10 tips for a successful negotiation of your management package

Today, more and more companies offer incentive plans, called “Management Packages” (“ManPacks”) to attract, retain and motivate key employees. A ManPack is a contract between a company and an employee whereby the latter is granted, in addition to their salary, a stake in the company (e.g., shares, options, etc.), usually on preferential terms.

A well-structured ManPack can be a powerful tool in aligning the interests of key employees with the company’s long-term success and value. However, behind this attractive offer lies a complex legal and tax framework. A poorly structured ManPack can quickly become a source of frustration, or even litigation.

Here are 10 practical tips every employee should consider before negotiating and signing a Manpack.

1. Understand the purpose of the ManPack

First and foremost, it is essential to ask yourself why the ManPack is being offered to you as they do not all serve the same purpose. It may be designed for:

• Attraction: compensating for a lower salary for instance when joining a new company, such as a startup.
• Retention: keeping you in the company for the long term.
• Performance: rewarding you based on predefined objectives (e.g., revenue, EBITDA, new clients, etc.).

Knowing the purpose of the ManPack helps you understand what is expected from you and what you can reasonably expect in return, helping you avoid unpleasant surprises.

For example, if the company’s goal is retention, your options will vest gradually over the years and will be lost if you leave the company early. If the goal is performance, your benefit shall depend entirely on meeting specific targets, regardless of whether you stay with the company or not.

2. Identify the participation instrument

Before signing a ManPack, it is important that you understand what form your participation shall take; this will determine your rights, the risks involved and the tax implications.

Below are the most common participation instruments:

• Shares: you become a direct shareholder of the company, sometimes along with voting and information rights.
• Stock options: you obtain the right to purchase shares of the company at a later date and at a predetermined price, usually once certain conditions (e.g., performance or exit event) have been met.
• Rights to acquire shares (Restricted Stock Units (RSUs) or similar instruments): you receive a promise to obtain shares in the future, usually for free and progressively through vesting, allowing you to access equity over time, without paying for it upfront.
• Phantom shares: you are entitled to a cash payment on an agreed date in an amount that mirrors the value of real shares without actually giving you any ownership.

By understanding your ManPack’s participation instrument, you will therefore be able to determine whether you will become a shareholder and when/if you will actually perceive a benefit.

3. Check the vesting schedule

You do not own the participation rights granted in the ManPack right from the start – they “vest” (i.e., become yours) progressively over time, usually after meeting certain time or performance goals.

It is central that you check your ManPack’s vesting schedule, as it determines how much you will receive and when. Vesting schedule often provide for a cliff period meaning nothing vests during said period and after that, your rights start to vest gradually. If you leave before the cliff ends, you usually lose the unvested rights.

Why this matters? Even a generous ManPack can end up being worth very little if the vesting schedule is too long, too strict or subject to the accomplishment of unrealistic targets.

Before entering into a ManPack, please make sure the cliff period remains reasonable, and that the plan clearly specifies what happens to your rights in case of early termination or change of control – for instance, if the company is sold (e.g., does the ManPack provide for accelerated vesting?).

4. Pay attention to good leaver/bad leaver clauses

Most ManPacks include a good leaver/bad leaver clause, which determines what happens to your rights should you leave the company.

The difference between a good leaver and a bad leaver can have a significant financial impact. These terms can be defined differently from one company to another. That said, in general terms:

• A “good leaver” is someone who leaves a company for justifiable reasons (e.g., retirement, redundancy, death, illness, etc.), and thus gets to keep all or parts of his vested rights.
• A “bad leaver” is someone who leaves a company under unfavourable circumstances (e.g., dismissal for gross negligence or breach of contract, etc.), and who may therefore lose his rights.

Ensuring that both terms are clearly defined (not too vague, nor too strict) in the ManPack is essential to avoid ambiguity and unpleasant surprises.

