September 27, 2004

An Example of Revisiting Employment Agreements

It is important to recognize that the Fannie Mae and Computer Associates stories that filled Friday’s papers effectively boil down to the same root problem – senior management massaging earnings to enable them to hit targets that create bigger payouts for themselves. To illustrate this point, the Friday NY Times contained a table that displayed the millions of dollars that Fannie Mae managers would not have earned if they hadn’t tweaked their numbers.

Notably, on Thursday, Fannie Mae filed a Form 8-K explaining how the employment agreements with its senior managers had been amended to refine the definition of “cause” in the event of termination – and that upon a termination for cause, a manager is only entitled to accrued base salary.

From a shareholder perspective – and the executive’s own fiduciary perspective, as highlighted in the Sept-Oct issue of The Corporate Counsel – more companies should be revisiting existing employment agreements to alter cause definitions and severance payment calculations. And not wait until the roof falls in to do so! Remember, by showing they sought to protect shareholders, making such changes now will help directors avoid personal liability and reputational harm.

During our October 20th Executive Compensation Conference, there will be a key panel on this topic, “What to Do About Reviewing Outstanding CEO Pay Packages and Agreements,” which will address:

– Obligations to re-examine, modify existing arrangements
– Fixing and adding “cause” provisions and clawbacks
– Ways to address current excessive compensation and how to have a difficult conversation about rolling back pay
– How to implement meaningful holding periods for outstanding equity compensation
– How to avoid traps for the unwary director when negotiating employment contracts and other compensation arrangements

8-Ks and Director Compensation

The Sunday NY Times contains an article about how 8-Ks are now providing executive compensation details sooner – but as noted by Ron Mueller on Thursday’s webcast, even director compensation details are being disclosed in 8-Ks. For an example, see this Form 8-K filed by Quidel Corp.

As for the Sunday NY Times article, my cursory review of those “sooner” disclosures doesn’t necessarily reveal any “fuller” disclosures…