Page 40 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

26 The Complete Guide to Executive Compensation

competencies. This divestiture is either done through a sale to another company or a
spin-off to the company shareholders.
More acquisitions and mergers fail than succeed because of incomplete analysis, inade-
quate preparation, and poor execution.
Joint Ventures and Alliances
A joint venture is when two companies form a third, either with each owning half or with one
having a majority stake. An alliance is a formal agreement between companies on respective
responsibility without forming a new company.
When two companies have different complementary strengths (e.g., one has a strong
research portfolio and the other manufacturing capabilities), it may be appropriate to set up
a joint venture, or JV. The new organization is staffed with individuals from both organiza-
tions and one of the requirements will be to set up an executive compensation program.
Coming to an agreement may be difficult, especially if the partners have equal votes and dif-
ferent views. Another problem to be addressed is what happens to the pay plans when the JV
is dissolved (as most eventually are). Exit strategies should be agreed upon at time of forma-
tion, not at time of dissolution.
An alliance is a contractual agreement specifying responsibilities over a period of time
without forming a new company. They are formed to either increase revenue or to reduce
costs, or both. For example, a company recognized for its marketing excellence might be
approached by another with a new product that is reluctant to take the time and expense to
expand its own sales force. Assuming the marketing leader has the available resources and the
commission arrangement is attractive, a comarketing alliance will be formed. Similarly, a
company may choose to form an alliance with a research organization rather than expand its
own research capabilities. In return for the investment, the investor will have rights of first
refusal on marketing any discoveries through an agreed-upon royalty arrangement.
Alliances are far less costly than acquisitions or mergers and can be just as successful (if
not more so) in many situations. Since the organizational structure of each company has not
been altered, there is little effect on the executive pay plans. Nonetheless, alliances must be
continually reviewed to ensure they are appropriate and properly aligned with organization-
al needs. Most important, exit strategies identifying when and how companies will end the
relationship (before they commit to the deal) are essential. For example, the return of trade-
marks to the parent organization in a JV is critical; otherwise, a third party may end up using
them.

Divestitures (Sales and Spin-offs)
The divestiture sale of one company is the acquisition of another. The sale may range from
brand names only to full businesses (including plants, buildings, and people). A divesting
company has an obligation to protect its employees transferring to a new owner. The sale
may be for cash or stock or both.
In a spin-off, the divested business is given (not sold) to existing shareholders. This is
done by creating a new stock. If the transaction is carefully done, it should be able to quali-
fy as a tax-free exchange, meaning the shareholder has no income tax liability. It is hoped
that the sum of the two stock prices will exceed that of the original company. If that does not
happen, some companies do a spin-in, simply reversing the action.
With a spin-off, care must be taken in crediting or protecting existing pay programs
while designing a new pay program for the spin-off, based on a newly defined survey peer