Executive Compensation for Middle Market Companies in Today’s Environment

Last week, I attended an Association for Corporate Growth (ACG) breakfast seminar on executive compensation trends and strategies in today’s environment for middle market companies.  Brent Longnecker of Longnecker & Associates did a great job of explaining how private companies can close the executive compensation gap with public companies.  Here are a couple takeaways that interested me:

• Restricted Stock vs. Options.  Brent strongly recommends that companies consider using restricted stock or units in lieu of stock options for the following reasons:   (1) Restricted stock causes less dilution since companies typically use 1/3 or 1/4 of the number of shares they would use with stock options; and (2) You don’t need to “reprice” a restricted stock grant if the stock value declines, which you might have to do with a stock option.  But note:  there are some tricky tax issues associated with restricted stock and unit grants, so make sure you consult with your tax advisors before you use them.
•  Culture Premium.  Employees of companies that have a great corporate culture can add a “culture premium” of up to 40% to their compensation.  In this difficult financial environment, increases in compensation may be a nonstarter for your company.  Therefore, focus on what you can do to generate a “culture premium” at your company.

The information on this website does not constitute legal advice and does not create any attorney-client relationship between you and the author.  Any opinions expressed on this site are solely those of the author and do not necessarily reflect the views of the author’s law firm, Munsch Hardt Kopf & Harr, P.C.

Advisory Boards can offer benefits of a Board of Directors minus the burdens

Here’s what I’m seeing: 

• The best companies have great Boards of Directors.  Boards use their experiences and business acumen to help management take the company to the next level.  They hold management accountable.  They can be an invaluable sounding board (pardon the pun).  They have key contacts you can use to grow your business.  And so on.
• But middle market companies have a difficult time attracting qualified Board members.  In my experience, this is primarily due to two reasons:  (1) private companies don’t want to (and don’t feel like they have to) pay sizable outside director fees; and (2) the fiduciary duties Board members owe make them reluctant to serve.  In many instances, it isn’t practical to pay prospective Board members enough to counterbalance the perceived risk.
• Consider establishing an Advisory Board to solve the problem.  An Advisory Board is established by contract.  And that contract will make it clear that the Advisory Board member is a consultant, not a member of the Board of Directors.  The company can grant equity to Advisory Board members and can “advertise” their involvement, just as with a Board of Directors.  And an Advisory Board member can be transitioned to the Board of Directors in the future if it makes sense.  I’ve previously established Advisory Boards for clients, and I’m seeing an increased interest in Advisory Boards as companies realize they need the assistance of seasoned management to navigate this challenging economic environment.

(This post is solely for educational purposes.  I do not intend it to render legal advice for your particular situation.)

Equity financing is starting to flow in the middle market

As clients go to their banks to renew their credit lines, lenders are requiring them to raise equity capital.  Other clients are “cash poor” and need capital in order to grow.  Here are the lessons:

• Strongly consider talking to an investment banker.  An investment banker’s job is to get you financing alternatives, whether debt or equity or a combination of the two.  The more options you have, the better the outcome.  Your professional advisors can help by introducing you to reputable investment bankers with whom they’ve worked.  Here’s a link to an article I’ve written on what to look for in an investment banker:  http://www.munsch.com/newsstand/articles-93. 
• Start to explore alternatives as early as humanly possible.  In this environment, due diligence takes longer to complete, and economic turmoil may quickly slam the door on a pending financing.  Time is not your friend; do not hang your company’s future on that next big customer you’ve been pursuing or on that potential investor who seems interested in your company.  Your professional advisors should be able to help you identify alternatives if you go to them early. 

(This post is solely for educational purposes.  I do not intend it to render legal advice for your particular situation.)