9 posts categorized "Exec Comp"

"Good Reason" in Sheryl Sandberg's Employment Agreement with Facebook

I've taken a very brief spin of Facebook COO Sheryl Sandberg's employment agreement, now on file with the SEC as part of Facebook's S-1 registration statement.

5547636055_8fceabd7b4Others are reporting and analyzing the financial stake that Sandberg and other employees have in the company. I was looking for more pedestrian, mechanical provisions that would "stand out" by not being where expected, or variations on boilerplate that might be innovative.

One tension growing companies often have to resolve, in employment agreements with key executives that merit and/or demand written contracts, is how to permit the company the flexibility it needs to change roles and reporting structures, while giving the executive assurances as to her authority that she will request.

Sandberg's contract is not especially innovative on the flexibility/authority tension, but it does express the considerations in equipoise, in an elegant way:

"You understand and agree that the Company is a rapidly growing and changing organization and the precise nature of the work you do for the Company as COO may be adjusted from time to time but, in any event, your duties and responsibilities always will be at least commensurate with those duties and responsibilities normally associated with and appropriate for someone in the position of COO."

Notice also that the word "authority" is not used. Instead, the scope of Sandberg's job is expressed in terms of "duties and responsibilities." There's an implicit authority in there somewhere, no question; but the Company-leaning emphasis (what Sandberg owes Facebook, as its COO) is smart.

This assurance to Sandberg has teeth by virtue of a "good reason" provision in her contract. As you probably know, "good reason" is typically a defined term in exec employment agreements, setting out those circumstances under which the employee can go ahead and quit, without sacrificing her entitlement to severance, acceleration, or other benefits that should follow in the event that the company terminates her employment without cause. (Here's a post from last year that speaks to "good reason" definitions in general.)

Here are the "good reason" factors in Sandberg's agreement (provisos and conditions omitted for the sake of conceptual clarity):

"(A) a material diminution in your base salary; (B) a material change in geographic location at which you must perform services (a change in location of your office will be considered material only if it increases your current one-way commute by more than fifty (50) miles); (C) any material failure of the successors to the Company after a Change of Control to perform or cause the Company to perform the obligations of the Company under this Agreement; (D) any action or inaction of the Company that constitutes a material breach of the terms of this Agreement; or (E) any other material adverse change in your duties, authorities or responsibilities as specified in Section l(a), above . . ."

Notice that in the verbiage above, the word "authority" is finally countenanced.

Minor point, but the Sandberg contract does not actually use the term "good reason." Instead, the list above is part of the defined term, "Involuntary Termination."

More interesting point: Sandberg's contract appears to be one of only two of the five exec employment agreements/letters filed that has a good reason clause. The other is the company's employment agreement with Theodore Ullyot, its general counsel. The other three, including Mark Zuckerberg, have shorter form "employment letters" that are far more streamlined.

The exec agreements were filed Wednesday as an amendment to Facebook's S-1 filing of last week. Other amendments will follow as Facebook receives and responds to comments from SEC staff on disclosure and accounting issues. This initial amendment, however, was solely for the purpose of filing exhibits, including the Sandberg and other exec agreements.

Photo: Sarah Page/Flickr.

Severance Pay in Washington State

Dan Rosen announced on his blog last week that he has changed his model term sheet, for use in seed stage angel financings, to prohibit employee severance agreements.

Dan's worried about a feature of Washington State law that permits employees to reach around the corporate firewall and hold individual board members liable for unpaid wages. And severance counts, in Washington, as wages.

Dan doesn't get into this in his post, but the principal statute used in Washington to pursue these kinds of claims may also provide for DOUBLE the wages owed PLUS attorneys fees. These are attractive cases for plaintiffs lawyers to bring. In my experience, such cases almost always settle on terms that are very favorable to the employee.

I think it's atypical for a seed stage company to have employment agreements, let alone employment agreements with significant severance obligations. Usually, severance first comes into the picture when the company recruits a chief executive or other key officer from outside the group of original founders. And quite often, those individuals are savvy enough to insist on some kind of cushion at exit, if only to give them a decent stretch of time to find another job in the event they are fired.

I think modest severance arrangements are often a fair price to pay to pull in a key officer from the outside at a critical time in an emerging company's growth. But Dan's right about the upshot; a board has to take a severance obligation to an exec as seriously as it does wages owed to any other employee. These severance obligations should certainly be factored in to the estimated "cost" of shutting a company down.


"Mural in UE Hall, 37 S. Ashland (built 1905). Mural depicts the history of the United Electrical Workers union, which was founded in 1936. Painted 1974 by John Pitman Weber." Photo by Eric Allix Rogers / Creative Commons.

Income Inequality & SEC Disclosure

The NYTimes "Room for Debate" series put up an unusual set of posts yesterday, on the topic of the growing concentration of American wealth in fewer and fewer hands.

