The compensation plan discussed by Gerald Weiss with the MediCode Technology can be considered feasible as it conforms to the normal practices of the industry in compensating the senior level executives. With his aim to ensure the total package of $ 12 million Gerald was offered a fixed-value plan where he would be offered more options by the company when there was a sharp decline in the stock prices. This is a well-drafted compensation plan at that point of time as the share prices were going up steadily. By this the compensation package of Gerald was made to remain intact.
However, in order that an incentive stock option can be granted, the plan should have been approved by the grantor corporation’s stockholders within 12 months either before or after the date the plan is adopted (Shilling, 2006). In the case of Gerald there does not appear to be a written contract of employment which incorporated the compensation plan discussed between Gerald and Joe in the presence of the Executive Vice President HR who made some notes and who was also a witness to the discussion. However, legally this is not sufficient for Gerald to enforce the stock option plan as there is the specific requirement of approval by the shareholders.
The company therefore is under no obligation to provide any stock options to Gerald. Gerald is left with no means to sue the company legally in the absence of a written employment contract. At the best he can insist of severance compensation as per the employment rules of the company in case he is asked to leave the company. If he decides to leave the services of the company on his own volition there may not arise any right to him either to claim the stock option or any other compensation in lieu thereof.
Fixed value plans which provide for a certain pre-determined Black-Sholes value each year have an inherent problem, when there is a decline in the stock value. When the stock prices go up in a certain year, the recipient gets the advantage of higher exercise price at the beginning of the next year. However such plans are found to be much robust in the case of decline in the stock prices. In such an event, the executive would receive a large number of options at the lower exercise price prevailing so that the annual grant can be maintained at the agreed level. Therefore during the period when the stock price declines the company has to provide for more number of options.
An alternative to overcome this incentive problem Gerald Weiss would have entered multi-year plans under which the company is obligated to pay a fixed number of at-the-money options each year. Such fixed-number plans actually can be considered as a compromise between megagrants and fixed-value plans.
The company is under no obligation to make Gerald as CFO as there is no written contract between him and the company to this effect. Even though a promise was made by the company to this effect, Gerald should have got the promise converted into a written agreement specifying the offer to make him CFO and the conditions attached to bring that offer to reality. In such case Gerald would stand a chance to force the company to make him the CFO provided he has fulfilled the attached conditions to the contract of such employment.
Reference
Shilling, D. (2006). The Complete Guide to Human Resources and the Law. New York: Aspen Publishers.