Now what?Getting Started: The 4 Questions You Must Ask1. What is your objective? hiring workers hiring/retaining key employees incentivizing desired behavior pacifying investors
The Questions You Must Ask2. What are you willing to give up? equity control appearance cash flow profits
The Questions You Must Ask3. What is your stage of development? one size doesnt fit all ask yourself: how many people? who needs what? how mature is our widget? do we have cash flow? do we have investors or other financial backing? do we need to be incorporated?
The questions you must ask4. Where is the industry? Attracting talent or staying motivated requires creativity Youve heard about:SalaryBonusesStock Options
But, Have you heard about their cousins? SARs Phantom Plans Performance Awards Restricted Stock Awards Stock Purchase Plans Non-compensatory Benefits
APPLE COMPUTER, INC. 2003 Employee Stock Option Plan (April 24, 2003) 1. Purposes of the Plan. The purposes of this Stock Plan are: • to attract and retain the best available personnel • to provide additional incentive to Employees and the Chairman; and • to promote the success of the Company’s business. Options granted under the Plan may be Incentive Stock Options (as defined under Section 422 of the Code) or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock appreciation rights (“SARs”) may be granted under the Plan in connection with Options or independently of Options. Stock Purchase Rights may also be granted under the Plan.
TRADITIONAL FORMS OF COMPENSATIONA. WAGES Exempt (Salary) v. Non-Exempt (hourly) minimum wage overtime pay periods deductions withholdings (FICA, FUTA, Social Security) Commissions
TRADITIONS FORMS OF COMPENSATIONB. BENEFITS Fringe benefits: insurance (more than just health) bonuses, premiums, incentives paid time off
Other non-compensatory benefits flexible schedules/hours telecommuting amenities at work (dry cleaning, meal preparation) (bike storage, food, showers, services) car allowances life and disability insurance health club memberships tuition reimbursement job share
TRADITIONAL FORMS OF COMPENSATIONC. How to get started 1. Planning job description terms of employment interviewing process (do u know what to ask?)2. Payroll Taxes Income tax withholding (fed, MI, local) Federal Social Security Tax (FICA) Federal Unemploment Tax Act (FUTA) Michigan Unemployment Tax
TRADITIONAL FORMS OF COMPENSATIONC. How to get started1. Forms Withholding Exemption Certificate (W-4) and MI-W4 Quarterly Reporting to IRS on wages Form 518 (App for Registration) – MI Dept of Treasury Employer Identification Number (EIN) Register with UIA as contributing employer Obtain workers compensation insurance Be aware of MIOSHA standards
What about an Independent Contractor? Employee vs. Independent Contractor Control Flexibility Loyalty from Eee Less administration Commitment (time) No payroll taxes Worker appeal No benefits Protection of your assets Avoid workers comp, (trade-off) unemployment, and OT Less legal exposure Lower overhead
The IRS’s Common Law RuleEvidence of the degree of control and independence1) Behavioral control: instructions given to the worker. How, when, where to work? training is also important.1) Financial control: extent of worker’s unreimbursed business expenses extent of worker’s investment extent that worker provides services to others how the worker is paid extent worker can realize profit/loss
The IRS’s common law rule3) Type of relationship: how do the parties describe their relationship in writing does the worker receive employee-type benefits the permanency of the relationship extent to which services performed by the worker are a key aspect of the regular business of the company.
Deferred compensation Qualified vs. Non-QualifiedNQDC plan: Any elective or nonelective plan, agreement orarrangement (written or unwritten) to paycompensation in the future E.g., Phantom Stock*NQDCs dont afford the tax benefits associated with qualifiedplans. E.g., 401K
Deferred compensation 4 categories of NQDC plans1) Salary reduction arrangements: deferring receipt of salary2) Bonus deferral plans: deferring receipt of bonuses3) Top-Hat plans: highly compensated retirement plans4) Excess benefit plans: Benefits to employees whose limitedunder the qualified plan
Deferred compensation Funded vs. Unfunded- Unfunded: Only the mere promise to pay in the future * Promise is not secured * Income tax deferral: Amounts cannot be set aside from the employers creditors for the exclusive benefit of the employee * Taxable upon constructive receipt- Funded: Assets are segregated so they are identified as a sourcefor payment of benefits * Benefits are generally taxable upon funding b/c it istransferable and not subject to forfeiture
Brief word: Stock Options Creating the Ownership cultureOptions give an Eee the right to purchase company stock at a predetermined price, regardless of the FMV of the stock. Nonqualified stock options (NSOs): Eee is taxed upon exercising the option. Taxed on the difference b/n the fair market price and the grant price. Incentive stock options (ISOs): No regular income taxes, but you must hold shares at least 1 year from date of exercise and 2 yrs from grant date. * capital gains not income taxes Vesting and Expiration
SARs and Phantom/Performance plansStock Appreciation Rights (SARs): *Like an Option: granted at a set price vesting and expiration*Unlike: Eee not required to pay an exercise price. Eee receives the net amount of the increase in the stock price in either cash and/or shares of company stock can work in tandem with stock option plansPhantom Plans: Cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified time period or on hitting performance metrics.
Benefits of SARs/PhantomsWhy do we like them? can share the economic value of equity, but not equity itself less restrictive than conventional stock plans enhances existing ownership plans, like ESOPs potentially less expensive to implement potentially less expensive to administer
Things to think aboutHow to pay for them? do you promise to pay or set aside the funds? putting aside $ ties up cash flow do you pay in stock or cash or a combination is there a market for the stock? determining the vesting rights tax implications for vesting and payout who to offer to? Watch out for ERISA
Restricted stock plansRestricted Stock Awards: Grant of stock in which the Eees rights are restricted until the shares vest. The Steps: 1) Eee is granted a Restricted Stock Award 2) Eee must decide whether to accept/decline Award 3) Upon acceptance, Eee may be required to pay purchase price for the grant 4) Eee must wait for vesting period to elapse (time based or performance based) 5) When the Award vests, the Eee receives the shares of stock or the cash equivalent without restriction
Stock Purchase PlansGenerally: Eees are given an option to purchase stock at a discounted price at the end of an offering period. The Eer may deduct a percentage or dollar amount from Eees pay throughout the offering period. *IRS limits Qualified and Non-Qualified Plans special rules and limitations for Qualified plans special tax treatment
GETTING IT IN WRITINGA. Employment Contracts No right for every positionA. Confidentiality Agreements Do you need to protect your secrets?A. Work For Hire AgreementB. Non-Competition and Non-Solicitation Agreements Know your industries’ practice Measure the impact on hiring/retaining the best
DisclaimerThis slide presentation is informational only and was prepared to summarizerelevant issues related to the topics discussed here. It does not constitutelegal or professional advice. You are encouraged to consult with aDickinson Wright attorney if you have specific questions relating to any ofthe topics covered in this presentation.