A description of executive compensation trends with a particular focus upon issues impacting privately held companies.

1. 2015
EXECUTIVE
COMPENSATION
TRENDS
BY DANIEL N. JANICH
Greensfelder,
Hemker
&
Gale
200
West
Madison
St.,
Ste
2700
Chicago,
Illinois
60606
Phone:
(312)
345-­‐5003
Fax:
(312)
419-­‐1930
dnj.greensfelder.com

2. Why
Should
We
Discuss
ExecuAve
CompensaAon?
§ Company
growth
and
conPnued
success—indeed
the
business’
mere
survival—requires
that
it
have
effecPve
and
talented
leadership.
§ ExecuPve
compensaPon
is
the
best
if
not
the
only
means
for
aYracPng,
rewarding
and
retaining
senior
management
talent
in
a
highly
mobile
and
compePPve
business
environment.
§ Companies
must
understand
and
be
mindful
of
current
trends
in
the
marketplace
and
adjust
their
strategic
plan
accordingly.
2

3. Focus
of
Discussion
Will
Be
On.
.
.
§ Privately
Held
Companies—S
Corps,
C
Corps,
LLCs
§ But
We
Must
Also
Consider
ExecuPve
CompensaPon
in
Public
Companies
Because:
ü Public
and
Private
Companies
Compete
for
the
Same
ExecuPve
Talent
ü ExecuPve
CompensaPon
Trends
in
Public
Companies
Frequently
Become
Best
PracPces
adopted
by
Private
Companies
3

4. 4
S and C Corporations LLCs (Hybrid:
Corporation/
Partnership)
Share or Stock Membership interest (unit)
Shareholder Member
Shareholder agreement Operating agreement
Limited liability Limited liability
S Corp taxed as
partnership; C Corp taxed
as an entity
Taxed as a partnership
S
Corps,
C
Corps
&
LLCs
May
Use
Equity
CompensaAon

5. § Types
of
ExecuPve
CompensaPon
§ Applicable
Laws
&
Pi^alls
§ Current
Trends
5
What
We
Will
Cover

6. Types
of
ExecuAve
CompensaAon
§ ExecuPve
compensaPon
components
(found
in
execuPve
employment
agreements):
Ø Base
salary—Fixed/Yearly
Adjustments
Ø Annual
Bonus—DiscrePonary/Performance
Based/
Guaranteed
Ø Equity
Awards—True
Equity/SynthePc
Equity/Fixed/
Performance
Based
Ø Perquisites
&
Employee
Benefit
Plan
ParPcipaPon—Car/
Club
Dues/Life
Ins./RelocaPon/Etc./RePrement
&
Welfare
Plans/Deferred
CompensaPon
Ø Severance
Arrangements—Parachutes/ConPnued
Insurance
Coverage/Etc.
6

7. Variable
vs.
Fixed
ExecuAve
CompensaAon
AMOUNT
RECEIVED
IS-­‐-­‐
§ Fixed:
Base
Salary,
Perquisites,
RePrement
and
Welfare
Plan
ParPcipaPon,
Deferred
CompensaPon,
SERPs,
Severance
Arrangements
Ø Adjustable
But
Generally
Not
Forfeitable
(Clawbacks)
§ Variable:
Short
Term
IncenPves
(Bonus),
Long
Term
IncenPves
(Equity
Awards)
Ø Usually
Based
on
Company
and/or
Individual
Performance
7

8. IncenAve
Based
CompensaAon:
Cash
&
Equity
Awards
§ IncenPve
Awards-­‐-­‐Short
and
Long
Term
Grants
Generally
Make
Up
Biggest
PorPon
of
Employee’s
ExecuPve
CompensaPon
Ø Awards
of
Public
Companies
Subject
to
Public
ScruPny
&
LegislaPve/Regulatory
AcPons
Ø Focus
of
Private
and
Public
Company
CompensaPon
Philosophy
in
CompePPon
for
Talent
Ø Driver
of
Prevailing
ExecuPve
CompensaPon
Trends
8

9. Equity
Awards:
S
&
C
Corps
§ Stock
OpPons
–
Broad
Based
or
Management
Only
(common
in
public
companies)
◦ IncenPve
Stock
OpPons
◦ Nonqualified
Stock
OpPons
§ Restricted
Stock/Restricted
Stock
Units
(common
in
public
companies)
§ Phantom
Stock
(common
in
privately
held
companies)
§ Stock
AppreciaPon
Rights
(common
in
privately
held
companies)
§ Performance
Shares/Units
(common
in
privately
held
companies)
9

