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CSU FRESNO Craig School of Business

ETHICAL AND REGULATORY ENVIRONMENT IN BUSINESS

Professor Ida M. Jones eMBA 215 Team project

EXECUTIVE COMPENSATION AND EMPLOYEE BENEFITS - Chapter 21

Textbook "Managers and the Legal Environment - Strategies for the 21st Century -"

Authors: Constance E. Bagley and Diane W. Savage

Team members:

LETICIA ESCOTO, DARRYL MANNING, VESNA GVOZDENOVIc

REGULATIONS - CORPORATE COMPENSATION

The Board of Directors ( BOD ) sets compensation packages for the Corporate Officers. Board actions are governed by federal regulations and state laws. There has been a recognized need for an independent Committee, since 1990's, when National Association of Corporate Directors initiated the call for an independent compensation Committee formation.

TThe reality is most executive compensations committees are not truly independent and are influenced by the directors they are setting compensation wages for.

Every state has their own corporate conduct Codes. They require corporate officers to show two basic Fiduciary responsibilities. 1.Duty of Care 2. Duty of Loyalty

a All state Laws are all similar, except for Delaware. Section 102(b)(7) of the Delaware corporate code permits the certification of incorporation to include a provision eliminating the personal liability of the directors ll similar except for Delaware. Section 102(b)(7) of the Delaware corporate code permits the certification of incorporation to include a provision eliminating the personal liability of the directors.

ERISA

WHAT IS ERISA? US Department of Labor definition is:

“The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for retirement and health benefit plans in private industry. “

Before ERISA was enacted by the Congress, employees were not protected under any law and many of them retired or were discharged without benefits; years of different questionable practices by certain pension plans passed by.

Teamsters Pension Fund was one of the largest, well known for unethical practices, including giving loans to Las Vegas casinos.

Despite the increase in number of plans and number of enrolled employees, there was no regulations to protect people from the abusive practices.

ERISA covers many different benefits, but the main ones are pension plans and in that area, ERISA regulates the following:

- Determines the rules of participation in a pension plan, established by an employer

- Obligates plan administrators to abide by certain rules, such as: how to invest the plan money, what investments to avoid, how to report and disclose pertinent information, to both plan members and the government as well as how to behave as fiduciary agents.

OWNERSHIP PLANS STOCK OPTIONS

A stock option is an offer from a company to one or more of its employees to purchase common stock at a given price, often referred to as the strike price. The strike price is commonly set by the market price of the stock when the option is offered and is for a given number of shares. The option is offered for a predetermined period of time, usually several years, and the employee benefits by purchasing the stock at the pre-determined or strike price, after the market value of the stock has increased. Company executives are more often the beneficiaries of stock options; in fact a 2000 study by the National Center for Employee ownership found that 34% of stock options go to senior executives.

Because of fears that stock options may lead executives to act in a manner to boost stock prices in the short term, rather than act in the long term benefit of the company, and also because of some fraudulent behaviors to boost stock prices for the benefit of stock options, some companies are moving away from stock options to other incentives, such as restricted stock plans, employee stock purchase plans, stock appreciation rights, and phantom stock.

Restricted stock plans may offer stock to employees at no cost, at a discounted cost or at market price, but with conditions that must be met before the employee takes ownership. Such conditions could include vesting periods, or corporate or individual performance goals. Employee stock purchase plans allow employees to contribute a portion of their earnings (often through payroll deduction) to purchase stock at the end of a given period. The benefit of this stock purchase is that the stock can be purchased at a discount of up to 15%, and no tax is due on increases in stock value until the stock is sold. There are plan restrictions that must be met in order to receive the tax benefits for the plan, such as a maximum purchase amount of $25,000 per year per employee, and a maximum offering term, among others.

Phantom stock and stock appreciation rights are both programs to award employees with a bonus based on the increasing value of company stock, but in both cases, no actual purchase of stock by the employee takes place. The major difference is that phantom stock awards cash or stock at the end of a specified period, whereas stock appreciation rights allow the employee the ability to decide when within the option period to exercise the award “right”. For previously mentioned stock appreciation right offered to Chevron employees, the plan offered a strike price of $76.00 per share for 100 or more shares depending on the employee’s current position. The term was for 7 years. This option, as with many others, did not require the actual purchase of stock by the employee. The employee had the option to simply receive the difference between the stock strike price and the market price (the “spread”) as a bonus from the company when the option was exercised, or to receive stock shares equal to the value of the spread.

OTHER LAWS

The Consolidated Omnibus Budget Reconciliation Act (COBRA)

of 1985 provides a means for workers who lose their health benefits to continue their coverage for up to 18 months.

The Health Insurance Portability and Accountability Act (HIPPA)

was drafted in 1996 and went into effect at the start of 1998. HIPPA provides protections for workers with preexisting medical conditions by restricting exclusions for group health care coverage when an employee changes jobs and had group coverage on the previous job.

Under the Worker Adjustment and Retraining Act (WARN Act)

of 1988, most employers with 100 or more employees must provide 60 days advance notice of mass layoffs or permanent closure of a plant.

GOVERNMENT WORKERS VIDEO - Property of Library of Congress