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There Are Potential Pitfalls to “The $100 Million Giveback”

The compensation package of Eugene Isenberg, former CEO and now chairman of Nabors Industries, Ltd., including a proposed $100 million termination payment, illustrates the far extreme of executive compensation.  While institutional shareholders brought suit to challenge his compensation, wasn’t there due diligence before investments were made?

Nonetheless, an intriguing angle on this is how the $100 million will be treated.  Can Mr. Isenberg merely waive the payment and not be taxed since, in effect, the $100 million may have been constructively received by him by contract?

The Company’s press release indicates that it entered into an agreement with Mr. Isenberg whereby Isenberg voluntarily terminated his employment effective December 31, 2011, remaining as Chairman through June 2012. It also states that Mr. Isenberg will receive “no cash compensation in connection with the termination and waives all claims he might have had against the Company in connection with his employment agreement, including any claim that the October 26, 2011 appointment of a new chief executive officer constituted constructive termination entitling him to [the] $100 million payment.”

In another interesting side note, Mr. Isenberg’s severance amount may constitute deferred compensation, depending upon the terms of his employment contract.  It is unclear what, if anything, Mr. Isenberg received (or will receive) in exchange for his agreement to forego receipt of this severance amount.  News reports suggest that his estate will receive a $6.6 million payment upon his death. However, if any amount payable to Mr. Isenberg (or his estate) in exchange for this agreement occurs after the date upon which he would have otherwise received his severance payment, the negotiated amount could constitute a substitute payment with a deferred payment date, which may be an impermissible subsequent compensation deferral in violation of Code Section 409A. When dealing with deferred compensation (as with many other tax provisions), you can’t do indirectly what you can’t do directly.

The $100 Million Giveback

This post was co-authored by Charles A. Bruder, a Member of Norris McLaughlin and Co-Chair of its Executive Compensation & Employee Benefits Group. Charles is experienced in all aspects of defined contribution and defined benefit plans, deferred compensation arrangements, stock option plans, employee stock ownership plans, and other incentive and equity-based compensation arrangements.