James V. Hughes, managing director of Steven Hall & Partners’ West Coast region, says if he weren’t a compensation consultant, he’d probably still be focused on M&A in some capacity. Part of his early work experience as a CPA led to the development of an expertise in structuring severance packages, or golden parachutes, for executives following a transaction. If paid too much, there are excise tax implications for the executive as well as non-deductibility issues for the corporation. The aim is to minimize taxation, maximize company value and keep executives motivated while aligning their pay with performance—that’s what makes the compensation advisor a trusted regular in boardrooms.
What issues are most challenging in terms of complying with the new executive compensation regulations and climate?
The biggest issue is “say on pay” and how that will affect boards’ decision making. It’s non-binding, so compensation committees technically don’t need to do anything other than perhaps reflect on the results of the voting when shaping their compensation programs. Questions include: How much should say-on-pay votes influence compensation committees who must take a holistic view of the situation? What are the demands of the market and the company? What is being asked of management in terms of performance and what is needed to attract, retain and motivate management in order to maximize shareholder value?
What executive compensation issues do you see most frequently in M&A transactions?
Often, with respect to companies being acquired, executives have employment agreements that may allow them to exit following the transaction with substantial severance payouts, immediate vesting of long-term incentives and other perquisites. One of the first questions for the buyer is: Are we trying to keep these people? If so, what plans need to be put in place to make sure they stay in the organization? Or, if we need to sever people, then the question is, how do we retain them long enough to make sure that the integration is successful? For the seller, the issues center around maximizing shareholder value. This may require downside protection for executives at risk of losing their jobs. It may also require incentives structured around execution of a successful sale.
Have you seen M&A transactions in which the compensation issues caused the transaction to fail?
Most often the deal-breakers are on the front end. Sometimes it’s a failure on the part of the sellers. They might not have put in place programs to ensure that management doesn’t feel threatened or unprotected despite knowing that their jobs may be in jeopardy should the transaction occur. There’s a natural tendency for people to behave more conservatively if they fear losing their jobs. They also may not be as aggressive in helping to sell the company or in getting the greatest value for shareholders. So often that’s a big deal breaker. The second issue is the inability of the buyer to structure programs that will be acceptable on a go-forward basis to retain current management. How, for example, do you create significant opportunity in order to retain the CEO who has accumulated millions through long-term incentives?
Do companies need separate compensation consultants in M&A transactions or can they rely on their benefits and tax counsel?
That becomes a judgment issue. The compensation consultant brings to the table a perspective that accounting, legal or benefits firms don’t necessarily bring. We tend to have a broader perspective that drives a different approach: let’s get a structure and a strategy that will help the merger succeed. We aren’t focused solely on the legality of issues, but rather on the strategy and implementation process.