Executive Compensation and the Role of the Compensation Committee

Employment /Severance Agreement

Another component of post-employment plans are agreements that provide income and job-loss protection for the executive in the absence of "cause". The amount of severance pay may trigger excise taxes; the type of executive impacts the final "benefits" the employee derives:

• New Hires - will have a low W-2 history and a greater potential to meet the 3x average earnings threshold that triggers golden parachute related excise taxes. Boards should adopt provisions to replace the initial employment contracts and severance protection given new hires.
• Significant Owners - employment contracts and severance packages are less common for founders or significant owners. They are not automatically offered such arrangements. It is important to consider the need and business purpose of arrangements for a particular incumbent.
• Long-tenured Executives - have significant accumulated retirement benefits or equity-derived wealth. Amending or terminating contracts can be challenging. Appropriate time horizons should be set for when certain features of the arrangement like a 280G gross up will expire or the entire agreement will expire absent an evergreen renewal.

Other specific terms in an employment contract include:

• Job description - the executive's duties and responsibilities, financial control, and personnel and reporting relationships need to be defined in detail.
• Compensation - the rewards for taking on the job are covered: those that are fixed and those that are dependent upon performance.
• Termination - the circumstances under which the executive can be terminated, and what they are entitled to at that time.
• Non-compete clause - prevents the executive from seeking employment with competitors for some time period and denies them the right to reveal confidential company information if they do become employed by a competitor.

CEO Payout Exposure Example