Page 411 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 7. Short-Term Incentives 397

time. It looks a lot like a mandatory deferral of current pay, except the award is usually in
addition to current pay.
The two most likely scenarios are postacquisition and during bankruptcy. The postacqui-
sition award is to ensure the needed talent is appropriately rewarded during the transition
period before the other short-term and long-term incentives take effect. The amounts should
be dependent on the importance of the individual and the shortfall (if any) in the other incen-
tive plans. The awards should be performance adjusted if possible. Payments are in cash
and/or stock (typically restricted) either at the end of the period or after certain milestones
have been completed if the transition period is lengthy.
The second scenario is if the company is in Chapter 11 bankruptcy attempting to
restructure the business so as to enable a return to solvency. Obviously it is critical that key
people be retained during this period. Payments in cash and/or stock (typically restricted)
would be paid for working to the end of the period in addition to severance payments.
These arrangements would have to be approved by a committee of the creditors and then
a bankruptcy court before implementation. The Justice Department charged with admin-
istering bankruptcy laws is likely to challenge large payments. Additional success bonuses
are paid if the company emerges from bankruptcy, possibly dependent upon how much the
bondholders recover.

Transaction Award
A payment to executives who have successfully divested a portion of the business or integrated
an acquisition is often called a transaction award. It can be expressed as a percentage of salary or
in terms of the size of the business affected or stock price after the transaction.
The target award might be increased if divestiture is at higher-than-expected price, acqui-
sition is at lower-than-expected price and/or the deal is closed sooner than targeted.
Conversely, the award might be decreased if divestiture is at lower-than-expected price, acqui-
sition is at higher-than-expected price, and/or the closing is delayed. A formula could be
devised by setting the expected price and then determining threshold and maximum prices.
Based on the actual result, an interpolation would be made to determine payout. This could
be a pool from which payments would be made, or separate formulas could be set up for each
of the eligibles. Payment would typically be in cash, but stock awards would also be possible.

Transition Award
A transition award is generally used to retain an individual until a particular event has tran-
spired. It may take the form of an executive succession award or a transaction bonus.
Alternatively, it could be awarded to a key contributor whose presence is needed to close
a business or until a new one is formed. Typically, the amount is expressed in terms of a
portion of salary.
This award could be in combination with a transaction award that is paid upon the
closing of an acquisition or sale. In this situation, the transition award would be paid for
successful completion of key milestone events along the way. The same approach could be
applied to downsizing or business expansions.

Contest Awards. Cash or noncash payment for achieving a specific outcome within a stated
specified period of time. These are more typically found at lower levels of the organization
although executives may participate as part of a group incentive.