Illinois ERISA Lawyer Blog

Executives in Chicago and the Midwest, especially working for small to mid-size employers, often negotiate into their employment agreements some form of deferred compensation and/or severance compensation. Until the relationship between executive and employer sours, the parties only think about the tax considerations of executive compensation. But when there is a dispute between employer and executive, and the executive must take measures to enforce the agreement, the question becomes whether the compensation is covered by ERISA or not. Results are mixed, and always turn on a fact specific inquiry. Consequently, there are no hard and fast rules.

One such executive recently filed a complaint in state court and faced a motion to remove to Federal court under ERISA by his former employer. See Hoffner v. Bank of Choice Holding Co., No. 11-266 (D. Colo. June 21, 2011). In that case, the bank entered into an "Executive Salary Continuation Agreement" with Mr. Hoffner, whereby the bank would pay Hoffner $50,000 for ten years upon retirement and reaching age 65. But if Hoffner voluntarily terminated his employment prior to reaching age 65, he would receive the balance of an accrued liability account--an unfunded account maintained on the bank's books recording a liability to pay Hoffner's post-retirement compensation. But nothing in the record suggested how the bank accrued the liability, whether on a straight line method or otherwise. The agreement only provided that the bank would place "appropriate reserves" in the accrued liability account.

The court ultimately held the parties' deferred compensation agreement did not meet the definition of an ERISA-governed plan. The court applied the element test of the seminal case, Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982). The court held the intended benefits were not reasonably ascertainable, there was not a reasonably ascertainable class of beneficiaries, and there was not a sufficient ongoing administrative scheme (see Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)). The court rejected the bank's argument that only the kind of benefits should be reasonably ascertainable, rather than the amount. Also, nothing suggested these benefits were provided to a class of beneficiaries--they were only provided to this one employee. Note, however, that other courts have held there could be a "class of one." Finally, without illuminating its rationale, the court held this agreement did not provide benefits "whose provision by nature requires an ongoing administrative program to meet the employer's obligation." Siemon v. AT&T Corp., 117 F.3d 1173, 1178 (10th Cir. 1997).

If you have questions about how to enforce provisions of your executive employment agreement or benefit plan, contact a skilled ERISA lawyer.

Executives in Chicago may be puzzled to begin seeing vague references to new compensation clawback policies in their executive employment agreements. Section 954 of the Dodd-Frank Wall Street Reform Act requires, as a condition of the employer's securities being listed on a national securities exchange or association (such as NYSE, NASDAQ, etc.), if the employer must restate any financial statements because of "material noncompliance" with the securities laws, then the issuer will recoup from any current or former executive officer during the 3 years preceding the date the employer had to restate those financial statements all amounts paid in incentive based compensation that exceeds what would have been paid under the restated financials.

Executive Compensation lawyers who advise employers mostly agree the executive employment agreements need to mention the clawback policy. However, the employers' lawyers advise to avoid being specific about the terms of the clawback policy in the employment agreement because as the Securities Exchange Commission issues regulations under Dodd-Frank, those policies will likely be amended or updated.

As the executive, however, you want to know what is in that clawback policy. You also want your agreement to delineate whether you are one of the executives to whom Dodd-Frank will apply. Though the SEC has not yet issued regulations defining the term, most believe the definition will either mirror or closely resemble that found in Rule 3b-7, which includes the President, VP of any operating division, or anybody else with similar policy making authority.

If you are an executive of a publicly held company and have questions about the Dodd-Frank Wall Street Reform Act or about your employment agreement, call an Executive Compensation lawyer.

With another Chicago summer approaching, good news is in store for its financial executives. Like the outlook of warmer weather ahead, executives' compensation is "warming up," evidenced by fewer salary freezes and more pay increases compared to the past few years.

The Financial Executive Compensation Survey's collection of data recently gathered recognizes an overall improvement in both companies' and executives' individual economic outlooks. In conducting the survey, Thomas Thompson, Jr., of the Federal Executives Research Foundation consulted with more than 1000 corporate executives - with about half of the executives being Chief Financial Officers - who chose to participate in the survey. The survey, released on May 19th, noted a .9% increase in base salary increases in both private and public companies, moving from 2.1% in 2010 to 3% in 2011.

Although private companies boasted an average $2,000 increase in base salary (moving from $204,800 to $206,800) over the past two years, public companies actually witnessed an average base salary decrease of $7,600 ($285,000 in 2010 to $277,400 in 2011) and an overall compensation decrease from $680,407 to $673,831. Thompson, Jr., noted that the decline with public companies was not significant in comparison with the positive economic outlook and may simply reflect the difference in executives participating in the survey from last year to this present year.

