Retaining key executives by using a parachute payment agreement.

• Author: Ellentuck, Albert B.

Facts: Becker Toys, Inc., a successful toy manufacturer's owned by Mike Becker, the founder, and his three children. The corporation has 1,000 shares of common stock outstanding. Mike has managed the corporation for 25 years. Several years ago, when Mike first considered retirement, he realized that he needed to identify and train a successor. For the past three years, he has worked closely with Ray Malone, Vice President of Operations. Mike is confident that Ray, who is very talented, can replace him when he retires. * Recently, several international corporations have expressed a desire to buy Becker Toys. Ray is concerned that Mike might accept one of the offers, leaving him without a job. Ray has indicated he might start looking for other work because financial security is important to him. * Mike does not want Ray to leave the company. He is considering agreeing to pay Ray a large bonus if the corporation is sold, and he has asked his tax adviser for assistance in designing the plan. Issue: How can Becker structure a compensation plan for Ray that will assure him of financial security if the corporation is sold and influence him to stay with the corporation?

Analysis

The tax adviser should first establish that nonqualified benefits are needed in this situation and that the company can afford to fund them. In discussions with Ray, the tax adviser determines that, while satisfied with his current compensation package, Ray is concerned that it may take him a long time to find new employment if he loses his job due to a buyout. Because of his financial commitments, Pay feels that he cannot afford to lose his job without having replacement employment available immediately.

In discussions with Mike, the tax adviser determines that Mike is willing to guarantee Ray four times his annual compensation in the event the company is sold if Ray is willing to stay with Becker. The company will have no problem funding the compensation because the sale will generate a large amount of cash.

Corporate and Executive

Profiles

Next, the tax adviser prepares the following profiles to ensure that all parties agree on the objectives of the compensation plan.

Becker Toys Profile

Stability: Established Market: Moderate growth Capitalization: Adequate Need for expansion capital: No need Management: Established;

centralized in owner

and one key employee Key nonowner executives: One with potential

as manager

Ray Malone Profile

Age: Midlife Career: Stable, growing

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