His Employment Agreement Says What?

When is the last time you looked really hard at every single employment agreement and plan document that touches your executives’ (and future potential executives’) compensation? As executive compensation retains its top spot on the list of most controversial issues for compensation professionals, it may be time for a thorough review and audit. These agreements were often created before you got to the company. They may have even been finalized without a review from anyone in compensation. And, they often contain sweet little promises that can explode like a flaming bag of excrement on your compensation doorstep.

These agreements are often written to entice someone to work at your company in lieu of immediate cash. This means they often include guarantees for things like raises and bonuses. Usually the guarantees cover only a few years and you may feel comfortable that these clauses have run their course and are no longer an issue. Just remember that multi-year guaranteed bonuses are considered factors in motivating excessive risk-taking when evaluating executive compensation. This may come into play when ISS is evaluating the 3 P’s (Problematic Pay Practices) for your company.

But, guaranteed bonuses are not the sleeper in your agreements and plans. The silent killer may be Change-in-Control (CIC) language. CIC language is designed to be very long-term. It is also an area where few people correctly remember the details until an event occurs. This is can be especially problematic when someone has been promoted to a publicly visible position, but has an employment agreement from prior to the promotion. The problem may be found by shareholders, or their advisors, when they look into things after the individual is promoted. Maybe the issues will only come up after a CIC deal is in process and Bob or Sally come into your office and ask when they will get paid out now that everything they have is vested. It is an avoidable situation that never ends pretty.

It no longer surprises me when I ask a client for all of their agreements and it takes days, and sometimes weeks, for them to find them. It no longer surprises me when I ask in presentations how many professionals have read every word of every plan and agreement documents and only 10% raise their hands. But it does surprise me when these issues only come to light when it is too late to anything to easily correct them. This year gather everything into one place and read it. Be one of the 10% in my next presentation. Even better share your own story of a time when an employment agreement caught you buy surprise (post anonymously, of course!)

P.S. Sometime between when I posted this article early the morning of January 27, 2014 and when you read it ISS will have released details about “QuickScore 2.0”, their updated benchmarking method for corporate governance issues.  You will be able to preview your company’s data and submit comments between January 27 and February 7, 2014. You may want to look into it, or wait until my next post when I discuss some of the highlights.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Known That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

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Also severance packages. Consider the Yahoo marketing exec recently fired at Yahoo after only 18 months. He walked away with $88M after on 18 months. (I think it was $88M --might be lower). Outrageous. It's an incentive for a nefarious, smooth-talking exec to get himself hired then of course screw up and walk away a millionaire. Stranger things have happened. Of course his reputation would be shot --- but if he's a millionaire --- who cares!! (Why did I say "he"?)