Employment Law Attorneys

Make Whole Payments

Copyright © 2003 by Carey & Associates, P.C. All Rights Reserved

Corporations provide “make whole payments” in order to compensate executives for the compensation package he or she is leaving behind at their previous employment. Make whole payments have equitable origins, in that the new employer seeks to place the executive in the same compensation position, if not better, the executive occupied with the former employer.

These payments have various names such as “signing bonuses,” “inducement awards” or “golden hellos.” Whatever the name given to these non-performance related payments, one thing is clear, the prospective employer will use the make whole payment, along with other variables of the compensation package, to appear more competitive in the industry. If the prospective company’s offer on the make whole side falls short, the executive is likely to remain with his or her current employer or take a position with another prospective employer.

The amount of the payment is commensurate with the executive’s salary, valuation of the forfeited compensation, and market competition for the executive. The signing bonus is obviously an inducement offer to persuade the executive to join a new management team. The payment is often made in the form of cash, stock options, stock, restricted stock units (phantom stock), guaranteed bonus, and relocation expenses including the sale of the prior residence.

Generally, the prospective employer will attempt to compensate the new executive for the forfeited compensation. Make whole payments are used to cover forfeited short and long term bonuses, present value spread of unexercised options and future value of unvested options, credits towards future pension accruals in the new company, compensation for lost SERP benefits, and restricted stock.

Private loans to executives were recently part of the make whole payment. On July 30, 2002, Congress passed the Sarbanes-Oxley Act, which virtually eliminated such loans to directors and executives. The Act prohibits loans to executives to purchase company stock, loans to cover income taxes due to vesting in restricted stock or performance shares, relocation loans and home loans.

Make whole payments can be substantial. According to a recent report,

“[o]ther excessive payments were made, for example, to Lawrence Johnston at Albertson’s, who received $24,548,214 in restricted stock units. Also, 1,486,336 restricted stock and stock units with a grant value of $65,557,400 was paid to Carleton Fiorina by Hewlett-Packard, not counting the grant date value of more than 1.5 million stock options. In addition to 3,500,000 stock options, Robert Nardelli, the new CEO of Home Depot, received 750,000 deferred stock units worth $30,562,500, plus $50,400, and a $10,000,000 loan, forgiven 20 percent each year with associated tax gross-up payments.”

“Golden Hellos”, by Paul Hodgson, The Corporate Library, September 2002