Executive Compensation, Employee Benefits and Taxation

We assist in connection with the design and drafting of employment and/or change in control agreements with executives and senior management.  These agreements define the rights and obligations of the parties in the event of termination of employment or if the employer engages in a merger transaction or other change in control event.  In today’s environment, the preparation of these agreements is subject to numerous tax and regulatory considerations and requires special expertise to avoid potential pitfalls.

We often work with financial institutions by preparing and negotiating separation and release agreements in the event an employment relationship ends and/or assist employers and executives in structuring consulting agreements.  Often this need arises for former executives who continue temporarily as independent contractors following retirement or a strategic combination with another financial institution.  Occasionally, these agreements are necessary to facilitate the departure of an executive.  The preparation of these agreements requires an in-depth understanding of bank regulatory and tax statutes that could create unintended consequences for each of the executive and the financial institution if not properly structured.

With regulatory and shareholder scrutiny of corporate performance and “best practice” governance models, long term equity and non-equity plans are often viewed as instrumental components of successful compensation programs.  Our attorneys have the experience and expertise to assist in the design of these programs to meet complex rules under the Internal Revenue Code and other applicable laws, including those of federal and state bank regulators.  In addition, we provide counsel, often in conjunction with a company’s compensation consultant, to help ensure that an equity or non-equity plan submitted to shareholders for approval has the specific features, where necessary, to obtain a positive vote recommendation from institutional shareholder proxy advisory firms such as ISS or Glass Lewis.

A key component to initial public offerings for many financial institutions is the establishment of an employee stock ownership plan that acquires employer stock in the offering and then allocates those shares over a period of years to the public company’s employees.  Our attorneys have helped to design and develop hundreds of these plans for community banks, including one initially established with over $100 million in employer stock.  As tax-qualified plans, these plans are subject to significant regulation under ERISA and scrutiny by the Internal Revenue Service and Department of Labor, as well as, for financial institution employee stock ownership plans, review by federal and state banking agencies, including the Federal Reserve Board.  In addition, we work with other tax-qualified plans, including 401(k) plans and, to a lesser extent, defined benefit plans.  We assist our clients with the maze of complex rules and regulations to which these plans are subject and often represent our clients in discussions with the Internal Revenue Service, the Department of Labor and other regulatory agencies as issues may arise.

Employers frequently implement supplemental executive retirement plans and other non-qualified deferred compensation arrangements to provide retirement compensation to executives at levels that cannot be achieved through broad-based tax-qualified plans alone.  In some cases, a financial institution may also seek to provide additional retirement benefits to their non-employee directors.  These arrangements may take the form of employer-funded supplemental executive retirement plans, excess benefit plans, employee elective deferral plans that may have a matching contribution component similar to a tax-qualified 401(k) plan, phantom stock plans and/or director retirement plans.  However, following the enactment of Section 409A of the Internal Revenue Code in 2004, the preparation and operation of these programs are highly regulated and the failure to properly draft and operate the plans can result in significant penalties to plan participants.  Our attorneys have spent countless hours working with these issues and mastering the requirements of the tax laws in order to assist our clients with avoiding potential pitfalls so that the intended results are achieved.

As one of the preeminent financial institution law firms in representing clients in merger and acquisition transactions, our compensation and tax attorneys have represented hundreds of financial institutions and executives in planning to avoid or reduce the impact of the golden parachute rules of Section 280G of the Internal Revenue Code, thereby alleviating in many cases the significant excise taxes that executives would face and avoiding the loss of corporate tax deductions.  Our goal is to begin working with clients who may anticipate a possible sale of control well before negotiations for a sale transaction occur, which is the optimal time when such planning can achieve the best results.  In these situations, we will prepare a preliminary analysis under Section 280G, making certain assumptions regarding stock price and future compensation in order to determine the extent of any potential excess parachute payments.  We have often been able to help clients make simple adjustments to the structure of their benefit arrangements that enable executives to avoid golden parachute excise taxes or a reduction of benefits under compensation plans.  Even in those situations where early planning does not occur, we often work with executives and employers to implement non-compete and/or consulting agreements that protect, to the maximum extent possible, the benefit expectations of corporations and the executives they seek to compensate.  On the other side of merger transactions, we work with acquirors early in the process to ensure they understand the design of the target bank’s compensation arrangements and the impact of Section 280G on those arrangements.