10. Equity
Awards
in
LLCs
§ Capital
interests
§ Profits
interests
§ OpPons
(nonqualified
only)
§ Unit
Rights
and
Unit
AppreciaPon
Rights
(phantom
equity)
10

11. Applicable
Laws
&
PiValls
§ ExecuPve
CompensaPon
Triggers
Income
Tax,
Corporate,
SecuriPes,
ERISA
Issues
&
Others
§ Internal
Revenue
Code
Ø 409A
–
“Deferred
CompensaPon”
Ø 280G
–
Parachute
Payments/CIC
Rules
Ø 422
–
IncenPve
Stock
OpPon
Requirements
Ø 83(b)
–
Transfer
of
Property
for
Services
Ø 162(m)
-­‐-­‐
$1M
DeducPon
Limits
Ø 3402
–
Income
Tax
Withholding;
FICA/FUTA
11

12. Applicable
Laws
&
PiValls
(Cont.)
§ State
Corporate
Law
–
Governance
Issues
§ ERISA
–
Is
compensaPon
arrangement
subject
to
ERISA?
§ SecuriPes
Laws
–
State
and
Federal
RegistraPon
&
ReporPng
Requirements.
Are
there
applicable
exempPons
that
apply?
Federal
and/or
State
Laws
may
apply
§ Host
of
AddiPonal
Federal
Laws
–
ADEA
(severance),
Dodd-­‐Frank
(governance),
etc.
12

13. Current
Trends
§ A
Period
of
Intense
ScruPny
Leads
To
Greater
Transparency:
Disclosure,
Disclosure
&
More
Disclosure
Ø Direct
impact
on
Public
Companies
through
Proxies;
Recent
Examples:
Pay
RaPo
&
Say
on
Pay
Rules;
Best
PracPces
for
Privately
Held
Companies
due
to
War
For
Talent
leads
to
disclosure
of
company
financial
performance
§ Performance
Based
Grants
and
VesPng
Ø ApplicaPon
of
Most
Suitable
Metrics
to
Measure
Performance
–
Most
Popular
=
Total
Shareholder
Return
(TSR),
but
trend
developing
to
use
others,
such
as
EBITDA
13

14. Current
Trends
(Cont.)
§ Corporate
Governance
Ø Fiduciary
Concerns
–
Shareholders
&
Officers
§ Clawbacks
–
SOX,
Dodd-­‐Frank
Clawback
Rules
for
IncenPve
CompensaPon;
Forfeitures
for
Non
compete
ViolaPons
&
Criminal
ConvicPons
14

15. Current
Trends
(Cont.)
§ Shis
Away
from
Stock
OpPon
Grants
and
Toward
Restricted
Stock
&
Other
Equity
Vehicles
Ø Broad
Based
OpPon
Plans
in
Decline
–
OpPons
&
Restricted
Stock
Grants
to
Senior
Management
§ 409A
Problems
ConPnue—Many
Pi^alls
Here;
Increasing
Employer
Liability
15

16. Current
Trends
(Cont.)
§ Shis
Away
from
DiscrePonary
Bonus
Plans
to
Performance
Based
Cash
Bonus
Plans
Ø Short
term
as
well
as
long
term
incenPves
must
align
company
performance
with
execuPve
compensaPon
§ Stock
Ownership
through
SubstanPal
Equity
Share
§ Perks
and
SERPs
are
on
downward
trend
due
to
shareholder
acPvism
16

17. Professional
Background
Dan Janich
is
an
aYorney
pracPcing
in
the
areas
of
employment
law,
employee
benefits
and
execuPve
compensaPon
in
Chicago.
His
clients
are
private
and
publicly
held
businesses,
C-­‐level
execuPves
and
other
professionals.
His
experience
includes
designing
and
implemenPng
rePrement,
welfare
and
equity
compensaPon
plans,
and
execuPve
employment
agreements
and
separaPon
packages,
and
liPgaPng
benefit
and
execuPve
compensaPon
claims.
Dan
received
his
undergraduate
and
professional
degrees
from
Marian
University,
Indianapolis
(B.A.),
The
John
Marshall
Law
School,
Chicago
(J.D.),
and
DePaul
University
College
of
Law,
Chicago
(LL.M.
in
TaxaPon).
He
has
recently
served
on
the
Board
of
the
NaPonal
Center
for
Employee
Ownership
(NCEO)
and
the
Senior
Editorial
Board
for
Employee
Benefits
Law
treaPse,
and
is
currently
an
acPve
member
of
the
NCEO
and
the
NaPonal
AssociaPon
of
Stock
Plan
Professionals
(NASPP).
17

18. Any
QuesAons?
18