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

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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 towerswatson.com 5 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. towerswatson.com 6 3
Program Treatment – Equity Compensation (LTI) Consider the following principles: A technical change-of-control (COC) should not result in automatic vesting. — If there is an ongoing share price and/or company performance can still be reasonably measured, there is no need to automatically vest or wind down the plans Participants should not be penalized — If the plans cannot, from a practical point of view, continue (e.g., no share price available or acquiring company does not want the equity continuing), full value should ultimately be settled. — A participant whose employment is terminated as part of the COC should receive the full benefit of the LTIP awards (i.e., fully vested) towerswatson.com 7 Stock Option in Transaction 3 types of treatment for stock options on a change-in-control: 1. Accelerate vesting and settle on transaction price; 2. Accelerate vesting and exchange options for those of the acquiring company (maintaining the option holders economic value); or 3. Maintain vesting and exchange options for that of the acquiring company (maintaining the option holders economic value). The 3 rd treatment is preferable with acceleration only if: The participant is actually or constructively terminated, or It is not practical to exchange the options (e.g., no publicly-traded share is available). towerswatson.com 8 4
Page 1 and 2: Strategies for Executive Compensati
Page 3 and 4: April 10, 2012 Strategies for Execu
Page 5 and 6: Incentive And Stock Compensation Ar
Page 7 and 8: Types of Private Equity Transaction
Page 9 and 10: Participation of Target/Portfolio C
Page 11 and 12: Exit Strategies and Investment Hori
Page 13 and 14: Key Design Considerations and Commo
Page 15 and 16: Stock Options - Rules for Canadian-
Page 17 and 18: Stock Options - Rules for Canadian-
Page 19 and 20: Share Purchase Loans • Management
Page 21 and 22: Cash-Based Long-Term Incentive Plan
Page 23 and 24: Cash-Based Long-Term Incentive Plan
Page 25 and 26: Non-Portfolio Company Incentives (c
Page 27: Acquirer (Buyer) Priorities in a Co
Page 31 and 32: Dollar Amount Converted to RSUs/DSU
Page 33 and 34: U.S. Statutory Clawbacks (cont’d)
Page 35 and 36: Type and Relative Prevalence of Cla
Page 37 and 38: Potential Tax Relief for Later Year
Page 39 and 40: Conclusion • Clawbacks in Canada
Page 41 and 42: Long Term Incentive Plan Clawbacks:
Page 43 and 44: - 3 - are subject to recoupment. It
Page 45 and 46: - 5 - U.S., a wide range of incenti
Page 47 and 48: - 7 - review our policy to assure t
Page 49 and 50: - 9 - Cash and Earnings Bonus Unit
Page 51 and 52: - 11 - underway or contemplated at
Page 53 and 54: - 13 - operate, the terminated part
Page 55 and 56: - 15 - use of the provision where a
Page 57 and 58: - 17 - interest paid or payable the
Page 59 and 60: - 19 - right is to postpone tax pay
Page 61 and 62: - 21 - taxpayer under subsection 7(
Page 63 and 64: Bill Sutherland Bill is a Senior Co

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