THE NUTS & BOLTS OF EXECUTIVE EMPLOYMENT AGREEMENTS (click here for video)
A video created by Dignitas Wealth Management – Family Office – Wealth Management.
EMPLOYEE APPRECIATION AS GOOD BUSINESS
October 23, 2012
Two months ago I tweeted: “Attended Royal Automotive’s celebration picnic – it reminded me that effective organizations celebrate their employees’ contributions.”
I had written about Royal automotive in a 2011 blog post entitled “Executive Lessons from my Auto Repair Lady: Trust”.
The young woman who manages Royal Automotive, her family’s business, invited my family to attend the company’s 
25th Anniversary Celebration Picnic. My ten-year-old son, Max, and I went to the picnic in Lincolnwood, a close-in Chicago suburb. In attendance were the company’s important customers, vendors, and employees.
There was plenty of food and free raffle prizes. After an introduction by his daughter on the beginnings of the business, the founding father gave a short speech in Korean. The primary focus of the remarks and the beneficiaries of certain special prizes were the employees. Daughter and father knew that their prospects for the family business were very much dependent on their hardworking and dedicated employees. They communicated simply and repeatedly how the employees were responsible for the success of the business. The long tenure of the multi-ethnic employees spoke volumes on how the employees felt about their employer.
Successful business people and leaders of organizations, large or small, for-profit or non-profit or governmental, know that people want to feel valued. Sure monetary compensation and benefits are important too, but knowing that your managers appreciate you has great psychological value. No one likes to feel invisible or inconsequential. Too often the attitude of managers, especially in these challenging economic times, is that the employee ought to be glad she has a job and not complain.
Employers do themselves, their customers, clients, and stakeholders a huge favor when they make their employees happy. Appropriate recognition of, and earned, deserved positive feedback to employees, contribute to employees’ contentment and become fundamental to a healthy enterprise. Investments of praise, appreciation, and recognition for genuine employee achievements reap enormous dividends for both the employee and the enterprise.
When her superiors acknowledge an executive’s achievements, then that should remind and prompt her, in turn, to recognize her subordinates’ contributions.
Continual positive feedback to employees is yet another executive lesson from my auto repair lady.
EXECUTIVES’ MITIGATION OF PERSONAL FINANCIAL RISKS
September 28, 2012G. A. Finch interviews Charlie Russ, a financial representative with Northwestern Mutual .
FINCH: Charlie, what are some of the strategies you would suggest to clients to manage the impact of taxes today and for the balance of their lives?
RUSS: If a person has the option of a ROTH IRA or a ROTH contribution to a 401k, we’d advise to take advantage of those options. Trouble is, many people make too much money and exceed the IRS set income limits for contributing to a ROTH, and very few 401k plans offer that option. Assuming folks are maximizing their pretax
CHARLIE RUSS
contributions to their retirement plans, the another approach is to use a deferred annuity. The tax deferred treatment of any accumulation can help manage the impact of taxes.
FINCH: When we met last, you told me about strategies that could materially enhance clients’ retirement distributions. Would you mind sharing those strategies with my readers?
RUSS: The key to optimizing retirement distributions is having assets funded in several buckets, and preferably most of those buckets are tax deferred. Anybody retiring now or in the near future is in a panic. They thought they’d be way ahead in the stock market from where they are now. They may be in a position to feel as if they’re forced to sell equities at a loss and move to bonds, (as a rule) because they no longer can accept the risk of another 40-60% collapse in the market. Moving away from equities to bonds affects the long-term yield and can create a very negative tax consequence in the taxable portfolio. We’re not talking about proper asset allocation within a stock portfolio.
Furthermore, one standard in the financial services industry, sometimes called the safe withdrawal rate, states that one may only draw down 4% of one’s assets if they expect to never run out of money for 30 years. This assumes a growing market, which we have not faced in 10+ years! The traditional wisdom of 4% being considered safe is simply not accurate in today’s environment.
FINCH: We have talked about six risks associated with retirement: Longevity Risk, Market Risk, Inflation Risk, Tax Risk, Health Care Risk, and Long Term Care Risk. What kind of strategies have you suggested to clients to mitigate each of these risks?
RUSS: Again the objective of our practice is optimizing retirement distributions while mitigating risks our clients face. Therefore it’s critical to address these risks long before retirement; otherwise it is unlikely you will be able to fully mitigate the risks.
Annuities address longevity risk; long-term care planning addresses the financial impact of a long term care event.