800px-United_States_Income_Distribution_1947-2007.svgUnusual, because the half-dozen or so correspondents in the forum seem to agree that the trend toward inequality is not a big deal.

This made me think of the news last week about a bill in Congress, sponsored by Rep. Nan Hayworth of New York.

Rep. Hayworth's bill seeks repeal of a provision in Dodd-Frank that would (after requisite SEC rulemaking, not yet started) require companies to disclose the ratio of "the median of the annual total compensation of all employees of the issuer, except the chief executive officer," to "the annual total compensation of the chief executive officer (or any equivalent position) of the issuer." In other words, Dodd-Frank wants to raise consciousness about income inequality, company by company.

I still think it borders on the surreal that the main argument for Rep. Hayworth's bill seems to be that we can't reasonably expect public companies to know what they pay their employees (God forbid anyone look at the W-2s that get filed!). But I won't go there.

I won't go there because, when checking the precise reference in Rep. Hayworth's bill to Dodd-Frank, I found, to my surprise, that her bill does not attempt to repeal the following provision of Dodd-Frank:

"The Commission shall, by rule, require each issuer to disclose in any proxy or consent solicitation material for an annual meeting of the shareholders of the issuer a clear description of any compensation required to be disclosed . . . including information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions."

That is to say, Rep. Hayworth seems to think its okay to try to relate pay to performance, to stick those ratios in the eye of Wall Street, even if it is unsporting, or uncouth, or un-whatever, to foment class resentment which, if the NYTimes is right, isn't in the spirit of today anyway.

Graph by Alan De Smet.

You Can't Fire Me, I Quit for Good Reason

A 2006 law review article entitled "An Empirical Analysis of CEO Employment Contracts: What Do Top Executives Bargain For?" has some interesting data about the prevalence of different provisions in CEO employment agreements.

The article was written by Stuart Schwab (the current Dean of my law school) and Randall Thomas. It was published by Washington & Lee Law Review. The data analyzed was from 375 employment contracts of public company CEOs, but I think that some of the patterns enumerated "ring true" for private, emerging companies. (Disclaimer: some of the published data can't correlate with private company behavior, as it describes some activity that can only occur in public companies; other data, such as length of post-termination noncompete obligations, don't quite track early stage company norms.)

The article is full of charts. Here are two, reformatted, listing the prevalence of factors for, respectively, "for cause" termination by the company, and "good reason" resignation by the CEO. ("Good reason" is significant because it defines circumstances under which a CEO may quit and still be entitled to severance and other benefits that he or she would typically get where he or she fired without cause. "Good reason" is sometimes thought to define circumstances that the parties will recognize as "constructive termination.")

 As the authors recognize, the "for cause" definition is typically agreed to with little difficulty. By contrast, the "good reason" definition is heavily negotiated and customized. It would have been great to have seen a further breakdown of the "other" category in the "good reason" chart!

By the way, the authors' study found that, when the CEO is terminated without cause, two years severance is the most common. No severance is typical if the CEO is fired with cause, although "cause" is very rarely invoked.

Curious Phrasing: President's Proposed Bank Tax to Apply to "Covered Liabilities"

I don't completely understand how the Financial Crisis Responsibility Fee proposed by President Obama would work, if implemented. But I wonder if a phrase used to describe how it will be implemented -- the phrase, "covered liabilities" -- might radiate with an unwitting acknowledgment.

Here's an image downloaded from the US Treasury website, provided as an example of how the new tax might work:

News Why would one call the net amount to be subject to the tax the "covered liabilities?" Is it because, in the policy-making back rooms of the Treasury, there emerged an intellectual rationale for a fee that would in effect be a kind of insurance premium, to cover the risk of the government's exposure to bank liabilities that are not already insured by the FDIC? Note that the tax is not to be imposed on amounts already assessed by the FDIC for insured deposits (this is indicated in example at the line, "minus $500 billion in Assessed Deposits"). 

I get that the public-facing, political rationale for the tax is to "get our money back," and perhaps speed up the previously-set TARP repayment schedule. To the immediate industry reaction that this tax will burden bank customers and shareholders, the President was quoted as telling the banks,"I'd urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives."

But I wonder if the phrase "covered liabilities" signifies something besides the exposure of these amounts to tax. Might the proposal be rooted in an acknowledgment, within the policy-making bowels of government, that some institutions are still yet "too big to fail," that the government is still exposed to the risk of additional bailouts?

If Talented US Bankers Head for the UK, They May Find They Have to Keep Moving

I’m posting this from an Internet café in Balham, which is on the Northern Line of the London Underground, ten stops south of the Bank station in London’s financial center. 

I read an item from the weekend’s Manchester Guaradian, written by Martin Farrer, the pertinent bit (for me) coming as follows:

A senior Bank of England official has claimed that bankers moving overseas to avoid the bonus super tax could be a "price worth paying" to achieve lasting reform of the sector.

