Designing the package
Executive compensation planning starts with what the company wants to reward and over what horizon. Cash salary and bonuses are straightforward to administer, but equity, whether options, restricted stock, profits interests in an LLC, or phantom equity, ties pay to value and brings tax and accounting consequences of its own. Private companies granting options usually need a defensible valuation of their common stock, because grants priced below fair market value can create tax problems for the recipient. Vesting, acceleration, and treatment on termination should be consistent across the plan, the award agreements, and any employment agreement, since conflicts among those documents are a frequent source of disputes.
Tax rules and governance constraints
Federal tax rules on nonqualified deferred compensation can apply to arrangements that do not look like deferred pay, including some severance and bonus terms, and failures can result in additional tax for the executive. Payments triggered by a change in control can run into separate rules that deny the company a deduction and impose an excise tax on the recipient above certain levels. Companies listed on a national securities exchange must maintain a policy to recover incentive pay after certain accounting restatements. Decisions on executive pay should go through the board or a compensation committee, with a record showing the information considered, particularly where an executive also sits on the board.
Starting the plan
We start with your current documents: any equity plan, outstanding award agreements, offer letters, bonus programs, and severance arrangements, along with the cap table and any recent valuation. We then look at what the company is trying to achieve over the next stage, such as hiring, retention through a financing, or preparation for a sale, and which pieces need to change. Restrictive covenants deserve their own review, because the enforceability of non-competes has been shifting in several states and should be checked against where each executive works. Bring the questions your leadership team has already raised, since those often reveal gaps in the current structure.
