- Ownership interests. Nothing shows appreciation more than offering a valued executive an opportunity to become a business partner. Granting direct stakes in companies provides key employees with a sense of ownership that is often hard to duplicate through other types of incentive arrangements.
There are, however, two potential problems with this approach. First, the value of the equity will be taxable to the executive on the date the shares are given (or the date of vesting, if different) unless the executive pays for his shares. Second, PR firms and executives often have to negotiate what can be complex buy-sell arrangements at the time the equity grant is made to deal with potential contingencies that may arise if an executive departs from a company in the future.
- Phantom equity. Under a typical “phantom equity” plan, PR firms agree to pay executives a percentage of the company's yearly profits and/or a percentage of the net proceeds from a sale of the firm. Phantom equity arrangements are contractual arrangements. They are sometimes referred to as “phantom equity” because they bestow upon executives similar rights of ownership as if they were actual equity holders.
Unlike stock grants, there are no negative tax ramifications associated with phantom equity grants. Participating executives typically would have no continuing rights to receive payments if their employment relationship with the company ends for any reason (unless the particular phantom equity plan provided otherwise). The biggest drawback of phantom equity awards is that payments the executive would receive upon a sale would be taxed at ordinary income rates instead of the capital gains tax rates that would apply if they held true equity in the company.
Individualized incentive arrangements. A PR firm could structure an individualized bonus arrangement with a key executive that would provide the executive with the right to receive a percentage of the revenue (or profits) that she generates for the company. This type of arrangement is often successfully utilized as a way to keep executives focused on driving and growing the business for which they are responsible. One drawback, however, is that by failing to link compensation to the overall success of the company, this type of structure may not be the most optimal in fostering a team-first mentality at the firm.
While there is no single approach that fits every situation, PR firms have implemented each of these options with great success in appropriate circumstances. In order to consider which approach is likely to reach optimal results in a given situation, PR agency owners should consider the overall importance of the executive to the firm, the age of the executive, his or her expected period of future employment with the firm, and how likely the company is to be sold in the future. Only by carefully considering these criteria can the best option be selected.
Michael Lasky is a senior partner at the law firm of Davis & Gilbert LLP, where he heads the PR practice group and co-chairs the litigation department. He can be reached at firstname.lastname@example.org.