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Executive Compensation Litigation

Executive Compensation Litigation Blog

Before we can talk about executive compensation litigation, we need to first explain what exactly executive compensation is. Executive compensation is significantly different from typical pay packages for salaried or hourly workers because executive pay is based on rewarding C-suite level executives for their performance. This means that if the company doesn’t perform up to expectations, the compensation is decreased.

What Does “C-Suite” Mean?

The term C-suite is used to describe the most important senior-level executives within a corporation. The name comes from the titles of these senior-level executives, which typically start with the letter C.

  • Chief executive officer
  • Chief financial officer
  • Chief operating officer
  • Chief information officer

Executive Compensation Explained

Typically, compensation packages given to executives are composed of six components:

  • Base salary
  • Performance-based annual bonus
  • Performance-based long-term incentive
  • Benefits
  • Executive perks
  • Contingent payments

Executives face some distinctive challenges when they join or leave a company to make sure their rights are protected. It is absolutely essential that you are aware of exactly what your compensation package looks like and how to maximize its value during negotiations. We will describe these components below.

Base Salary

This will typically be presented as an annual salary, though it is usually paid out once a month or every other week.

Performance-Based Annual Bonus

This incentive compensates executives for achieving the short-term business strategy of the company. There are usually several goals that must be reached and the nature of the goals varies based upon several conditions, including the business and the company strategy.

This bonus is typically paid in cash and is a percentage of the CEO’s salary. Most of these incentives include a “target” level (reached goal) and a “stretch” level (goal was significantly exceeded).

Performance-Based Long-Term Incentives

This is usually the largest part of an executive compensation package. The reason for this is to reward executives for achieving the company’s objectives to maximize shareholder value. This is typically offered in the form of stock-based compensation.

The performance period usually runs between three to five years. The executive will not be paid until the end of that period. Just like an annual bonus, there are “target” and “stretch” levels to encourage executives to achieve exceptional performance.

Benefits

Benefits programs for executives are similar to those of salaried employees. These include benefits such as Medicare, unemployment insurance, Social Security and Medicare. They may also participate in other benefits such as sick days, medical insurance, life insurance, vacation, severance pay, and holidays.

Executive Perks

Perks are compensation that are only available to executives in a company. Other salaried employees are not eligible for these. They are usually structured to show the value that the executive provides to the company.

Contingent Payments

These payments include severance packages, which are provided to the executive in case of involuntary termination–unless there is just cause. They’re usually included in agreements to encourage executives from other companies to leave their prior employer in case the agreement doesn’t work out.

Termination Issues

As mentioned, the way a company presents the termination of the executive is very important. If there is “just cause” for the termination, the executive will typically lose their rights to unvested long-term incentives and other compensation. However, if they are terminated without cause or they resign with good reason, they can typically secure severance benefits.

When it comes to executive compensation litigation, there are three bases on which plaintiffs usually bring claims against an executive or the company for::

Breach of Fiduciary Duty

The laws in most states enact specific fiduciary duties on the directors and executive officers of loyalty, good faith and care. Breaches of these laws come in a variety of ways, from failing to respond to a say-on-pay vote to making/not making certain disclosures in annual statements and awarding specific forms of equity compensation.

Wasting Corporate Assets

Most states have laws requiring that directors of a corporation engage in fair exchanges where the assets of that corporation are concerned. However, as long as the corporation received consideration in the exchange and the director acted in good faith, the directors are protected from being sued.

Unjust Enrichment

The laws in most states forbid directors from unjustly retaining benefits that cause a loss to shareholders. Considering recent compensation litigation cases, this allegation is based on compensation received through a proxy statement with insufficient disclosure.

False or Misleading Disclosure

Proxy statements containing false or misleading statements regarding material facts or omitting necessary facts are prohibited by Section 14(a) of the Exchange Act and SEC rule 14A-9. many states have laws providing an equivalent cause of action through the fiduciary duties of the directors.

Often, the first three claims are brought under the law over the state in which the company is incorporated. A disclosure-based claim can be brought under the law of the state or federal securities laws.

Final Thoughts

As you can see, executive compensation litigation can get quite complicated. This is why you need an attorney to represent you. We are here to help you make sure that you get the compensation you deserve.

Our firm offers in-person and virtual consults, if you have any questions or concerns about the topic of this Article or any corporate, commercial, employment or family law issue, please feel free to call our office at 305-460-0145 or to schedule a consult here.

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