Executive Compensation Counsel

Restricted stock awards that vest over a period of time are becoming more popular forms of compensation, according to Seidel. Also, cliff vesting, where an executive is vested completely only at the end of a specified time period, is gaining in popularity. She sees this form of compensation as a good retention tool, especially for companies that haven’t paid a bonus in a year or two.

Urness says that he sees small- and micro-cap public companies with some volatility in share price using stock options instead of restricted shares. Restricted shares are “a nice vehicle if you have a stable share price, because people don’t feel like they’re missing out on the upside,” he says. Restricted shares are paid to the holder as long as he or she has completed a vesting period—based on time or performance benchmarks. Unlike stock-option compensation, in which executives are locked into a preset price for a given number of shares, restricted stock value rises and falls with the stock price.

Perks and benefits are changing, too. First class travel, a company car, club memberships, and life insurance are being cut in response to a difficult market and shareholder sensitivity to perks that appear to be too lavish. “When the SEC changed disclosure rules on perks about three years ago, that’s when you really started to see companies seriously rethinking their programs and cutting back on perks,” Rosenbaum says. That trend has accelerated lately. He’s heard of companies providing lump sums of money for executives to use as they see fit instead of providing a club membership, for example.

However, others are seeing just the opposite. According to Sheffert, some companies have increased the benefits and perks granted to executives as a way to offset decreased base salaries. “That’s the way boards are trying to manage,” he says.

Compensation and Consequences

Clawback clauses are becoming more common in executive contracts, especially at publicly held companies, according to John Stout, a partner and chair of the corporate governance and investigations group at Minneapolis-based law firm Fredrikson & Byron. These clauses require executives to give back compensation and bonuses that are earned by committing fraud or other misconduct that is detrimental to the company. In July, the SEC asked a court to order the former chief executive officer of CSK Auto Corporation, a Phoenix-based auto parts retailer, to reimburse the company and its shareholders more than $4 million that he received in bonuses and stock sale profits while CSK was violating the Sarbanes-Oxley Act.

Seidel has seen more companies implement clawback policies. Corporate counsel at many firms are wrestling with creating enforceable policies. Seidel says questions about the enforceability of clawbacks include: How far down in organization’s management ranks should clawbacks go? Should they apply to cash bonuses and equity awards? Should clawbacks apply only to new awards going forward or to outstanding awards as well?