Executive compensation is one of the largest investments most companies make, yet far too many companies don’t approach executive compensation strategically, paying modest annual salary and bonus increases across the board, which reward tenure vs. performance and, over time, create high fixed cost structures.
The Palm Beach County business lawyers of Comiter, Singer, Baseman & Braun can help you craft an executive compensation plan that not only ensures you attract and retain the talent your Florida based business requires, but effectively links the incentives for your executive team to the strategy and priorities of the organization.
How Our Florida and Palm Beach County Business Lawyers Structure an Executive Compensation Plan
A strategically designed executive compensation plan will enable a company to: attract and hire the right executives; motivate executives to achieve their specific goals and collaborate to achieve the company’s goals; and retain the most valuable executives.
Business owners must first determine what the priorities of the business are: increased cash flow, position for a potential sale or IPO, increase equity value, gain market share, etc. To properly establish goals, defined time-horizons and success metrics should be established with short-term and long-term compensation components tied to the short and long-term goals.
Family-owned businesses may not want to provide non-family executives with equity, but that doesn’t mean they can’t provide long-term incentives to key executives through phantom equity plans or long-term cash incentives. Fast-growing and early-stage companies may prefer to preserve cash and put more of their executives’ compensation in equity, profit interests, and other future payouts, while profitable companies may prefer cash incentives vs. diluting equity ownership.
The plan must make sense from an income tax perspective. The tax rules governing deferred compensation have become enormously complex, but none more than Internal Revenue Code Section 409A.
Enacted to address abuses revealed by the spectacular failures of Enron, Worldcom, Tyco, etc., Section 409A reaches every form of compensation that is paid in a tax year after the year in which the employee or independent contractor rendered the services to earn it—from the simple annual bonus paid after the tax year ends, to the success bonus paid on the sale of the business, and all variations in between, i.e., deferred compensation.
If a deferred compensation arrangement does not comply with Section 409A, then the employee or independent contractor is taxed as if the payment were made in the year in which it was earned, and a 20% non-deductible tax penalty, and interest, are added on top. There are a number of exceptions to Section 409A; most important, perhaps, is the bonus that is paid within 10 weeks after year-end.
There are also some arrangements, such as the issuance of a profits interest by a partnership, that remain outside the reach of Section 409A, at least for the moment. A profits interest granted to an executive permits the executive to share in the growth of the business that occurs after the date it is issued. The value of the business, its "capital" as of the date of issuance belongs to the current owners, and the increase in value, operating cash flow, or both, are shared by those owners and the executive.
Properly structured, the executive’s receipt of a profits interest is not currently taxable to the executive, even if the executive’s entitlement vests over time. While this arrangement is only available to businesses that are taxed as partnerships, a business that is conducted through a corporation can be restructured to create such a profits interest through a technique known as an inversion.
Develop an Executive Compensation Strategy with the Help of Our Florida and Palm Beach County Business Lawyers
For more information on how to develop your executive compensation strategy, contact the Florida and Palm Beach County business lawyers of Comiter, Singer, Baseman & Braun, either online or by calling us at 561-626-2101 or toll free at 800-226-1484. We work with clients throughout the state of Florida, including those in Palm Beach Gardens and Boca Raton.