Executive Compensation Plans Executive compensation plans are designed by companies and lay out the compensation package offered by the company to its executives. They are not binding agreements, but rather they are an explanation of available compensation and benefits. Companies offer such compensation plans in an effort to attract and retain talented executives whom the company believes can successfully lead the company to reach its goals of growth and profitability. Typically, an executive will consider strongly the company’s plan before accepting employment. Employers thus design these executive compensation plans to be effective means of rewarding a top executive for high performance and to motivate that executive to meet financial goals. This article will provide drafters with some guidance as how to draft an effective and legally sufficient executive compensation plans. Following are some key provisions that are often included. 1. Purpose. The purpose of the plan should be stated. As previously discussed, the purpose is to provide incentives and rewards to those employees largely responsible for the success and growth of the company and to assist the company in attracting and retaining executives and other key employees with experience and ability. 2. Definitions. The key terms of the plan should be defined in this section. Here are the most popular terms that are used and defined: a. “Award” – generally means either shares of common stock, restricted shares, stock options, incentive stock options, or any other rights granted to a recipient under the plan. b. “Committee” – means the compensation committee responsible for administering the plan. c. “Performance Period” – means the period of time specified by the Committee during which the recipient must satisfy any designated performance goals in order to receive an award. d. “Recipient” – means an employee of the company who is eligible to receive an award under the plan. 3. Administration of the Plan. This section should state that the plan will be administered by the committee, and should also list the members who will make up this committee, and if applicable, how those members will be selected. The key to this section is also to state that the committee will have full power and absolute discretion over the interpretation and administration of the plan. This means they can make changes to the plan if necessary, establish the objectives and conditions for receipt of the awards, and essentially do all other things necessary and proper to carry out the intentions of the plan. The drafter should make sure that this power and discretion is stated in detail.
4. Eligibility. Which employees are eligible for an award pursuant to the plan should be listed here. 5. Stock Subject to the Plan. If the total number of shares awarded under the plan is limited to a certain amount, this should be stated here. If only certain classes of stock are eligible to be awarded, such as common or restricted stock, this should also be listed. 6. Vesting Requirements. If the committee has the power to determine that all or a portion of an award shall be vested, for the best interests of the company, this power should be listed in this provision. 7. Employment Status. It should be made clear that only executives still with the company are eligible to receive the award, unless the committee determines otherwise. It should also be noted that providing an award to an executive will not be construed as imposing upon the company the obligation to continue the employment of the executive. 8. Mergers and Consolidations. The effect of a merger, consolidation, reorganization, or liquidation on the Plan should be described in this provision. These are the key provisions commonly found in executive compensation plans. Provisions explaining the funding of the plan, the plan’s guidelines, when and how the plan may be termination, and a provision stating that commencement of the plan is contingent upon prior approval by the shareholders might also be included. For more information or to read actual companies’ executive compensation plans, please see the agreement section of this website.