St. Louis Business Journal – Anne Marie Schumacher
Kathleen Bilderback – Affinity Law Group, LLC
With the unemployment rate hovering around 10 percent, you would think law and accounting firms would see a decline in the business of structuring executive compensation plans. But the economic downturn is leading to an increase in employers looking to change the ways they recruit, retain and compensate executives. Kathleen Bilderback, a member of Affinity Law Group LLC, said she has seen a surge in the use of equity-based compensation plans, which allow employees to buy or receive a partial stake in the company. “These plans allow companies who may be strapped for cash to reward key employees yet keep their assets on the balance sheet since they don’t require an immediate cash payout,” she said.
Equity compensation plans are generally based on the company’s performance and typically payable over time – usually three years. This setup provides employers with a cost-effective method of incentivizing valuable employees to stay for the long haul and work harder to maximize the company’s worth. “Since the amount of the benefit is based upon the company’s performance, it provides employees with an incentive to increase the value of the company, just like the owner,” Bilderback said.
Troy Kendrick, partner at Stinson Morrison Ilecker, LLP noted that stock options at public companies are a great way to reward key individuals, but he counsels privately held clients to be careful about giving away equity. Often he will suggest those clients explore other methods such as a supplement al executive retirement plan (SERP). A SERP will allow an owner to say to a key executive that if you stay with me and help me grow my company, in an agreed upon number of years and when you reach a certain age. I will pay you this amount,” Kendrick said. The benefit of deferred compensation plans for businesses trying to weather the difficult economy is obvious. They can keep more cash on hand. Employees like them because of their potential tax advantages. “If an employee defers part of h is or her compensation and gets the payout 10 to 15 years later, chances are they will be in lower tax bracket by that point.” Kendrick said, “Their kids may be in college, and they can use the deferred income for tuition or to fund retirement. Often it just makes good sense from a variety of perspectives.”
Kendrick said the heyday of deferred compensation plans was about 15 years ago, but with the economic downturn, companies are once again realizing a significant part of their value is tied to retaining their key people. Recent clients he has served in this area include a large broker firm, a manufacturing company with patented equipment, a few technology companies, and an insurance brokerage firm. “Even key executives can be worried about reductions in force he said, “Often they’re wondering if their bead is the next to roll.” To determine whether an alternative method of compensation is appropriate, Bilderback typically sits down with clients to discuss long-term goals and what they are trying to accomplish. She also talks to the executive team members to determine whether or not this type of incentive compensation would be meaningful. “Generally employees really like these plans,” she said. There arc pitfalls, however. “lf the stock price or value of the company falls, these plans ca n be risky,” said Marty Doerr, member-in-charge of tax services at accounting firm Brown Smith Wallace. “With stock plans. we are currently seeing many companies increase the number of shares payable to the executive since prices are low.
This gives the executive more of an upside.” In addition, should difficult times occur, these types of agreements may be subject to a bankrupt company’s creditors. And almost all of plans contain specific clauses that may amend the original agreement should a significant transaction occur or if the employee were to leave the company, Typically, that comes at a cost as employees also must agree to a non-compete clause and agree to not recruit any other key employees away.
