Incentive Plan Changes that Depleted their Wealth, Awards them $53.5 Million.
Did a company’s change in its employee compensation package amount to fraud?
When employers use incentive-based compensation plans to motivate their employees, the result often benefits all involved. But not when a company decides it has been too generous and tries to reduce compensation covertly. According to a recent legal ruling, this is what happened at ArborGen in Summerville, South Carolina.
The court entered judgments against the company, several related companies, and board members of these companies, for conniving to reduce the value of options promised to 10 of its employees without their realizing it. The judge’s award of $53.5 included punitive damages and interest.
The employees had participated in a lucrative stock option plan designed to enable them to benefit from the growth of ArborGen. As the company grew, members of the board of directors decided they had been too generous. They came up with a plan to dilute the option plan of the employees, a goal they accomplished through misrepresentations and false information, according to the lawsuit. Instead of receiving $11.3 million in equity based on a $550 million valuation of the company after its growth, the employees received a mere $414,330 in incentive compensation. ArborGen was worth even more—$650 million—when it was converted to a C-corporation.
The case illustrates the importance of care and deliberation when creating employee incentive and compensation plans. It also is a reminder of the need for full disclosure and for abiding by legal rules when seeking to make changes. A qualified corporate attorney can advise on the best approach. Attempting to correct mistakes through shortcuts or subterfuge only results in negative outcomes: legal liability and even greater costs for management, board members and the company as a whole.