Executive Compensation & Incentives

The documents, and the arithmetic behind them. The documents are the employment agreement, the equity or bonus plan with its award letters, and the separation agreement at the end, with the restrictive covenants running through all three. The arithmetic is the part a general counsel rarely sees drafted: whether a severance formula is exempt from section 409A as a short-term deferral or a separation-pay plan, whether change-in-control payments approach the three-times parachute line, and whether an Illinois non-compete clears the earnings floor and the consideration test. We do both, for the company.

Mostly the tax code, then securities law, then state employment law. Section 409A sets the timing rules for anything deferred. Sections 280G and 4999 tax change-in-control payments that reach three times average pay. Section 162(m) caps a public company's deduction for each covered executive, and from tax years beginning in 2027 the covered group widens to the next five highest-paid employees. A deferred-compensation plan for a select group of management is a top-hat plan under ERISA, registered with the Department of Labor within 120 days. For listed companies a new compensation arrangement with a named executive is disclosed on Form 8-K within four business days, and the clawback policy required since December 2023 reaches three fiscal years of incentive pay. In Illinois the Freedom to Work Act governs non-competes and non-solicits, and since January 2025 the Equal Pay Act requires employers of 15 or more to state the pay scale in every job posting.

In Illinois, yes, for executives, if the paperwork was done. The federal rule that would have voided most non-competes was set aside by a federal court in 2024 and abandoned by the agency in 2025, so state law decides. The Illinois Freedom to Work Act, in force for agreements signed since January 2022, voids non-competes for employees below an earnings floor and non-solicits below a lower one, and both floors step up on January 1, 2027. Above the floor the covenant must protect a legitimate business interest judged on the whole relationship, be no broader than that interest in duration, territory and activity, and rest on adequate consideration, which the statute benchmarks at two years of continued employment. The employee must have been told in writing to consult a lawyer and given 14 days to decide. An employer that sues and loses pays the employee's fees, which concentrates the mind at the drafting stage.

Separation is when every clause is read for the first time by someone with a reason to read it closely. Three recur. First, the release: an executive aged 40 or over has 21 days to consider it and 7 to revoke, and if that window can straddle December 31 the severance must be paid in the later year or section 409A is tripped. Second, the equity: incentive stock options keep their tax treatment only if exercised within three months of termination, unvested awards follow the plan's definitions of cause and good reason, and acceleration can push a package over the parachute line. Third, the covenants: the non-compete that was adequate at hire is re-read against what the executive is now going to do, and in Illinois an employer that sues on it and loses pays the fees. We run the exit with all three open on the desk.

They decide part of the price. A buyer's diligence request asks for every agreement with a change-in-control trigger, and the parachute calculation under section 280G follows: if an executive's contingent payments reach three times five-year average pay, the excess over one times draws a 20 percent excise tax on the executive and costs the company its deduction. A private target can cure that with a shareholder vote of more than 75 percent, taken after full disclosure and before the payment is made, which is why the vote appears on the closing checklist. Retention bonuses are drafted to pay within two and a half months after the end of the year in which they vest, so section 409A never applies, and single-trigger acceleration of equity is examined against the buyer's own plan before anyone promises it.

By dividing the work along the lines the rules draw. Your accountants compute the section 280G base amount and the payroll treatment of severance; we draft to the result. An independent appraiser values the common stock for option grants, because a valuation less than twelve months old from an independent appraiser is presumed reasonable under section 409A, and we make sure the grant date falls inside that window. Your benefits consultant designs the deferred-compensation plan; we file the top-hat statement within 120 days and write the plan's separation-from-service language. The compensation committee approves the economics; we write the agreement the executive's lawyer will mark up, and one partner stays on the file from offer letter to exit.