You have inevitably heard of them by name.
They were legends in their own time – the
golden barons of corporate America. Their
names are Kenneth Lay, Bernard Ebbers and
Jack Welch – the former CEO’s of Enron, WorldCom,
and General Electric respectively. These three
sovereigns of Wall Street were so highly regarded
by their respective enterprises that they
seemed irreplaceable. So, what exactly could
the stakeholders do to keep these golden barons
in place? Offer them more gold, of course!
How about a pair of golden handcuffs?
what golden handcuffs are? It will not surprise
you to learn that the term “golden handcuffs”
is yet another buzz word from corporate America.
It refers to supplementary executive perks
that are structured to attract and keep top
performers and other key personnel. Stock
options, deferred compensation and low interest
loans are examples of some of the perks that
have served as golden handcuffs. However,
these perks are only effective as golden handcuffs
if they contain forfeiture provisions that
require continued employment and/or include
were golden handcuffs applied to the three
golden barons? Kenneth Lay was clandestinely
awarded a 7.5 million dollar line of credit
that could be repaid with stock that Enron
had given him. He built a ‘house-of-cards’
and it imploded! Bernard Ebbers mysteriously
received more than $400 million in personal
loans, with very soft repayment terms. WorldCom
has since filed for the world’s largest bankruptcy!
General Electric secretly spent $15 million
on a penthouse for Jack Welch. He had to give
it back! After these incidents, and others,
the Sarbanes-Oxley Act of 2002 was introduced.
Sarbanes-Oxley Act of 2002 was enacted following
several corporate scandals similar to the
three portrayed above. This law makes it incumbent
on corporate America to establish a system
of corporate governance and internal controls
based on the highest ethical principles and
standards. Among its many provisions, it specifically
requires detailed disclosures of off-balance-sheet
transactions and bans company loans to officers
and directors. This law, in effect, put a
stop to a growing corporate trend of ever-richer
executive benefits packages whose costs were
not disclosed to shareholders. Corporate America
still uses the golden handcuff principle,
with full shareholder disclosure, to attract
and keep top performers and other key personnel.
companies now take a proactive approach in
the use of golden handcuffs to retain their
most talented personnel. The practice of offering
cash bonuses or similar perks based on meeting
certain performance standards can be effective;
however, once these awards are granted, they
have no lasting value when it comes to ensuring
the individual’s continued performance, loyalty
and/or stability. The golden handcuff approach
provides added incentive for the individual
to stick-around. These perks may come in the
form of a retention bonus that is cleverly
coupled with a repayment and non-compete agreement.
If the individual leaves, the company then
has the right to partial or even full repayment.
In some cases, retention bonuses are used
to provide the employee with cash for a home
mortgage down payment. These agreements usually
provide the company with the right to place
lien on the individual’s personal residence.
Probably the most effective golden handcuffs
are those that provide the individual with
some form of equity in the business.
is the bonus that keeps on giving,” according
to Paul Lemberg of the Stratamax Research
Institute. “The value of equity compensation
is likely to increase over time, often considerably.
Equity acknowledges your employee’s past contribution,
but the real payoff is for work still to be
done – and your people have to stay around
to reap the rewards. In real terms, the current
cost of equity compensation is cheap, especially
relative to the loyalty it can purchase. Plus,
since no cash changes hands at the time of
the equity bonus, you can use it as a reward
even if your company is cash-strapped.” Equity
compensation might include outright stock
grants, non-qualified stock options or phantom
stock. Such equity grants will not be effective
as golden handcuffs unless they are coupled
with a defined vesting period.
today’s economy, successful companies need
to offer ample perks and benefits to attract
and retain top-notch executives and employees.
These perks need to be tied to the company’s
future performance in order to assure that
key personnel will stay-the-course to reap
the long term payback. Benefits tied to equity
in the company appear to be most effective
golden handcuffs available. To learn more
about establishing employee incentives and
managing peak performance, call us today.