2015 EXECUTIVE COMPENSATION TRENDS

BY DANIEL N. JANICH

Greensfelder, Hemker & Gale200 West Madison St., Ste 2700Chicago, Illinois 60606

Phone: (312) 345-5003Fax: (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, LLCsBut 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 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

S Corps, C Corps & LLCs May Use Equity Compensation

Types of Executive CompensationApplicable Laws & PitfallsCurrent Trends

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What We Will Cover

Types of Executive CompensationExecutive compensation components (found in executive employment agreements):Base salary—Fixed/Yearly AdjustmentsAnnual Bonus—Discretionary/Performance Based/GuaranteedEquity Awards—True Equity/Synthetic Equity/Fixed/Performance BasedPerquisites & Employee Benefit Plan Participation—Car/Club Dues/Life Ins./Relocation/Etc./Retirement & Welfare Plans/Deferred CompensationSeverance 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 ArrangementsAdjustable 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 CompensationAwards of Public Companies Subject to Public Scrutiny & Legislative/Regulatory ActionsFocus of Private and Public Company Compensation Philosophy in Competition for TalentDriver of Prevailing Executive Compensation Trends

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Equity Awards: S & C CorpsStock 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 interestsProfits interestsOptions (nonqualified only)Unit Rights and Unit Appreciation Rights (phantom equity)

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Applicable Laws & PitfallsExecutive Compensation Triggers Income Tax, Corporate, Securities, ERISA Issues & Others Internal Revenue Code409A – “Deferred Compensation” 280G – Parachute Payments/CIC Rules422 – Incentive Stock Option Requirements83(b) – Transfer of Property for Services162(m) -- $1M Deduction Limits3402 – Income Tax Withholding; FICA/FUTA

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Applicable Laws & Pitfalls (Cont.)

State Corporate Law – Governance IssuesERISA – 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 applyHost of Additional Federal Laws – ADEA (severance), Dodd-Frank (governance), etc.

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Current TrendsA Period of Intense Scrutiny Leads To Greater Transparency: Disclosure, Disclosure & More DisclosureDirect 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 performancePerformance 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 GovernanceFiduciary Concerns – Shareholders & OfficersClawbacks – 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 VehiclesBroad Based Option Plans in Decline – Options & Restricted Stock Grants to Senior Management409A 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 PlansShort term as well as long term incentives must align company performance with executive compensationStock Ownership through Substantial Equity SharePerks and SERPs are on downward trend due to shareholder activism

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Professional BackgroundDan 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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