Strategies for Executive Compensation: Design and Tax Issues for a ...

Transaction Scenarios
Acquisition
A purchases B
Sale/Divestiture
A sells part of its
business to B
Merger
A and B combine
Joint Venture
A and B create C
IPO
Go Private
Acquired company’s incentive compensation plan tends to disappear
May include a standstill agreement that leaves plans unchanged for a
period of time
Acquired business tends to see its incentive plans disappear or, at the very
least, significantly modified to align with the new culture
Incentive plans can take on a ‘yours, mine, or ours’ mindset
Provides an opportunity to take the ‘best-of’
Can lead to dramatically different reward cultures and pay philosophies
Highly focused/customized incentive plans created – opportunity to
experiment
Bigger executive role
Anticipate pay disclosure and governance scrutiny
New ownership
Equity focused on deal price
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Company In-Play or Reviewing Strategic Alternatives
Implication for management: May have Winners and/or Losers
Bigger Job, Same Job, Smaller Job, No Job
Security /
Protection
Understanding termination benefits can foster significant retention for ‘atrisk’
positions.
Formalize/clarify understanding of severance protection.
Program
Treatment
Providing clarity around the equity treatment could provide a strong
incentive to retain key talent – particularly if potential value is meaningful.
Important to also ensure responsible treatment to allow for retention
beyond transaction.
Additional
Retention
Incentives
May require the creation of retention programs to ensure that critical talent
is retained and key executives are acting in the best interests of the
desired transaction efforts.
Need to ensure that any amounts are responsible in the context of the
entire pay package.
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