4. Modifying Compensation Programs for ParentCo Following Spin-Off
After the spin-off transaction is complete, it is a good time for the remaining ParentCo to review its own compensation programs to ensure that they reflect the company’s new size and business focus. While not inclusive, the following program components may require review and/or potential modification:
a. Compensation Philosophy and Competitive Market
The company should assess who the appropriate peer companies are in terms of size, business mix, customers, geographic footprint, domestic vs international business. It may be that the company maintains a market median pay philosophy, but that market position means something different now. If the company’s size is significantly smaller than before, pay levels will need to be monitored for alignment with the newly defined market over time.
b. Annual Incentive Program
The company’s annual incentive plan may need revision so that the performance metrics reflect key drivers of the remaining entity. Adjustments to the plan should reflect the new organization structure as it relates to any Business Unit or Division performance components. If the remaining business has slower growth prospects and lower margins, for example, the performance metrics may need to be redefined, and the weightings reallocated. It may also be the case that there is more of a role for strategic goals as ParentCo also embarks on a new business strategy.
Long-Term Incentive Program
The company should reassess the role of various long-term incentive vehicles at ParentCo. For example, in a low growth business, stock options are not the most effective long-term incentive and the company may be better served by increasing the role of a three-year long-term incentive. Conversely, the company may want to instill renewed enthusiasm around ParentCo’s long-term stock performance and growth potential. It may be an appropriate time to emphasize the role of equity. It is also a good time to reassess equity award participation as it relates to overall cost and/or share utilization, both domestically and internationally.
From a more technical standpoint, the Parent should review its current equity plans and share reserve, in light of the recapitalization. A spin-off event itself may not necessarily require revisions to plan documents, but it is an appropriate time to review documents to ensure that appropriate terms and provisions are included. It is also a good time to review compliance with IRC Sections 162(m) and 409A.
The compensation-related programs and provisions that need to be addressed and acted upon in a spin-off are comprehensive. It is important to the ongoing entities that both ParentCo and SpinCo business objectives are supported by appropriate pay design. At the same time, employee perspectives need to be considered as these transactions can present uncertainty. Planning should begin well in advance of any potential or planned transaction. A cross-functional team from HR, legal, finance and possibly outside advisors, should oversee the necessary action steps.
Key Questions for Committee Members to Ask:
- Do we have a clear understanding of our contractual obligations to SpinCo and ParentCo employees upon the spin-off? Do we believe that they are being treated fairly and positioning both companies for success going forward?
- How do the differences in business models that are driving the spin-off impact the future compensation program philosophies and design? How should compensation practices at SpinCo differ from past practices at ParentCo?