Employee Retention

| Corporate Law

EMPLOYEE RETENTION IS “KEY” FOR EMPLOYERS

In today’s employment climate there are a variety of reasons why it is difficult to retain key employees who are important to the success of your business.  Prudent employers realize these challenges and find creative and effective ways to retain those key employees.  One such vehicle for doing so is a Stock Appreciation Plan.

Purpose

The purpose of a Stock Appreciation Plan (“Plan”) is to provide select key employees with an incentive to remain with and to help grow the employer’s business.  The Plan allows the employer to grant participants “equity participation units” (“EPU(s)”).  These EPU(s) become vested over time and promote an ownership mentality by granting participants the opportunity to benefit financially, based on the growth and appreciation of the business.

Administration

Utilizing a corporate entity structure as an example, the Plan is administered by the employer’s Board of Directors (“Board”).  The Board determines which key employees are selected to participate in the Plan, how many EPU(s) are to be granted and when such grants are made.  Further, the Board is responsible for setting forth the rules regarding the administration of the Plan.

Participants

The participants selected by the Board may or may not also be officers or directors.  Directors who are not employees are ineligible for inclusion in the Plan.  When granting EPU(s), the Board may include or exclude those participants who were previously granted EPU(s) under the Plan.  Upon the granting of EPU(s), each participant must execute a separate agreement with the employer, agreeing to participate in, and be bound by the terms of the Plan.

EPU(s)

EPU(s) granted to Plan participants do not provide legal ownership in the employer, nor do they provide management or voting rights or entitle participants to any dividends or distributions.  Instead, EPU(s) provide participants the right to receive payments upon certain triggering events and based on the number of EPU(s) in which the participant is vested.

EPU(s) are valued at the time they are granted to the participant and are then revalued, annually, after the close of each fiscal year.  The value of the EPU(s) is most often based on a pre-determined formula, typically provided by the employer’s accountant.

The EPU(s) become fully-vested over a period of time determined by the Board, typically based on a participant’s years of service and a schedule set by the Board.  Delayed vesting provides participants with additional incentive to remain with the employer and remain committed to its success.

Forfeiture

Under the Plan, the employer may specify the conditions upon which a participant forfeits rights and benefits related to the EPU(s).  A participant will oftentimes forfeit allrights and benefits, whether vested or not, (a) upon the employer’s termination of the participant’s employment for cause, (b) in the event the participant violates the terms of the non-competition provisions set forth in the Plan, or (c) upon voluntary termination of employment by the participant (except, upon retirement on or after a certain age).

Death or Disability

If a participant dies or becomes disabled prior to the termination of employment, the participant typically becomes fully vested in the participant’s EPU(s).  Upon a participant’s disability or death, the employer will normally pay to the participant or to the participant’s designated beneficiary, as the case may be, the appreciated value of the EPU(s).

Change in Ownership

In the event the employer sells substantially all of its assets or the employer’s principals sell a majority of the ownership interests in the business to an unrelated third party, the participant typically becomes fully vested in the participant’s EPU(s), so long as the participant remains with the employer through the closing date of the sale.  In such instance, participants are normally entitled to receive payment for the participant’s EPU(s) based on the net sales value being received by the employer or its owners.

Payment of Plan Benefits

Upon certain triggering events (which may vary from plan to plan), such as a participant’s death, disability, retirement on or after a certain age, or involuntary termination without cause, the participant typically is entitled to receive payment for the vested portion of the participant’s EPU(s).  Payments are made according to the terms of the Plan and the total payment due is most often based on the appreciation value of the EPU(s) calculated from the time the EPU(s) were granted to the time of the triggering event.

Agreement Not to Compete

In consideration for the granting of the rights and benefits under the Plan, the employer most often requires the participant to agree not to (a) compete with the employer, (b) solicit the employer’s customers or employees or (c) disclose any of the employer’s confidential information, for a fixed period after the termination of employment. In the event a participant violates any of the foregoing covenants, the employer typically will have the right to permanently cancel, terminate and void the participant’s benefits under the Plan.

Conclusion

If an employer is looking to reduce the risk of losing its key employees to competitors, the Stock Appreciation Plan is a very flexible tool to assist in reducing that risk and is becoming more commonplace among business owners.

Call Dave Dewick at 920-430-1900 to find out more information.

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