One of my partners, Mark Poerio, an expert on executive compensation, has written a client alert discussing what companies can consider doing proactively to encourage executives to stick around rather than move onto greener pastures. In short, they are all different ways to make the current position “greener,” so to speak, than competing pastures. (I promise – no more of this extended metaphor, which I have already stretched much farther than I should have). They are predominately compensation based efforts, such as retention bonuses and deferred compensation awards that require what one might consider “long termism” in the executive ranks to collect, and similar ideas.
Unlike Mark, who gets to stay on the sunny side of the street by typically addressing executive compensation issues proactively, when the company and the executives are still looking for ways to maintain – and in fact guarantee – their continuing relationship, I typically see these same issues – and these same efforts at retention – only after the fact, when an executive has left and the question of payout, and any disputes over it, has arisen.
For instance, Mark rightly notes the important role that deferred compensation or equity-based awards can play in encouraging long-term employment. Both, however, can lead to disputes later, often dependent, in my experience, more on the good faith of the company after the executive’s departure than on anything the departing executive did or did not do. I have had multiple cases where, after departure, the value of the equity grant turned out to be different than the executive believed it was and, sometimes, different than it was represented while the executive was being wooed to stay.
Mark also references the role of using claw backs for disloyal or corrupt employees, something that I have often seen tied to deferred compensation and top hat payouts so as to control executive behavior both during and after departure. The obvious rub here is that what looks disloyal – for instance, wrongful competition after departure – to one side doesn’t look that way to the other, often leading to litigation over whether the payout is required.
Likewise, Mark discusses one of the most – to me, anyway – interesting aspects of executive loyalty, which is the use of severance and change in control agreements to encourage executives to remain in place in uncertain corporate environments. In concept, these types of agreements work well for these purposes, although I think it is fair to say that they can sometimes encourage executives to stay only so long as is necessary to trigger payouts under such agreements, which to some extent at least undercuts their purpose. The sort of mirror image problem exists as well, which is that I have also seen companies suddenly become very grudging on the question of whether payment under those agreements is triggered once it becomes clear that a relatively sizable number of executives may have had their rights to payout under the agreements triggered by the same set of circumstances.
All of this is a long way of saying that probably the most important suggestion in Mark’s piece – from a litigator’s perspective – is his recommendation that companies proactively “refine plan documents and agreements in a manner that defuses litigation risks.” All of the (real life) examples of disputes that I mentioned above had more than one precipitating cause, but each also had a similarity without which no dispute would have been possible: a poorly written agreement that left room for the parties to later argue over its meaning. Pay attention to avoiding that problem, and the odds of any litigation at all related to an executive’s departure fall dramatically.