Another interesting area of data gathered by the survey involves the participation in both defined contribution and defined benefit plans. Although nearly 69% of executives did not participate in defined benefit plans - one common reason for not participating being the simple fact that such a plan was not offered - nearly 75% of surveyed executives participated in a defined contribution retirement plan with a matching employer contribution of 4%.

It is a great time to be renegotiating your executive compensation package. If you need advice or assistance regarding executive compensation, call an attorney knowledgeable in employee benefits and executive compensation.

Executives in Chicago and the Midwest may be excited to hear about all the General Motors executives suing to recover executive retirement plan benefits from a previously bankrupt employer. Often, when executives have such retirement plans, commonly referred to as SERPs (or "top hats"), the participants can expect to receive little or nothing if the employer becomes insolvent. That is because ERISA § 201(2) top hat plans are exempt from ERISA's funding, vesting, and fiduciary responsibility protections, though are still enforceable as ERISA plans. The General Motors that emerged from bankruptcy assumed much of the pre-bankrupt retirement plan obligations, but the credit agreement with the United States Treasury required that certain obligations, including pension obligations, be reduced.

Like most executives and managers who have such non-qualified deferred compensation or excess benefit plans (ERISA § 3(36)), the GM executives appear to also have been participants in qualified retirement plans at GM, a defined benefit pension plan and a defined contribution stock bonus plan. On Monday, approximately 112 former executives (or their beneficiaries or alternate payees pursuant to a Qualified Domestic Relations Order) sued GM under ERISA § 502(a)(1)(B) claiming a denial of benefits due. The dispute between the executives and GM appears to be over interpretation of a provision in the plan which allows for reducing the SERP benefits by two thirds if benefits exceed $100,000 per year on a single life annuity basis.

The retirees argue that the reduction only applies if he benefits of the SERP exceed $100,000 per year. Meanwhile, GM argues the SERP benefits are reduced when benefits under the qualified retirement plan and the SERP combined exceed $100,000 per year. The language over which the parties dicker states: "for executive retirees who have a combined tax-qualified SRP plus non-qualified benefit under this Plan in excess of $100,000 per annum on a life annuity basis, the amount of benefits under this Plan over the combined $100,000 per annum threshold shall be reduced by 2/3rds." This phrase is certainly open to more than one interpretation, though the question will be whether the administrator's interpretation was reasonable. Also, the use of "combined" just before the second reference to $100,000 appears to present a hurdle to the retirees they did not appear to argue how they clear in any of the internal appeals.

The retirees' interpretation of the plan may very well be the only reasonable interpretation when read in conjunction with other portions of the plan document, in light of amendments to the plan, or pursuant to prior Executive Compensation Committee interpretations of the clause. However, several critical pages of the plan document were omitted from that which was filed, and neither of the other categories of information were attached to the complaint, so we will have to wait to see the outcome! If you have questions about your executive retirement plan, call a lawyer who concentrates in ERISA today.

Policies on clawback of executive compensation in Chicago are not new. Employers have used clawback policies for eons to deter dishonest or fraudulent behavior (bad boy clauses), enforce covenants not to compete, or to recover bonuses following a financial restatement. Following Enron's demise, Sarbanes-Oxley included new laws on executive incentive based compensation clawback, but only applied to misconduct by CEOs and CFOs, and required the incentive based compensation received in the year following the first restated financial statement be repaid. 15 U.S.C. § 7243.

Dodd-Frank, however, will likely impact many more executives than previously implicated under Sarbanes-Oxley. Section 954 of Dodd-Frank requires that, as a condition of the employer's securities being listed on a national securities exchange or association, if the issuer must make financial restatements because of "material noncompliance" with the securities laws, then the issuer will recoup from any current or former executive officer during the 3 years preceding the date the issuer must make the restatement all amounts paid in incentive based compensation above what would have been paid under the restated financials.

First, Dodd-Frank appears to expand the scope of executive officers to whom it will apply, though it does not define the term. That is left to the SEC and exchanges. A safe bet, though, is that the definition will look something like Rule 3b-7 of the 1934 Act, which would include the president, VP of any principle business unit or function, or any other person who performs similar policy making. Second, the act does not define incentive based compensation, other than specifically including stock options. Again, we can assume this will encompass bonuses and equity based compensation. It will nevertheless be confusing at best to determine what a business unit VP would have received in bonus or stock based compensation under restated financials.

Third, there is a 3-year lookback. But will this retroactive clawback immediately apply, or will the provision only apply to be able to clawback income earned after 2010? Finally, what exactly will the employer do to enforce an alleged clawback? Withhold wages? Withhold SERPs? The tax consequences vary, and vary even more depending on whether any clawback occurs in the same tax year the incentive based compensation was paid, or in a subsequent year.

If you are an executive in a publicly traded company and want to know YOUR rights, not the employer's, under any compensation clawback law or policy, talk to an executive employee benefits lawyer today.