares that vest over three years and an option to purchase 2,500,000 shares of common stock, 25% of which were subject to time-based vesting and the remaining 75% of which were subject to the achievement of a performance condition that the closing price of RadioShack's common stock be at or above $5.00 for 20 consecutive trading days. If the performance targets are met, the payoff for each party could be substantial.
Use the chart below to see how these sign-on compensation awards compare to those provided by other companies that hired outside chief executive officers to implement their corporate turnarounds.
What's Market: Executive Employment Agreements
Employment Agreement | Chief Executive Officer June 30, 2013 | Chief Executive Officer February 11, 2013 | President and Chief Executive Officer July 16, 2012 |
Signing Bonus | $5,000,000, subject to full repayment if the employer terminates the executive's employment for cause or the executive terminates his employment other than in connection with a constructive termination, in either case, within 12 months following the executive's start date. | A one-time payment of $1,000,000, subject to full repayment if the executive terminates his employment other than for good reason or if the employer terminates the executive's employment for cause, in either case, within six months following the effective date or the executive is terminated for cause for failure to relocate to the Dallas/Fort Worth metropolitan area within six months of the effective date. | None specified. |
Sign-on Equity Grants | The following awards under the employer's equity incentive plan and according to the employer's standard equity grant polices: A make-whole equity grant consisting of restricted stock units in respect of 8,928,571 shares of restricted class A common stock, subject to time vesting in the following three installments (Make-Whole Grant): 45.32% of the Make-Whole Award vests on the first anniversary of the executive's start date. 45.32% of the Make-Whole Award vests on the day before the employer's 2015 annual shareholders' meeting. 9.36% of the Make-Whole Award vests on the third anniversary of the executive's start date. An inducement equity grant consisting of restricted stock units in respect of 1,785,714 shares of class A common stock and a stock option to purchase 7,357,143 shares of class A common stock with an exercise price equal to fair market value on the grant date. Both the restricted stock units and stock option are subject to time vesting in the following three installments (Inducement Grant): 60% of the Inducement Grant vests on the third anniversary of the executive's start date. 20% of the Inducement Grant vests on the fourth anniversary of the executive's start date. 20% of the Inducement Grant vests on the fifth anniversary of the executive's start date. | On the first business day following the effective date that the employer and the executive are not subject to a blackout restriction, the executive will receive a one-time grant of the following equity awards: An option to acquire 2,500,000 shares of common stock with an exercise price equal to fair market value on the grant date. 650,000 of the shares are subject to time vesting in two equal installments on the second and third anniversaries of the grant date. 1,750,000 of the shares are subject to a performance condition that the closing price of the employer's common stock be at or above $5.00 for 20 consecutive trading days during the seven-year period following the grant date. 500,000 restricted shares of common stock, subject to time vesting in three equal annual installments on each of the first three anniversaries of the grant date. | A make-whole award of restricted stock units under the employer's stock plan with an aggregate value of $14 million, subject to time vesting according to the following schedule (Make-Whole Award): One fifth of $4 million of the Make-Whole Award vests on the 17th of each month in 2012 starting in August. One twelfth of $7 million of the Make-Whole Award vests on the 17th of each month in 2013. One twelfth of $3 million of the Make-Whole Award vests on the 17th of each month in 2014. The executive receives one share of employer common stock for each vested restricted stock unit. The employer has the option of making this grant in the form of restricted stock instead of restricted stock units. In addition, the following retention equity award under the employer's stock plan with an aggregate award value of $30 million, subject to time vesting and financial and performance criteria (Retention Equity Award): Half of the Retention Equity Award is in the form of restricted stock units that vest in five equal annual installments on each of the first five anniversaries of the grant date (July 26, 2012), if the applicable financial and performance criteria are met. Half of the Retention Equity Award is in the form of stock options to purchase shares of common stock, which vest in five equal installments on the 12-month, 18-month, 30-month, 42-month and 54-month anniversaries of the grant date (which is contemplated to occur in November 2012), if the applicable financial and performance criteria are met. The number of stock options will be calculated according to the employer's option valuation practices and is subject to applicable adjustments in the event of stock splits, stock dividends or other similar capital transactions between calculation and grant. All equity grants awarded under the employment agreement are subject to the terms and conditions of the employer's stock plan, which provides that the number of shares underlying an option award granted to any one person during a calendar year will not exceed 15,000,000. |
Severance on Termination Without Cause | Installment payments over 24 months in an aggregate amount equal to the sum of two times annual base salary and two times the target bonus. Pro-rated annual bonus for the fiscal year in which termination occurs, based on the lesser of either the executive's target for that fiscal year or the amount which the executive would have earned for that fiscal year. Employer-subsidized COBRA premiums until the earlier of 18 months following termination, the date the executive becomes eligible for group health insurance coverage through subsequent employment or the date the executive ceases to be eligible for COBRA coverage. The cost of the coverage will be reported as taxable income to the executive. Accelerated vesting of the Make-Whole Grant. However, if termination occurs following the executive's start date but before the grant date, then the executive receives a lump sum payment in an amount equal to $25,000,000 in lieu of the accelerated vesting. Accelerated vesting of the portion of the Inducement Grant that would have vested during the one-year period following termination. However, if termination occurs following the executive's start date but before the grant date, then the executive receives a lump sum payment in an amount equal to $3,000,000 in lieu of the accelerated vesting. Accelerated vesting of the portion of any ongoing equity grants that are subject to time vesting which would have vested during the one-year period following termination. Vesting of any ongoing equity grants that are subject to performance vesting, contingent on achievement of the applicable performance conditions and pro-rated for the portion of the performance period employed, if the executive completes at least six months of the applicable performance period. | Lump sum payment in an amount equal to the sum of: 18 months of base salary plus one month of base salary for each completed full year of service with the employer, with a maximum total of 24 months of base salary. Lump sum payment in an amount equal to the annual bonus and long-term awards for performance periods (beginning on or after January 1, 2013) that have not ended before termination and that the executive would have received had he remained employed through the end of the applicable performance periods, pro-rated based on the period employed during the applicable performance period. Outplacement assistance selected by the employer for one year following termination. Any amounts payable pursuant to the interest provision of Section 12(i) of the employer's officers' severance program with respect to base salary severance. The executive's severance payments and benefits are in lieu of payments and benefits under the employer's officers' severance program. | Accelerated vesting of the Make-Whole Award. Accelerated vesting of the restricted stock units granted as part of the Retention Equity Award and the restricted stock units granted as part of the 2012 award, in each case, that would have vested within six months following termination. Continued vesting of the stock options granted as part of the Retention Equity Award and the stock options granted as part of the 2012 award, in each case, that would have vested within six months following termination, only if the applicable performance criteria are met. In addition, the employer will offer the executive severance benefits pursuant to its normal practice at the time of the executive's termination and similar to what is offered to senior executives. |
For additional employment agreement summaries, see What's Market, Executive Employment Agreements, which provides summaries for a variety of executive positions and a diverse group of employers, based on size, industry and location. The summaries cover terms that are typically heavily negotiated, such as compensation, severance and non-competition provisions, and can be used to detect emerging trends.