SHOR » Topics » Retention Incentive Agreements

This excerpt taken from the SHOR DEF 14A filed Oct 5, 2009.

Retention Incentive Agreements

          On February 3, 2009, the Compensation Committee of the Board of Directors approved forms of Retention Incentive Agreements (the “Agreements”) for its executive officers, including its named executive officers. The Agreements provide for specified termination benefits, and if executed by the executive officer, replace any existing severance agreements with the executive officer. The Agreements were adopted in an effort to establish consistency in its executive severance practices and to encourage retention of its executive talent.

          The Agreement entered into with Mr. Combs provides for the following benefits:

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          Termination in Absence of a Change of Control. In the event of employment termination in the absence of a change of control of the Company, and upon the execution of a binding release agreement, Mr. Combs will be entitled to receive (1) a lump sum payment in an amount equal to twelve months of his base salary, less applicable withholding taxes, and (2) reimbursement of premiums paid for continuation coverage for twelve months pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”).

          Termination Upon a Change of Control. In the event of employment termination upon a change of control of the Company, and upon the execution of a binding release agreement, Mr. Combs will be entitled to receive (1) a lump sum payment in an amount equal to eighteen months of his base salary, less applicable withholding taxes, (2) a lump sum payment in an amount equal to one hundred percent of his annual target bonus, less applicable withholding taxes, (3) full acceleration of all outstanding equity awards, and (4) reimbursement of premiums paid for continuation coverage for eighteen months pursuant to COBRA.

          The Agreement with Mr. Combs may be terminated by Mr. Combs or the Company on an annual basis following the second anniversary of the effective date of the Agreement.

          The Agreements entered into with Messrs. Healy and Girskis provide for the following benefits:

          Termination in Absence of a Change of Control. In the event of employment termination in the absence of a change of control of the Company, and upon the execution of a binding release agreement, each of Messrs. Healy and Girskis will be entitled to receive (1) a lump sum payment in an amount equal to six months of his base salary, less applicable withholding taxes, and (2) reimbursement of premiums paid for continuation coverage for six months pursuant to COBRA.

          Termination Upon a Change of Control. In the event of employment termination upon a change of control of the Company, and upon the execution of a binding release agreement, each of Messrs. Healy and Girskis will be entitled to receive (1) a lump sum payment in an amount equal to twelve months of his base salary, less applicable withholding taxes, (2) a lump sum payment in an amount equal to one hundred percent of his annual target bonus, less applicable withholding taxes, (3) acceleration of seventy-five percent of all outstanding equity awards, and (4) reimbursement of premiums paid for continuation coverage for twelve months pursuant to COBRA.

           The Agreement with Messrs. Rump and Weisner provides for the following benefits:

          Termination Upon a Change of Control. In the event of employment termination upon a change of control of the Company, and upon the execution of a binding release agreement, each of Messrs. Rump and Weisner will be entitled to receive (1) a lump sum payment in an amount equal to six months of his base salary, less applicable withholding taxes, (2) a lump sum payment in an amount equal to fifty percent of the officer’s annual target bonus, less applicable withholding taxes, (3) acceleration of fifty-percent of the officer’s outstanding equity awards, and (4) reimbursement of premiums paid for continuation coverage for six months pursuant to COBRA.

          For a description and quantification of these severance and change of control benefits, please see “Employment, Severance and Change of Control Arrangements.”

          Other benefits. Executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life, disability, and accidental death and dismemberment insurance and our 401(k) plan, in each case on the same basis as other employees, subject to applicable law. We also provide vacation and other paid holidays to all employees, including our executive officers, which are comparable to those provided at peer companies.

          In February 2008, the Compensation Committee approved for Messrs. Combs and Weisner a monthly travel and living allowance of $5,600 and $6,500 respectively. This allowance is for commuting expenses from their permanent homes to the San Francisco Bay Area. The Compensation Committee decided it was necessary to pay these allowances to these executives in order to retain these executives who would not otherwise be willing to relocate to the San Francisco Bay Area on a full time basis. Messrs. Combs and Weisner received this monthly travel and living allowance throughout fiscal 2009.

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          Accounting and Tax Implications. We account for equity compensation paid to our employees under SFAS 123(R), which requires us to estimate and record an expense over the service period of the award. Our cash compensation is recorded as an expense at the time the obligation is accrued.

          Under federal tax laws, a publicly-held company such as ShoreTel is not allowed a federal income tax deduction for compensation paid to certain executive officers to the extent that compensation exceeds $1.0 million per covered officer in any year. The limitation applies only to compensation that is not performance based. Non-performance based compensation paid to our executive officers for fiscal 2009 did not exceed the $1.0 million limit per officer and the Compensation Committee does not anticipate that the non-performance based compensation to be paid to executive officers for the 2010 fiscal year will be in excess of the deductible limit.

          The Compensation Committee believes that in establishing the cash and equity incentive compensation programs for the company’s executive officers, the potential deductibility of the compensation payable under those programs should be only one of a number of relevant factors taken into consideration, and not the sole governing factor. For that reason the Compensation Committee may deem it appropriate to provide one or more executive officers with the opportunity to earn incentive compensation, whether through cash incentive award programs tied to the company’s financial performance or equity incentive grants tied to the executive officer’s continued service, which may be in excess of the amount deductible by reason of Section 162(m) or other provisions of the IRC. The Compensation Committee believes it is important to maintain cash and equity incentive compensation at the requisite level to attract and retain the executive officers essential to the company’s financial success, even if all or part of that compensation may not be deductible by reason of the Section 162(m) limitation.

          Also, the Compensation Committee takes into account whether components of our compensation will be adversely impacted by the penalty tax associated with Section 409A of the IRC, and aims to structure the elements of compensation to be compliant with or exempt from Section 409A to avoid such potential adverse tax consequences.

          Equity Award Policies. Equity awards for newly hired executives are typically made on the date the executive starts employment. Performance grants and annual re-fresh grants are typically made to executives during an open trading window as defined in the Company’s insider trading policy. We do not have any equity security ownership guidelines or requirements for our executive officers.

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