Andy Haldane, head of financial stability, also said that banks have become too big and was sharply critical of the culture where bankers could take huge risks in the knowledge that the taxpayer would bail them out. . . . 

His comments underlined the gulf between Threadneedle Street and the City over how to deal with the fallout from the financial crisis. The Bank's financial stability report, published yesterday, stepped into the row over bonuses by calling for banks to build up their capital rather than make large payments to staff as many are expected to do.
This mirrors the same controversy, and threat, in the US, where all year Wall Street execs. have been responding to exhortations by President Obama and other politicians to clamp down on Wall Street pay by predicting/threatening that banking talent will respond by leaving Wall Street for firms overseas. 

I’m wondering where the talented bankers are all now headed. Asia? 

It could be the European continent, but then again an official from Deutsche Bank was quoted in the same Guardian article to say that it would not be fair to their UK-stationed bankers to let the UK tax fall just on them; Deutsche Bank intends to spread the impact of the tax around the firm globally. Might that not be the global industry’s response, unless and except as they find they can quit a geographic market altogether? Add up the employment taxes imposed by the US, the UK, perhaps other governments, figure out what profits are available for bonuses firm-wide, then adjust the bonuses by region accordingly with an eye toward the after-tax consequences for bankers in each market? 

Making money by moving money has been around since the 19th Century and I’m not sure that industry will ever go away (though in the US I gather Philadelphia and other cities were more vital financial centers before the function was ceded altogether to New York). 

The other thought that is resonating as I think about this subject is what Senator Mark Warner said a month or so back, at a hearing of the Senate Banking Committee:

"I think one of the things we need to recognize is that, you know, over the last few years, banking and investment banking have been the place to be, as year after year we've seen banks record record profits. But I think that we've seen that many of those gains were really based upon black magic. And that the magic of the marketplace has turned into a nightmare for an awful lot of families and businesses and in many ways for the country. To a degree, it's time to make banking a little bit more boring again. . . ."

The VC Carry as an Executive Compensation Model for Wall Street

In the course of a talk yesterday at Reed College, J. Bradford DeLong, UC Berkeley economist and blogger extraordinaire, made (what I took to be complimentary, if incidental) references to two practices of venture capital financiers: their avoidance of leverage; and their method of compensating themselves.


DeLong's talk, "Financial Crisis & the Macroeconomy, 1825-Present," surveyed common patterns of financial panics caused by bankers over the last couple hundred years, together with the responses of governments and central banks. A common denominator of such meltdowns is an excessive use of leverage. Thus it is, explained DeLong, that although four times as many dollars were lost in the dot com crash at the beginning of this century than have been lost in bad mortgages in the current sub-prime crisis, we did not fear the onset of a depression then as we do now. The difference is that the dollars lost then were not borrowed, and so the losses stopped with those who had invested in tech companies and the funds that invested in tech companies.

As for prescriptions to better align executive compensation on Wall Street with prudent risk-taking, DeLong suggested that Wall Street use the model of venture capitalists from Silicon Valley: put the compensation in the form of a carried interest, that only pays out if the company does well for its other stakeholders over a longer time horizon. This model, DeLong seemed delighted to state twice in his talk, would turn all ambitious 35 year old investment bankers into their firms' best risk managers.

How long is "long term" enough? Initially, DeLong seemed to say yesterday that executives' compensation should be tied to the fates of their companies over a 15 to 20 year time frame; this may be his best judgment for policy, even if it varies from the time frame that his venture capital industry analogy would suggest. Later in the talk, though, I thought I heard DeLong say 10 (or 10-plus) years was an appropriate period of measure.

Contrast this with the approach of the Treasury Department's special master for executive compensation, Ken Feinberg, who according to Time is looking to get executives of bailed-out financial firms to think three or four years down the road:

In the end, he made more changes to the way executives get paid than to how much. . . . Gone are year-end payouts and AIG-style guaranteed retention awards. Instead, he devised . . . something he calls salary stock. Each pay period, the executives at Bank of America, GM and the other firms will get awards of stock along with their regular paychecks. The checks can be cashed immediately, but the executives may not sell the stock for up to four years. Also, bonuses are paid in restricted stock, which must be held for at least three years and may be sold only after the firm has repaid what it owes taxpayers. The result is that in most cases, much of what the executives will get paid — in some instances, nearly 95% — will be in long-term stock grants.

If fifteen to 20 years seems too long, three to four years doesn't seem quite long enough. Then again, four years is a tried and true vesting period under employee stock option plans.

[Although not my subject here, I should point out that DeLong's talk had a sober thesis about the prospects for (non-executive) employment generally: although we are "almost surely" not going to be facing another Great Depression, or even a Japanese-style "lost decade," we have seen the "employment to population ratio" enter a free fall, and, according to DeLong, the US economy is unlikely to rebalance to historical employment rates for years to come.]

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