Broader asset allocation across accumulation vehicles not in the stock market is one strategy to address Market Risk;
Running retirement analyses with higher inflation rates and incorporating lifetime incomes through annuities and whole life insurance can help identify a strategy for addressing Inflation Risk;
Placing assets in tax deferred tools with tax free distributions is another way to manage the impact of taxes;
Budgeting for healthcare costs is important to offset healthcare costs; we estimate $1000 per month appreciating with inflation be written in to a retirement analysis in addition to lifestyle requirements;
Addressing potential long-term care needs is prudent unless one can be self insured, which would require considerable assets.
FINCH: What are your thoughts about handling potential future estate tax liability?
RUSS: The IRS announced that the estate tax exemption will be raised from $5,000,000 to $5,120,000 in 2012. That’s the good news. The bad news is that it returns to $1,000,000 on 1/1/2013 when the Bush tax cuts expire. Many are gifting the maximum with the thought there will be no “claw back” of prior gifts. You may not wish to gift that today, for obvious reasons. However, I believe it’s important to consider the need for permanent insurance to cover estate taxes.
What these changes mean in plain English is that all assets, north of $1MM, including real estate and all investments remaining inside the estate at the 2nd to pass will be taxed at ~50% between state and federal taxes. Those taxes will be due 9 months from the date of the 2nd to pass and will be payable with or without insurance to fund. You could place all the insurance in an irrevocable trust and avoid estate taxes on 100% of those proceeds.
And, there are some tools which can permit a client to put potentially a substantial amount away on a tax deferred basis keep those assets in the estate and still provide for life insurance to protect against estate taxes. If you’re worried about estate taxes but cannot afford or choose not to fund an irrevocable trust today because you might need your own money in 50 years, this is a very relevant conversation to have.
FINCH: Do you have any thoughts about what if any role insurance products might have in seeking creditor protection?
RUSS: We have a very strong practice among doctors and other professionals who have personal liability from malpractice or on personal loans or other business obligations. Permanent life insurance is purchased primarily for the death benefit. Over time, it accrues cash values which are generally protected, similar to the equity in a primary residence or assets in a retirement account from the claims of creditors in Illinois. Keep in mind creditor protection varies from state to state. Of course one would always need to consult with one’s attorney concerning the applicability for individual circumstances.
Another important idea around wealth accumulation is contractual guarantees. The cash values within a whole life contract with Northwestern Mutual are guaranteed by the good faith and credit of the company to never go down year to year. It’s common for people today to be less concerned with the return “ON” capital vs. the return “OF” capital!!!
FINCH: Charlie, whole life insurance sometimes gets a bad rap in the personal finance press as not being a smart financial investment as compared to term life insurance. Could you give us your take as to why whole life insurance can be advantageous to an executive or professional?
RUSS: It’s not a panacea and it has its risks. We go out of our way to explain and articulate those risks. We only put whole life plans in place for clients where those inherent risks are minimized. That said, the truth is that most people need and want life insurance. Most need and want to grow their wealth, which the cash value build up of permanent life insurance can help accomplish.
The job of our team is to design a financial strategy for our clients which meets their needs today and through their lifetime. The objectives are most often to minimize or eliminate risks and to accumulate wealth in the most tax efficient tools available. Your readers should be asking themselves these simple questions. Do you have a distribution strategy? What asset will you sell first to try to optimize the yield and manage the impact of taxes on your entire portfolio now and through your lifetime? If you don’t have an answer, we can work with you to get it answered and identify a plan designed to achieve all of your objectives discussed in this interview.
Charlie Russ
Financial Representative
Northwestern Mutual
312-443-7382
web site: www.charlieruss.com
Northwestern Mutual (NM) is the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries. Charlie Russ is an Insurance Agent of NM and Northwestern Long Term Care Insurance Company, Milwaukee, WI (long-term care insurance), a subsidiary of NM. Registered Representative of Northwestern Mutual Investment Services, LLC (securities), a subsidiary of NM,broker-dealer, member of FINRA and SIPC. There may be instances when this agent represents companies in addition to NM or its subsidiaries.
LEGAL, INVESTMENT AND TAX NOTICE: THIS INFORMATION IS NOT INTENDED TO BE AND SHOULD NOT BE TREATED AS LEGAL ADVICE, INVESTMENT ADVICE OR TAX ADVICE. READERS, INCLUDING PROFESSIONALS, SHOULD UNDER NO CIRCUMSTANCES RELY UPON THIS INFORMATION AS A SUBSTITUTE FOR THEIR OWN RESEARCH OR FOR OBTAINING SPECIFIC LEGAL OR TAX ADVICE FROM THEIR OWN COUNSEL AND TAX ADVISORS. THIS POST DOES NOT ESTABLISH AN ATTORNEY-CLIENT RELATIONSHIP AND DOES NOT CONSTITUTE AN ENDORSEMENT.