5. Check liquidity and exit conditions

As appealing as it may sound to hold a participation in a company, this only matters if you can actually sell it at some point. In many companies, shares and options cannot be freely sold, meaning you may hold rights “on paper” without being able to monetise them for years.

Thus, before signing, make sure you understand when and how you can cash out. In particular, check whether you can sell only at a company sale (“exit”) or also earlier, and whether the company has the right or obligation to repurchase you participation if you leave. The buyback price may depend on whether you qualify as a good or bad leaver, which can significantly affect your final payout.

6. Beware of non-compete clauses

Non-compete obligations, if applicable, should be considered from the very start when negotiating a ManPack; as they may impact it.

Non-compete clauses aim to protect the company’s legitimate interests (e.g., know-how, customer base, etc.) after the departure of a key employee. They can however restrict your professional freedom and even affect the validity of your ManPack if not properly drafted.

According to art. 340a para. 1 of the Swiss Code of Obligations, a non-compete clause must be reasonable in geography, duration and scope to be enforceable.

It is therefore essential to take the non-compete clause content into account when drafting the ManPack to avoid any harmful contradictions, which could even jeopardise the validity of the ManPack.

7. Clarify governance and information rights

If your package involves shares, verify whether you will actually have voting rights or access to company information. In many cases, ManPacks are purely economic.

Knowing whether your rights are also political will help you understand your true position and your ability to protect your interests.

8. Understand dilution and future capital increases

The value of your stake in the company may vary over time, for example if the company decides to increase its capital or to issue new shares. If your number of shares remains the same in such events, your percentage decreases – this is called “dilution”.

It is important to check whether your ManPack includes an anti-dilution clause protecting you from a decrease in the value of your stake or allows the management pool to be topped up in case of new financing rounds.

9. Assess the tax implications

The tax treatment of your ManPack, when carefully structured, can potentially result in a tax-free capital gain for the employee.

Under current law and cantonal practices, gains from employee participation plans may be treated either as tax-free capital gains or as taxable employment income subject to income tax and social security contributions. The key factor is how the participation plan is designed.

Typically, the taxable benefit is calculated based on the fair market value of the shares or options at the relevant taxable event:

• Shares and RSUs: Taxation generally occurs at vesting or acquisition, on the difference between the grant price and the fair market value of the shares, even if the shares are not sold immediately. Any subsequent sale usually qualifies as a tax-free capital gain.
• Stock Options: Taxation arises at exercise, based on the difference between the exercise price and the market value of the shares at that moment.
• Phantom Shares or Cash-Settled Plans: Taxation is triggered when the cash payment is made or becomes due.

For non-listed companies where market prices are unavailable, a reliable and appropriate valuation method is essential to determine fair market value accurately, ensuring correct tax assessment.

Given these important differences in timing and tax treatment, it is crucial to structure ManPacks thoughtfully. Early awareness of these tax implications is vital, as certain instruments may trigger taxation before any cash is received. A well-designed plan can therefore have a significant impact on your net benefit.

10. Get legal advice before signing

A ManPack usually combines corporate, labour and tax law; it is rarely straightforward. Before signing it, we would recommend having it reviewed by a Swiss lawyer familiar with these aspects.

At Deloitte Tax & Legal, we have the combined expertise to guide you through these issues. We would be pleased to assist you in reviewing your ManPack – a brief consultation at the right time can make a real difference.

Deloitte view

A ManPack can be a great opportunity. However, it is rarely a “simple bonus”. It involves long-term commitments, legal obligations and sometimes risks if key elements are left unclear.

With that in mind, we encourage you to carefully review the content of your package. When properly structured, a ManPack can be a genuine long-term incentive. If needed, do not hesitate to seek guidance early on, especially during the negotiation process.

Authors

• Paul de Blasi, Partner, Tax & Legal
• Audrey Soutter, Senior Manager, Tax & Legal
• Silvio Jobin, Senior Manager, Tax & Legal
• Nina Hazan, Senior Consultant, Tax & Legal