6 Important Issues, Corporate Spin Off: Part 2 - Equity Compensation

September 15, 2017

Welcome to the second part of the Spurstone Executive Wealth Solutions 6 part series discussing executive compensation negotiations and benefit considerations during a corporate spin off. Through this series we will be covering topics to help you get a solid understanding of how your risks could increase or decrease, where you may become more "handcuffed" and major issues to understand and evaluate.

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Part 2 - Equity Compensation

As an executive of a publicly traded company, your equity compensation is likely to be the biggest and most volatile component of your compensation package. As such, this should be evaluated, negotiated and managed to your unique needs.

When going through a spin off, you are hopefully already familiar with the equity compensation structure of your current, soon to be previous, employer. The first thing to recognize is the fact that the types of stock compensation offered may change with the new spinco. This is the first of many reasons why it is important to ensure you have an experienced team of talent around you to educate and advise on the mechanics of each equity award type.

If the parent company is a large multinational corporation, it is possible they currently provide your equity compensation in multiple forms. This could be in the form of the two most common stock compensations of Non-Qualified Stock Options (NQO) and Restricted Stock (RSA/RSU), as well as any of the other popular but less often used styles of Incentive Stock Options (ISO), Performance Share Units (PSU), Stock Appreciation Rights (SAR) and more. Each of these types of compensation have different complexities and reporting requirements, leading to an increase of provider cost as layers are added. It is not unusual for a Spinco to streamline the equity compensation package in order to increase efficiency and reduce administration costs as well.

Once you establish which new compensation vehicles are available, there are a few additional items of consideration that are important in structuring your total package. First, understand that the new spinco will have different risk characteristics and stock price volatility than the parent company. This may create a substantially different return experience and have a dynamic impact to your long term wealth.

Second, it is important for you to determine if you will be a director, officer or other restricted individual for trading in the new spinco stock. While you may not currently be in these categories at the parent company, that status may change with your new employer. If in fact you become subject to these additional restrictions, which are too lengthy to address in this post today, you should speak with the spinco legal team as well as your own personal advisors to help ensure you understand and abide by these new rules. These new rules will restrict how and when you can trade in your employer stock and if violated may have extremely severe consequences including loss of employment or legal implications. This change in liquidity may also encourage you to consider liquidating positions prior to the change but be sure you discuss these sales with counsel prior to sale to be sure you are proceeding appropriately.

Each of these items above show the importance of having a solid understanding of your current and proposed benefits in order to help you effectively negotiate a compensation package that works best for your needs. Combining these issues along with the others discussed in this blog series should aide in your process and strength.

Check back next week for part three in which we will be discussing deferred compensation, how it may change and how your new employer’s financial strength could impact your risk.

If you would like to privately discuss your personal executive compensation planning, including ways to potentially reduce risk or mitigate taxes, contact our team today.


Tim Golas
Spurstone Executive Wealth Solutions