2015 EXECUTIVE
COMPENSATION TRENDS
BY DANIEL N. JANICH
Greensfelder, Hemker & Gale
200 West Madison St., Ste 2700
Chicago, Illinois 60606
Phone: (312) 345-5003
Fax: (312) 419-1930
dnj.greensfelder.com
Why Should We Discuss
Executive Compensation?
Company growth and continued success—indeed
the business’ mere survival—requires that it have
effective and talented leadership.
Executive compensation is the best if not the only
means for attracting, rewarding and retaining
senior management talent in a highly mobile and
competitive business environment.
Companies must understand and be mindful of
current trends in the marketplace and adjust their
strategic plan accordingly.
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Focus of Discussion Will Be On.
..
Privately Held Companies—S Corps, C Corps,
LLCs
But We Must Also Consider Executive
Compensation in Public Companies Because:
Public and Private Companies Compete for the
Same Executive Talent
Executive Compensation Trends in Public
Companies Frequently Become Best Practices
adopted by Private Companies
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S Corps, C Corps & LLCs May Use
Equity Compensation
S and C Corporations
LLCs (Hybrid:
Corporation/
Partnership)
Share or Stock
Membership interest (unit)
Shareholder
Member
Shareholder agreement
Operating agreement
Limited liability
Limited liability
S Corp taxed as
partnership; C Corp taxed
as an entity
Taxed as a partnership
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What We Will Cover
Types of Executive Compensation
Applicable Laws & Pitfalls
Current Trends
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Types of Executive Compensation
Executive compensation components (found in executive
employment agreements):
Base salary—Fixed/Yearly Adjustments
Annual Bonus—Discretionary/Performance
Based/Guaranteed
Equity Awards—True Equity/Synthetic
Equity/Fixed/Performance Based
Perquisites & Employee Benefit Plan Participation—
Car/Club Dues/Life Ins./Relocation/Etc./Retirement &
Welfare Plans/Deferred Compensation
Severance Arrangements—Parachutes/Continued
Insurance Coverage/Etc.
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Variable vs. Fixed Executive
Compensation
AMOUNT RECEIVED IS-Fixed: Base Salary, Perquisites, Retirement and
Welfare Plan Participation, Deferred Compensation,
SERPs, Severance Arrangements
Adjustable But Generally Not Forfeitable
(Clawbacks)
Variable: Short Term Incentives (Bonus), Long Term
Incentives (Equity Awards)
Usually Based on Company and/or Individual
Performance
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Incentive Based Compensation:
Cash & Equity Awards
Incentive Awards--Short and Long Term Grants
Generally Make Up Biggest Portion of Employee’s
Executive Compensation
Awards of Public Companies Subject to Public
Scrutiny & Legislative/Regulatory Actions
Focus of Private and Public Company
Compensation Philosophy in Competition for Talent
Driver of Prevailing Executive Compensation
Trends
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Equity Awards: S & C Corps
Stock Options – Broad Based or Management Only
(common in public companies)
◦ Incentive Stock Options
◦ Nonqualified Stock Options
Restricted Stock/Restricted Stock Units (common in public
companies)
Phantom Stock (common in privately held companies)
Stock Appreciation Rights (common in privately held
companies)
Performance Shares/Units (common in privately held
companies)
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Equity Awards in LLCs
Capital interests
Profits interests
Options (nonqualified only)
Unit Rights and Unit Appreciation Rights
(phantom equity)
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Applicable Laws & Pitfalls
Executive Compensation Triggers Income Tax,
Corporate, Securities, ERISA Issues & Others
Internal Revenue Code
409A – “Deferred Compensation”
280G – Parachute Payments/CIC Rules
422 – Incentive Stock Option Requirements
83(b) – Transfer of Property for Services
162(m) -- $1M Deduction Limits
3402 – Income Tax Withholding; FICA/FUTA
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Applicable Laws & Pitfalls
(Cont.)
State Corporate Law – Governance Issues
ERISA – Is compensation arrangement subject to
ERISA?
Securities Laws – State and Federal Registration &
Reporting Requirements. Are there applicable
exemptions that apply? Federal and/or State Laws
may apply
Host of Additional Federal Laws – ADEA
(severance), Dodd-Frank (governance), etc.
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Current Trends
A Period of Intense Scrutiny Leads To Greater Transparency:
Disclosure, Disclosure & More Disclosure
Direct impact on Public Companies through Proxies;
Recent Examples: Pay Ratio & Say on Pay Rules; Best
Practices for Privately Held Companies due to War For
Talent leads to disclosure of company financial performance
Performance Based Grants and Vesting
Application of Most Suitable Metrics to Measure
Performance – Most Popular = Total Shareholder Return
(TSR), but trend developing to use others, such as EBITDA
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Current Trends (Cont.)
Corporate Governance
Fiduciary Concerns – Shareholders &
Officers
Clawbacks – SOX, Dodd-Frank Clawback
Rules for Incentive Compensation;
Forfeitures for Non compete Violations &
Criminal Convictions
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Current Trends (Cont.)
Shift Away from Stock Option Grants and
Toward Restricted Stock & Other Equity
Vehicles
Broad Based Option Plans in Decline –
Options & Restricted Stock Grants to Senior
Management
409A Problems Continue—Many Pitfalls
Here; Increasing Employer Liability
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Current Trends (Cont.)
Shift Away from Discretionary Bonus Plans to
Performance Based Cash Bonus Plans
Short term as well as long term incentives must
align company performance with executive
compensation
Stock Ownership through Substantial Equity Share
Perks and SERPs are on downward trend due to
shareholder activism
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Professional Background
Dan Janich is an attorney practicing in the areas of employment law,
employee benefits and executive compensation in Chicago. His clients
are private and publicly held businesses, C-level executives and other
professionals. His experience includes designing and implementing
retirement, welfare and equity compensation plans, and executive
employment agreements and separation packages, and litigating benefit
and executive compensation claims.
Dan received his undergraduate and professional degrees from Marian
University, Indianapolis (B.A.), The John Marshall Law School, Chicago
(J.D.), and DePaul University College of Law, Chicago (LL.M. in Taxation).
He has recently served on the Board of the National Center for Employee
Ownership (NCEO) and the Senior Editorial Board for Employee Benefits
Law treatise, and is currently an active member of the NCEO and the
National Association of Stock Plan Professionals (NASPP).
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Any Questions?
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