United States: Executive Compensation Trends And Issues: A Q&A With Marissa J. Holob

Marissa Holob is chair of the firm’s Executive Compensation and Employee Benefits practice. She advises clients on a wide range of executive compensation and employee benefits issues, including those that arise in the context of mergers and acquisitions, restructurings, and similar transactions.

Q: How should buyers approach their due diligence, and what key factors should they look for when reviewing the compensation arrangements of a target company?

A: The diligence process is always an important first step in any transaction. On the compensation side, it not only helps identify potential issues and liabilities but also gives insight into the culture of the target company and the types (and amount) of compensation that executives and employees have historically received.

Diligence review of compensation arrangements will typically focus on individual employment agreements, severance plans, equity ownership by management, and other short- and long-term incentive arrangements. It is especially important to determine whether the proposed transaction will trigger any payments or springing rights under any compensation arrangements and the potential costs involved, as well as to identify any compliance issues. For example, a potential buyer will need to confirm that all compensation arrangements comply with, or are exempt from, some of the more difficult rules governing nonqualified deferred compensation arrangements (Sections 409A and 457A of the Internal Revenue Code), in order to avoid any surprise taxes for employees or surprise liabilities for the acquiror. In addition, a buyer will want to make sure that the management team continues to be aligned with the ongoing company post-transaction. This is one reason it is very common for management employees of portfolio companies of private equity funds to be required to either roll over a portion of their equity or invest post-close.

Q: Is there any potential tax rule in particular that can be triggered by a merger or acquisition?

A: While there are many areas of compensation arrangements that need to be addressed, Sections 280G and 4999 of the Internal Revenue Code, often referred to as the golden parachute rules, should always be considered in a transaction context. By way of background, Section 4999 imposes a 20 percent excise tax on excess parachute payments, and Section 280G denies a tax deduction for excess parachute payments. The golden parachute penalties apply if a “disqualified individual” receives payments in connection with a change in control that are equal to or exceed three times the individual’s base amount (five-year average annual compensation). If the aggregate present value of such payments equals or exceeds three times the individual’s base amount, then the individual is subject to a 20 percent excise tax on all parachute payments in excess of one times the individual’s base amount and the company is denied a deduction for those amounts.

The 280G rules apply to “corporations.” This means that they generally do not apply to payments made by a partnership or limited liability company (that has not elected to be taxed as a corporation), even if those payments are contingent upon a change in control. However, it is important to consider whether all the entities under common ownership are partnerships (or LLCs) or whether some of those entities are corporations. If the group of entities under common ownership is comprised of both partnerships and corporations, further analysis is needed to determine whether these rules are implicated. Factors to be considered are the entity employing the disqualified individuals, the entities that the individuals perform services for and the entity that is the payor of the change in control payments.

In addition, for non-public companies, an exemption from the parachute rules exists if the shareholder approval requirements are met.  Not only must the company receive the necessary percentage of shareholders to approve the payments to meet the shareholder approval exception, there are several other requirements to satisfy, including the fact that the vote must be determinative of the individual’s right to receive or retain the payments, and adequate disclosure of all material facts regarding the potential parachute payments must be provided to shareholders. This requires careful planning to make sure that everything is completed prior to the change in control.

Q: Is compensation part of deal planning as well? How should a buyer approach the structure of future compensation and incentives in order to maximize their effectiveness and cost efficiency?

A: Typically, in the private equity context, as I mentioned before, buyers will both have key management employees roll over equity and enter into new incentive arrangements with those individuals. This allows the executive team to be personally invested in the company and be aligned with the equity owners. It also allows for forward planning with the incentive structures.

There are several driving forces behind compensation decisions:  tax implications, securities laws, retention of key executives, competitive compensation package and exit strategies/performance. In addition, a purchaser will want to be aware of the market for the targeted industry in order to be competitive in terms of total target compensation. Compensation arrangements, especially for key individuals, should also address what occurs when those individuals leave under different circumstances.

For example, typically, senior level executives have protection in the event of a termination of employment without cause or a resignation for good reason, which can include severance benefits and/or certain accelerated vesting of equity awards. Conversely, the purchaser will want to make sure it has appropriate protections in place, such as certain restrictive covenant agreements, which may include non-competes, non-solicits and confidentiality provisions.

I do not believe in a one-size-fits-all approach to compensation arrangements. Best practice is to structure executive compensation arrangements to properly align and incentivize employees with the goals of the company and its shareholders (while being tax-efficient).

Q: Are there any trends in the types of compensation arrangements at private equity portfolio companies?

A: While upside-only awards, such as stock options and profits interests, continue to be popular incentive vehicles at private equity-backed portfolio companies and sponsors continue to require a large portion, if not all, of any equity or equity-based grant to be subject to performance-based vesting triggers (such as achievement of return goals, often measured by IRR or MOIC or both), compensation arrangements at these entities is an area where we see significant innovation and are able to help design creative compensation programs that meet the specific goals of the company and its sponsors. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions