Many corporations provide their officers and executives with special compensation packages in addition to their normal salaries. These include stock options, restricted stock units and convertible bonds, all of which are governed by agreements. Deutsch Atkins & Kleinfeldt, P.C. understands these sometimes intricate arrangements and we regularly assist in negotiating and/or reviewing compensation agreements to make sure our clients’ interests are protected. We also represent employees in dispute resolution or litigation when employers fall short of fulfilling their obligations.
An employee stock option (ESO) grants an employee the right to buy a certain amount of the corporation’s shares at a predetermined price during a specific period in the future. The employee has the right to obtain the shares, either as a gift or by purchasing them, once he or she has worked at the company for a certain period of time or has satisfied a performance requirement. When that happens, the ESO becomes vested, allowing the employee to exercise the option at the grant price at any time until the option’s expiration date. The idea behind ESOs is to align employees’ incentives with those of the shareholders.
Restricted stock units (RSUs) became popular in the wake of accounting scandals involving companies like Enron and WorldCom that erupted in the mid-2000s. An RSU involves a promise by an employer to grant restricted stock at a specified time in the future, once the employee works at the firm for a certain number of years or meets a performance requirement. Upon vesting, the RSUs are assigned a fair market value and are treated as taxable income. If the value of the stock has risen, the employee must report the increased value as a capital gain. RSUs have the twin advantages of delaying the recognition of taxable income to the employee while maintaining the advantageous accounting treatment for the corporation. Unlike stock options, which must be recognized as expenses to the company immediately when issued, RSUs stay on the company’s books until they vest.
Another method of future compensation is deferred equity. This usually takes the form of a convertible bond issued to an employee that that can be exchanged for shares of common stock when the bond reaches maturity or when the stock value reaches a certain level. A convertible bond states a ratio that determines how many shares the holder will receive based on the bond’s face value. The bond usually includes a call provision allowing the company to repurchase the bond upon specified triggering events. Over the lifetime of the bond, the holder receives interest payments based on the bond’s face value. Upon redemption, the bond holder has the choice of receiving common stock or selling the shares for cash.
When you join a corporate team that offers any of type of deferred compensation, it’s important to have a legal adviser who can analyze the prospective economic advantages and detriments. Deutsch Atkins & Kleinfeldt, P.C. represents New Jersey workers in negotiating and reviewing deferred compensation plans and in enforcing employer compliance through dispute resolution and litigation. Please call 551-245-8894 or contact us online to schedule a confidential phone call or in-house conference at our office in Hackensack, New Jersey with one of our attorneys.