THANK YOU NOTES AND OTHER MISSIVES
July 20, 2012There is a lot written about the importance of writing thank-you notes and how people do not write them often enough or do not write them at all. The lack of writing extends to congratulatory notes, get-well notes and condolence notes. There are countless articles 
written on how one must write a thank-you note after a job interview and how such an act will distinguish one from other job candidates. Seems pretty basic doesn’t it? The fact is that fewer and fewer people handwrite anything let alone missives that have to be sent by snail mail.
My mother brainwashed my siblings and me that basic etiquette required one to write a thank-you note for everything ranging from receiving gifts to staying as a guest in someone’s home to benefiting from a recommendation and so forth. So I do write thank-you notes and other notes, but I feel I still do not write enough of them. I need to be more compulsive about it.
President George H.W. Bush reportedly is an inveterate note writer. I suspect it has to do with his old-school Yankee upbringing where etiquette was part of “proper” training. His sending notes to folks may have given him that little extra edge that made him a Congressman, an Envoy to China, a CIA Director, a UN Ambassador, and, ultimately, President of the United States. I don’t aim to be president of the United States but I try to be gracious.
President George H.W. Bush
What about thank-you emails? What about thank-you text messages? What about thank-you voice mails or phone calls? They are all good and vindicate the principle of expressing gratitude. A handwritten thank-you note is more personal and makes a bigger impact on the receiver. I know when I receive a handwritten note, I do notice.
It takes a lot of effort to be conscientious in writing and sending notes. It is worth the effort in letting people know that you appreciate, value and acknowledge them. Isn’t that what life is all about – making those human connections as often as we can? Now I must go and mail my little son’s note to his godmother thanking her for his birthday present.
CLAW BACKS CLAWING THEIR WAY TO PROMINENCE
July 14, 2012What are we to make of the recent spate of claw-back headlines?
Barclays Bank intends to claw back shares from its former Chief Executive Officer Robert Diamond for the LIBOR rate-fixing scandal
J.P. Morgan Chase has revealed it intends to claw back compensation from its Chief Investment Officer Ina Drew, the trader Bruno Iksil, and others for the $5 billion “whale trading” fiasco.
The defunct “Big Law” firm of Dewey & LeBoeuf LLP, now in bankruptcy, has tendered to over 700 of its former partners a claw-back settlement demand or they will face certain tortuous litigation.
These claw backs aim to retrieve compensation already received by these respective executives and law partners.
As I indicated in a previous blog post, a claw back provision, under certain conditions, permits a company to demand repayment of compensation previously paid to executives. Those conditions usually involve compensation paid to executives based on performance measures or factual circumstances that turn out to be inaccurate, false, or fraudulent. It can be based on statute or by contract.
The claw back in the Dewey situation involves the legal principle of “insider preference” which disallows a transfer of property by a bankruptcy debtor (like Dewey) to an insider (like one of its partners) to the disadvantage of another unsecured creditor.
In Dewey’s case, the firm’s bankruptcy estate is offering the deal to gain cash to pay down its debt in exchange for the ex-partners’ release from liability. The alternative is having personal liability for the law firm’s debt and being pursued by its unsecured creditors.
By statute and contract our free market economies attempt to regulate or bind executives to uphold and adhere to legal and moral conduct.
Can we legislate ethics or contract for morality? The Ten Commandments is a combination of law and covenant to do the right thing. We also have claw-back laws on the books like the Sarbanes –Oxley Act of 2002 and the U.S. Bankruptcy Code, and in the case of not-for-profits, state not-for-profit corporation laws and common law.
A person’s reputation takes years to build and only a minute to be destroyed by some real or perceived illegal or immoral act. Executives must be vigilant about their ethics and business choices.
The public, whether they are the residents of Main Street America, the self-described 99 per centers, or good corporate governance types, really is fed up with reckless, risky corporate financial behavior and outsized compensation packages that bear little relation to performance by the executives receiving them. Greed is not good. For executives, ethical behavior is always the right thing to do personally, organizationally, and globally.
Claw-back mechanisms are necessary to do justice and to reassure the public that fairness, honesty and proportionality will be promoted and protected. We are still in uncertain, unstable economic times and there is much economic hardship. Such conditions make ripe the seeds of class warfare that always underlie the surface of a capitalist economy. I love capitalism and there is no better system; however, it cannot be unbridled and must be tempered with appropriate controls like statutory and contractual claw-back provisions.
