Executive Compensation Best Practices

FREDERICK D. LIPMAN is a senior partner with the international law firm of Blank Rome LLP and also the President of the Association of Audit Committee Members, Inc., a nonprofit organization. He was a lecturer in the MBA program at the Wharton School of Business and at the University of Pennsylvania Law School. A graduate of Harvard Law School, he has more than forty years' experience in areas of corporate governance, M&As, private equity, and IPOs. Mr. Lipman is the author of ten other books including Audit Committees and Wiley's recent Corporate Governance Best Practices. He has appeared on television programs on CNBC, CNN, and Bloomberg as a national commentator on initial public offerings, venture capital, mergers and acquisitions, and stock options. He has been quoted in the Wall Street Journal and other publications and is located in the Philadelphia, Pennsylvania office of Blank Rome LLP. STEVEN E. HALL is founder and Managing Director of Steven Hall & Partners, a compensation consulting firm located in New York City. He has over thirty years of experience in rendering advice to organizations in both the public and private arenas on a broad array of topics, including executive compensation, board remuneration, and governance issues related to the compensation committee. Mr. Hall is also a member of the faculty of the National Association of Corporate Directors (NACD), where he teaches courses focused on the responsibilities of board members in the areas of executive compensation and corporate governance. He is a frequent author and speaker and has appeared as a commentator on CNBC, CNN, and other national networks. He has also been quoted in the New York Times, the Wall Street Journal, and other U.S. and international periodicals.

• Preface xiAcknowledgments xviiCHAPTER 1 Introduction 1Should the CEO be Rewarded or Punished for Events Beyond the CEO’s Control? 1Warren E. Buffett on Executive Compensation 3CEO Compensation Theories 4CEO Forced Exit Packages 6Private Equity Compensation 8Entertainment and Sports Celebrities 8Benefits of Good Corporate Governance 9CHAPTER 2 Motivating Executive Performance 13Tying Performance to the Strategic Plan 15Unintended Consequences 16Firm Expansion and CEO Pay 19Equity-Based Compensation 20A New Role for CEOs 21Satisfying Investor Expectations 22Minimum Equity Ownership Requirements 23CHAPTER 3 Peer Groups and Benchmarking 25Adjusting the Peer Group 28Peer Groups for Different Levels of Executives 30Benchmarking 31Lake Wobegon Effect 33Benchmarking with Medians 34CHAPTER 4 Competing With Private Equity Funds 35CHAPTER 5 Explaining Executive Compensation to Shareholders 43Introduction 43Reconstructing Executive Compensation Disclosure for Shareholders 50CHAPTER 6 Compensation Committee Ordinary Operations 57SEC Action Against Tyson Foods 62Earnings on Deferred Compensation 64Practical Steps for Compensation Committees 65Compensation Committees of Non-Profit Organizations 67CHAPTER 7 Negotiating Executive Employment and Severance Agreements 71Negotiating with New CEO Candidates 71Negotiating with Existing CEOs 76Best Practices Applicable to New and Existing CEOs 77Council of Institutional Investors 78Gross-Up Clauses 89Retirement Arrangements 94The Grasso Case 95Section 409A of the Internal Revenue Code 96Other Best Practices in Negotiating Employment or Severance Agreements 96CHAPTER 8 Compensation Committee Structure and Process 99Creating Incentives for Good Corporate Governance 108Disney Litigation 110CHAPTER 9 Equity Incentive Choices 113Overview of Equity Incentives for Key Employees 113Dilution 114Stock Option versus Stock Appreciation Rights 114Restricted Stock versus SARs or Phantom Appreciation Plans 120Phantom Plans 121ISOs versus Non-ISOs 122The Advantage of ISOs 124Non-ISOs with Tax Reimbursement 125The Tax Benefit to the Company 127CHAPTER 10 Option Granting Practices 129Option Granting Practices 135The Council of Institutional Investors 142Equity Retention Practices 143CHAPTER 11 Director Compensation 145Retainer and Differential Pay 147Minimum Equity Requirements 148Director Compensation Procedure and Process 149Shareholder Approval 151Perquisites, Repricing and Exchange Programs,Change in Control, and Severance Payments 151Disgorgement 152CHAPTER 12 Negotiating for the Executive 153CEO Turnover 154New Candidates for CEO or Other Executive Positions 154Employment Agreements with Private Equity Buyers of CEO’s Business 161CHAPTER 13 Executive Compensation and Section 409A of the Internal Revenue Code 163Background 166Plans That Do Not Provide for the Deferral of Compensation 168Nonqualified Deferred Compensation Plan – Plans that Provide for Deferred Compensation 172Special Rule Applicable to Specified Employees 173Change-in-Control Events 174Change in the Ownership of a Corporation 175Change in the Effective Control of a Corporation 176Change in Ownership of a Substantial Portion of a Corporation’s Assets 177Structuring the Payments upon an Event Payment Trigger 178Specified Time or Fixed Schedule 179Equity-Based Compensation 179Section 409A Compliance 181Appendix A Compensation Committee Charter 183Appendix B Corporate and Securities Update:SEC Adopts Sweeping Overhaul of its Executive Compensation Disclosure Requirements (September 2006 and revised December 2006) 189Appendix C Employment Agreement 213Appendix D Public Company Equity Incentive Plan 233Appendix E Search Terms Typically Required to be Researched by Public Company in Option Backdating Investigations by the Securities and Exchange Commission 285Appendix F What an Employee Should Know About His or Her Stock Options 289Index 309