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July 14, 2004
How to Get the Best Client

As an advertising lawyer who structures employment agreements for top management and key talent, I have seen how successful agencies hire, motivate, and retain key talent. Here are three strategies to land that star (or soon-to-be star) employee:

1) Use written employment agreements.
In most states, employers may fire employees for any reason or no reason - so long as there is no agreement, or discrimination law, providing otherwise. Because employers usually like to retain the right to fire "at will," lawyers often advise against written agreements that may limit that right or trigger a severance obligation. But that advice does not apply when you're going after bigger fish. To lure the best people, you need to use employment agreements.

2) Offer attractive bonuses.
Crafting special bonus arrangements with key talent can be extremely beneficial to both the agency and the talent. Just be sure the bonus arrangement is consistent with the employee's duties. Being generous should not be a problem—so long as the employee really adds to the bottom line. Put another way, paying a $150,000 bonus to an employee who adds $500,000 in extra year-end profits means an additional $350,000 in profit for owners. Just be careful not to structure a bonus plan that only benefits the employee. Make sure whoever develops the bonus program has developed bonus programs before and understands the unique issues of the marketing services industry.

3) Implement ownership plans.
Big shops use equity plans to attract key talent. But many privately owned companies are loath to share equity. Here's a rundown of the pros and cons of using equity to lure key employees:

  • "True equity." The large shops often share equity with their best people, and granting a true ownership or equity interest ties your key employees to the company in the same way an owner is tied to the company. Because you've given the employee an incentive to work hard, craft knock-out creative, and boost company revenue, you can expect the new arrival to give his "all." But granting true equity has a downside.
  • "True" equity downsides." First, existing owners lose some control. For instance, a new equity holder may become a minority shareholder in the company, with attendant voting rights, the right to review the company?s books, and other significant rights. Second, income tax is due on the grant and the employee will look to the agency to pay the tax. Third, you incur significant administrative costs when creating and issuing true equity shares.
  • "Phantom equity alternative." If you feel the downside of offering true equity is too great, consider another option—"phantom" equity. Phantom equity is simply a contract that offers an employee most of the benefits of true equity, while addressing the concerns of owners. The typical phantom equity agreement creates what we call "equity participation units" (EPUs). EPUs permit an employee to receive a payment on the sale or merger of the agency, or on termination of employment if agency net worth increased.
  • "Benefits to owners." Phantom equity offers several benefits to owners. First, phantom equity does not dilute ownership or control. Second, owners may save a lot of money - both in the initial hiring stage and the long term. That's because in many cases owners offering phantom equity do not offer as large a signing bonus (or any signing bonus at all). Phantom equity also may reduce the amount of salary increases owners might otherwise have agreed to pay each year. Third, unlike a grant of "true" equity, phantom equity grants do not trigger current income tax obligations or the need to bonus the employee to pay the tax.
  • "Benefits to employees." Phantom equity offers ownership-type benefits to the prospective employee. For instance, EPU recipients share in agency growth - just as a "true" owner would. And EPU recipients may profitably "cash out" on a sale or merger of the agency - just as a "true" owner would. Also, EPU holders incur no additional current income tax obligations (as they would if they received a cash bonus). In sum, providing phantom equity plans to prospective key employees increases the chances they will sign on with your shop.

Disclaimer: This Article provides general coverage of its subject area and is not meant to provide legal advice. Your situation will depend on specific facts and legal analysis. Please consult with your attorney.

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Gavin McElroy is a partner with Frankfurt Kurnit Klein & Selz, PC, a leading media and entertainment law firm. Gavin advises executives and companies in the advertising, marketing, and PR industries on employment, transactional, advertising, and intellectual property issues.
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