Mark's Hot Topics

Keeping a close watch on changing attitudes and the laws that often follow is important. Here are some perennial Hot Topics – please check back for updates:

1. Wall Street Bonuses

I'm writing this in early February 2009 and the headlines are screaming about the Wall Street bonuses that were recently paid, undoubtedly using some taxpayer money to pay them.

In a word, I'm disgusted. I don't know all the details but it strikes me as unconscionable that a company that was this close to going BK, could use the taxpayers' money that way.

I can already hear the arguments: the bonuses didn't go to the senior executives but just to the middle level people who really deserved them. After all, base salary for these folks is not nearly as important as their incentive pay. Plus they earned it and we need these strong performers more than ever.

Yeah, well, I don't buy it. Right now they're lucky to have a job. Just ask the folks at Lehman Brothers, Wachovia and WAMU.

I don't favor federal regulation of executive compensation but first the auto chieftains fly to Washington in private jets and now this.

There's never a dull moment in the fun world of executive compensation!

2. Option Repricing

A primary reason for granting stock options is to make the recipients think and act like they are shareholders. Fair enough. But when the options are underwater - and right now most are so far underwater they have no realistic chance of ever seeing the sun again - there are screams and general exhortations to reprice the options so that they might once again have value, some day.

Clearly this is a mixed bag. After all, the shareholders don't have a chance to reprice their holdings. Yet without repricing, an executive can quit his employer, join a competitor and get new options from his new company at the then current price. There have been stories over the years of two friends literally swapping jobs so they could both get options that would someday actually have value.

There are many rules about option repricing that are beyond this short piece. Suffice to say here that repricing options is not automatically a bad idea but it's not automatically a good one either. We suspect, however, that there will be thousands, probably millions, of options that have been or will be repriced during 2009.

3. Pay Cuts, Job Sharing and Layoffs

Look in any business section of a newspaper these days and you will probably see articles on layoffs, job sharing and pay cuts. We certainly live in turbulent times. Of course, every situation is different but when asked, employees often prefer spreading the pain by taking pay cuts rather than see their friends lose their jobs. Because of payroll taxes and fringe benefit costs, a layoff will often save more money than a widespread pay cut (after all, the medical insurance premiums do not change) but the higher morale that is generated by avoiding layoffs is often a win-win for both the employees and the company.

4. Exempt/Non-Exempt Determination

The old days of "thinking" or guessing that a job is not eligible for overtime are long gone. Not only have the definitions of what qualifies a job to be exempt from overtime changed, the risks of getting it wrong can be enormous. The words "class action" are enough to scare anyone, particularly in California where plaintiffs can, in addition to the lost overtime, recover penalties, interest and attorneys fees going back as far as 4 years in some cases. While most companies are not going to make headlines in the WSJ, companies must understand that all it takes is one employee saying one thing to the DOL or California Department of Labor Standards Enforcement (DLSE) - even an employee who likes the company – and you might find yourself between an uncomfortable rock and a very hard place.

Here's a thought to ponder: did you know that an accountant with 20 years experience might not qualify as a Professional under the current definitions?

5. Employee vs. Contractor?

There are two perennial Hot Topics for compensation professionals: errors in exempt/non-exempt classifications, and incorrectly treating an employee as an independent contractor (think W2 vs. 1099).

Sometimes the employer makes this determination because there's a hiring freeze or caps on employee headcounts. Perhaps the employer doesn't want to provide benefits or pay overtime. Maybe the employer wants to avoid issues when terminating the worker at the end of a project. There are many reasons an employer may prefer a worker to be a contractor rather than an employee.

On the other hand, some workers request contractor status because they want the tax deductions that come with being self-employed.

Regardless of the reasons why an employer and a worker might want to set the relationship as client – contractor rather than employer – employee, the IRS and States have very specific rules. Even if the employer and worker mutually agree to consider the worker a contractor, the taxing authorities have their own tests and make their own determination.

There are risks to getting it wrong. If the relationship is determined to be employer-employee, then the employer will be required to pay employment taxes to the taxing authorities plus possibly workers compensation and pay additionally for missed meal and rest periods. Plus perhaps fines and interest. Since the contractor presumably set his or her billing rate with the knowledge that, as a self-employed contractor, he or she will have to pay both the employer's and employee's FICA and social security taxes, the employer could try to get the contractor-turned-employee to refund the taxes. Good luck trying....

There's also the issue of overtime payments lurking in the background but I'm sure you get the point.

We thank Ms. Marta Fernandez of the law firm of Jeffer Mangels Butler & Marmaro LLP for her review. For more information, feel free to contact Marta at

6. Intermediate Sanctions for NFPs and Retirement Plans for Executives

Every 501(c)(3) and (c)(4) organization needs to know about IRC section 4958. Another long story short: if the IRS determines that any executive of a covered organization is paid excessively, the executive and the Board that allowed it to happen will pay an excise tax on the excess.

There's a side effect of this legislation. Many times I've had to tell a CEO (often the founder) of a NFP that s/he waited too long to create a retirement plan. If the exec and board thinks they can ''make up for lost time'' by creating a plan late in the executive's career, such backloading may prove impossible.

When in doubt get good advice.

"Your involvement has gone well beyond "the norm" and required a real hands on commitment to understanding our business climate, goals and objectives, cultural dynamics and subsequently translating all this to fair and balanced plans. You did so with professionalism that has served us and all involved extremely well.

I have used the larger branded consulting firms in former positions but in my estimation I would never have gotten greater results for what this task called for in 2006! You performed virtually perfectly!"

Martin C. "Skip" Farber
Chief Executive Officer
WSA Global

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