As for the headlines, I say bravo for the increased use of legitimate claw-back mechanisms.
THE AGE OF ENTREPRENEURS – IT’S NOT WHAT YOU WOULD EXPECT
July 13, 2012I serve on an advisory board of a small company and the president of this company asked me to attend her inauguration as a member of the second cohort class for Goldman Sachs 10,000 Small Businesses in Chicago. This is an initiative driven by Goldman Sachs and its local partner, City Colleges of Chicago, to generate economic growth and job creation through small businesses by facilitating their access to business education, financial capital, and business support services.
Age Is Just A Number
As I watched the recently graduated first cohort members speak about their exceptional experiences in the program and the second cohort members speak about their dreams, aspirations, and ambitions, I was struck by the ages of these eager beaver entrepreneurs. Yes there were a few twenty-somethings and thirty-somethings, but a large number of them were middle and advanced middle age. Some had been in business for 35 years and some even had MBAs.
Judge George Leighton
What did this plurality of older entrepreneurs show me? It shows me that enthusiasm, energy, motivation, and achievement cannot be limited by age. It reminds me that when you stop growing and learning, then you are in decline. You are done. Asian and African cultures put a premium on age and wisdom. In the U.S., we have become defined and intimidated by a youth-obsessed culture.
Continuous Learning
The fact is that you do not really hit your stride until middle age in terms of competence, confidence and knowledge. Middle age and older are the stages in life when you begin to reap the dividends of your experience and skill sets. Most importantly, though, is to continue to broaden your experience and expand your skill sets. You must always be in a learning mode.
My mother exemplifies the learning mindset in that she went back to college in her late fifties and she is always intellectually and socially curious. I also saw this energetic mindset when I recently attended the dedication of a courthouse in honor of retired federal Judge George Leighton, who practiced law until he was 98, and will turn 100 in October of this year. Judge Leighton still plays chess every day.
Maturity As An Asset
There is so much human capital in older executives, entrepreneurs and professionals that can and needs to be continuously exploited. Our nation cannot afford not to use this older human capital to leverage and grow our economy. I am comforted to see that older hands are helping to drive the entrepreneurial spirit in our small businesses. I will be as delighted to see when more older, experienced hands remain in the executive and professional suites using their talents to push our economy forward. I am glad my own law firm embraces and practices utilizing older talent – that philosophy has helped our firm thrive.
No matter how old we are, as long as we can do it, we should be in “the hunt” for business and professional development, success and achievement.
INDEMNIFICATION AND D & O INSURANCE IN EMPLOYMENT CONTRACTS
June 16, 2012Indemnification By Employer
In my law practice covering executive employment contracts, I see too infrequently a provision requiring an employer to indemnify an executive for any costs, expenses, liabilities, and losses incurred by the executive in the performance of his duties with the company. Usually, the indemnification arises in the context of litigation costs. It should apply to any kind of claim or proceeding including an action, law suit, arbitration, investigation, or administrative proceeding. It should also apply to both civil and criminal actions, investigation, and proceedings.
The costs, expenses, liabilities and losses should include, but not be limited to, reasonable attorneys’ fees, judgments, interest, expenses of investigation, fines, excise taxes or penalties and amounts paid or to be paid by executive in any settlement.
A well drafted indemnification provision will require the employer to advance to the Executive all his costs and expenses concerning a claim or proceeding.
An indemnification provision may have qualifying language that, as a precondition for indemnification, the Executive must be properly performing his obligations in good faith.
Claw Black of Indemnification Payments
Some indemnification provisions will have a mechanism allowing the employer to claw back the amounts advanced to an Executive if a determination has been made that the Executive was not entitled to indemnification for the subject costs and expenses.
The most comprehensive indemnification provision I have seen used reads as follows: “Employee shall be held harmless and fully indemnified by Employer to the fullest extent permitted by [State X] law without qualification or limitation.”
A companion provision that would be prudent for the Executive to include in his employment agreement is that the employer be required to keep in place directors and officers’ liability insurance coverage for the Executive during his employment with the employer and for four years afterward.
Executives get investigated, prosecuted, and sued all the time. An Executive’s having indemnification and insurance provisions will offer the Executive some peace of mind.
Indemnification By Employee
Employers sometimes require an Executive to indemnify the Company.
One kind of Executive’s obligation to indemnify involves the Executive’s indemnifying, defending, and holding his company harmless from any uninsured portion of any claim, loss or expense arising from any action by the Executive that contravenes the rules and policies of the company, any applicable laws or that arise from intentional misconduct by the Executive.
