August 29, 2017

Spin-Offs: Compensation Considerations

Compensation issues in spin-offs can be very complicated.  Matters that need to be addressed include the terms of SpinCo’s compensation & benefit programs, treatment of outstanding parent company awards, & whether special awards will be made as part of the transaction.

This PayGovernance memo provides an overview of compensation considerations that need to be taken into account when planning a spin-off. Here’s an excerpt addressing potential transaction-related special awards:

Many spin-­‐offs include “Founders’”grants of SpinCo stock and/or stock options to SpinCo’s senior management team both to provide support for team retention during an initial post-spin period and to help establish ownership of SpinCo stock by the new team. The special grants are typically determined by RemainCo’s Board, and are included in the offer letters for SpinCo’s senior management.

Some companies also provide “success” or “completion” award opportunities – either in cash or stock — to staff who will play a key role in executing the spin-off; in doing so, they may be required to take on additional responsibilities beyond those core to their role. Participants may include staff who will transition to SpinCo and/or staff who will stay with RemainCo. These awards are typically designed to support retention by vesting after the spin-off is completed and to incentivize excellence in execution of the spin-off (e.g., by linking payouts to the achievement of cost or timing goals).

In addition to discussing employee compensation, the memo also addresses factors to take into account in establishing compensation arrangements for SpinCo’s outside directors.

John Jenkins