ONLY FOR REFERENCE PURPOSES
Jurden WIndows Inc. hired JUstin, a new sales VP, two years ago. Justin is 51. In the words of the company CEO, Justin has "taken the company to the moon." He has used his contacts in the industry to cherry-pick the best salespersons and to put together a sales effort that has everyone talking. That's the good news. The scary news is that everyone wants Justin and his sales team, whose loyalty is more to Justin than to the company. Bottom line: the company needs to lock Justin up.
The CEO of the Co. knows that Justin, a big spender, is concerned about his retirement down the road. The CEO doesn't know much about Justin's financial situation, but suspects that Justin doesn't save and invest much. Justin has inquired on a number of occasions if something can be done to enhance the company's retirement plan, which is a vanialla 401(k) plan that puts the funding onus on the employee.
The CEO would like to adopt a special retirement plan just for Justin. Ideally, it would be a plan that would bind Justin to the Co for the duration. The CEO has many questions: i such a plan for one person legal? What are the tax impacts? How would the benefits under the plan be funded? The CEO feels strongly that the plan must offer Justin more than just a "naked promise" down the road. There needs to be "some teeth" to show that the benefits will be paid. Plus, the CEO says it "can't create a bunch of tax problems for Justin before he starts collecting follow his retirement from the company." Advise the company.
11-D
Refer to Case Problem 11-C above and Jurden Industrie's challenge to lock in its star VP of Sales, Justin. The CEO opened up discussions with Justi n and to everyone's susprise, Justin demanded a piece of the rock. He wants to participate in the equity growth of the company. He wants the rights of an owner, specifically, Justin has requested (demanded?) the following:
1. He wants equity value now in recognition of the value has hs already brought to the company. He doesn't want a deal the its based solely on the future appreciation of the company's stock.
2. He doesn't want to pay anything for his equity in the company. He figures thta he has already paid through his efforts on behalf of the company.
3. He wants an official vote in the management affairs of the co. He isnt' asking for control - just the right to be a part of the inner circle.
4. He doesn't want to pay any income taxes on the equity interest that he receives until the stock is solid and cash is realized.
5. He wants the tax benefits of stock ownership - specifically preferred tax treatment on dividends and capital gains benefits at the time of sale.
Jurden's CEO is overwhelmed. He doesn't want to give Justin anything that is not tied to his future long term performance on behalf of the company. The CEO asks: what happens if we give Justin stock and he stops performing or quits? How do we get the stock back? Do we have to buy it back? what happens to justin's stock if there is a falling out down the road? The ceo wants your advice. What do you recommend?