New Employer’s Protection from Old Employer’s Restrictive Covenants
Another kind of Executive’s obligation to indemnify involves the Executive warranting that Executive is not under any legal or contractual obligations that contravenes the new employer’s employment agreement and execution of the employment agreement will not breach any other agreement by the Executive. If there is such a breach, then the Executive must indemnify the new employer and must hold the new employer harmless from and against any and all loss, damage, and expense emanating from the claim against the Executive or the new employer arising from Executive’s relationship with his previous employer. The breaches would typically involve non-compete provisions, non-solicitation provisions, and confidentiality provisions.
Employers must protect themselves from new employees who know they have valid legal obligations to previous employers like confidentiality agreements. One additional way to protect themselves is for the employers to require the prospective employee to provide copies of all employment and separation agreements containing restrictive covenants like non-compete, non-solicitation, and confidential information.
Employers should also be able to be made whole from the bad conduct of their employees giving rise to uninsured liability.
The scope and kind of indemnification by an employee must be appropriately negotiated by each side. Obviously indemnification amounts can be quite burdensome and even financially catastrophic for an employee.
TERMINATION FOR CAUSE: MORAL TURPITUDE
May 20, 2012Employment contracts may have a termination-for-cause provision. This kind of provision may include the term “moral turpitude.” The following are two different examples of a termination-for-cause definition clause containing moral turpitude:
- Employee’s conviction of, or guilty plea or nolo contendere plea to, or confession of, a Class A-type felony or felony involving moral turpitude.
- The Employee’s conviction of, or plea of guilty or nolo contendere to, (a) a felony (other than traffic violations), (b) a crime involving moral turpitude, or (c) a criminal act which adversely affects the business or reputation of Company, its parent or its subsidiaries.
These typical for-cause termination clauses that the use term “moral turpitude” do not define the concept.
The term turpitude means vile, depraved, shameful, or base. It has a grave meaning, and even the sound of the word suggests a perverseness. You add the word “moral” before “turpitude” and it suggests an egregiously bad act or conduct. While we have a textbook definition of “moral turpitude” as being reprehensible conduct, what can it mean in practice? Who knows? However, an executive should care.
The term is too vague and subjective. Crimes come in varying degrees of wrongdoing. Felonies involve varying degrees of criminality. Some are worse than others. In order to avoid arbitrary results and inconsistent employer or judicial application, we ought to discard this hidebound term altogether. When representing executives or organizations seeking to enter into employment contracts, I discourage the use of this term. I prefer an itemized list of causes for termination and plain language like the following clause:
- Employee’s commission of any act (i) involving (A) misuse or misappropriation of money or other property of Corporation or (B) a felony or repeated use of drugs or intoxicants; or (ii) which disparages the business integrity of Corporation, its parent Corporation or subsidiaries or affiliates or their officer directors, employees or customers, and materially and adversely affects the business reputation of Corporation.
This clause makes it readily understandable, among other acts, what kind of crime would be cause for termination, i.e. a felony. In the moral turpitude clauses above, the term crime or felony is modified by the term “moral turpitude” and, consequently, makes the felony or crime more vague and difficult to determine its applicability.
The use of term moral turpitude is anachronistic and should be eliminated from employment contract termination-for-cause provisions.
PREVAILING PARTY’S LITIGATION EXPENSES
April 22, 2012A not uncommon provision in employment agreements, separation agreements, or stand alone agreements containing restrictive covenants (e.g. non-competition and non-solicitation) is a “prevailing party” provision. This kind of provision grants the prevailing party in any litigation over an agreement the right to be reimbursed its, his or her legal fees and costs.
A typical prevailing-party provision will read like the following: “If litigation arises under this Agreement between the Company and the Executive, the prevailing party in such litigation shall be entitled to recover its or his reasonable attorneys’ fees, court costs and out-of-pocket litigation expenses from the non-prevailing party.”
The prevailing-party provision serves as a disincentive for an individual employee to assert his legal rights or to take a risk of violating an agreement. From the outset, the employer ordinarily would have more financial resources to litigate, and this added provision of saddling the non-prevailing party with all the litigation costs has a chilling effect on the employee’s seeking vindication of his rights. From the employer’s standpoint, this is precisely the sobering reminder that an employer wants to send to its ex-employees who may choose to test the validity of the employer’s restrictive covenants, especially non-compete clauses.
In any event, the prevailing-party provision is one that must not be overlooked by either the employee or the employer.
