At some point in your career, as you become more experienced, successful or otherwise in demand, you may be presented with the opportunity to become a CEO, C-level or other senior executives. Whether the job offer is within your own company, or from another company, your employer may want you to sign an executive employment agreement.
This article is a tutorial for the newly-minted CEO or other senior executives when you are presented with the first executive employment agreement of your career. In this article, I provide answers and explain these questions.
- What is an executive employment agreement?
- Why is this agreement important to the company?
- Why is this agreement important to you?
- What are the key terms and conditions that you should focus on?
- How do you achieve success in negotiating these executive contract terms?
Before we move on as I answer each of these questions, congratulations on achieving this level of your career! Now, with this tutorial, I hope to help you to make the most of this opportunity.
What is an executive employment agreement?
An executive employment agreement establishes key contractual obligations and expectations between the executive and the employer. As a contract, it presents an exchange of “considerations” – things that each side agree to do for the other. For the company/employer, the agreement sets out the executive’s role, responsibilities and performance rules and conditions that are expected of the employee/executive. For the employee/executive, the contract sets out his/her executive compensation package, both short and long term, as well as benefits and equity, if any, that he or she is to obtain.
The employment agreement would be expected to include conditions of employment, such as location, position, term of employment, compensation and benefits, conditions and behaviors leading to severance or termination, post-termination restrictions such as non-compete and non-disclosure terms, and dispute resolution.
Why is the contract important to the company?
Why are you offered an executive employment contract? Why is the contract important to the company?
There are four main reasons:
- Clarity of understanding
- Company flexibility
- Limitation of liability
- Executive motivation
The executive employment agreement is intended to inject stability into the Company’s relationship with its CEO and other senior executives. In doing so, the Company seeks to confirm the titles, positions, benefits and expectations so that misunderstanding do not arise.
At the same time, the Company seeks to maintain a level of flexibility to make changes in the executive suite if that is later determined necessary by the CEO or Board. Hence, contracts often state expressly that the employment is “AT WILL.” This enables the Company to terminate the executive at any time it chooses.
The employment agreement also helps the Company in setting a limit on what the executive can receive in terms of compensation, benefits, severance and other terms. The express terms of the contract are normally reinforced by a “merger clause” – that is, a clause that states that it is the entire contract with all other “understanding” excluded.
Yet at the same time, the Company may use the contract to motivate the executive – for example, a signing bonus to get him or her to join, other executive bonus and equity terms triggered by superior performance in the role.
Why is the executive contract important to you? Why should you negotiate?
Many new CEOs or C-level executives assume that the employment agreement is just boilerplate. It correctly recites my title and salary. Why do I need to look further, much less negotiate terms?
Accepting the employment agreement offered to you without review by an experienced executive employment attorney can be a mistake for several reasons. Two of the Company motivations – flexibility and limitation on liabilities – are two of the biggest reasons why you, as the new CEO, CFO, COO, or other C-level executives, need to review the terms of the executive contract.
Because your contract is likely to be “AT WILL,” you need the contract to address and make you whole for adverse circumstances that can occur if the Company has that clause and uses it. For example, if you got a signing bonus, do you have to pay it back? If the Company relocated you, do you have to pay that back? Will you get a severance? These things need to be addressed carefully in the contract to reflect your position as well as the Company’s.
You also need to address your side of limitation of liability. As said, the merger clause will likely exclude all prior discussions and understandings. Well, are you relying on any particular understanding to go into this position? It needs to be stated in the executive contract or an exception made to the merger clause.
Although you may see boilerplate executive employer agreements online, each and every employment situation is different and the boilerplate agreements should be treated as a starting point for negotiating a custom agreement between you and your employer.
Finally, the executive contract is also important to you because you may be spending a number of years working for the Company. If you succeed in your job, you want to make sure the terms are clear on the reward you will receive for that success. Alternatively, if you are mid-career, you also want to be focused on severance and restrictive covenants. You do not want to find yourself so restricted by broad non-compete or non-disclosure terms that you cannot secure satisfactory new employment.
Now, let’s take a look at the key terms and conditions in an executive employment agreement.
Key terms and conditions in an executive employment agreement
The key terms can be divided in the following categories: duties and responsibilities, compensation and benefits, severance, restrictive covenants.
Duties, Responsibilities & Authority
You will want to negotiate some contract coverage for expected responsibilities, performance targets, organizational authority, reporting structures, staff hiring, reporting and firing, facilities, and budgets. It is important to identify the person (by job title) or entity that you will report to, whether you will serve on the Board, and the limits to outside activities such as serving on the board of nonprofits or other companies.
Compensation and Benefits
Here are some key terms to focus on:
- Base salary, review and increases
- Bonus structure, including signing bonus and performance bonus, and claw back provisions
- Benefits, including health care, disability, and pension
- Expense reimbursement including relocation, travel and professional memberships.
Executive equity compensation is a big one. I have written extensively in this area. Here are some key terms to focus on:
- Equity structure and its taxation including restricted stock, RSUs, and stock options
- Vesting, exercise, acceleration to realize upon your equity grant
- Your rights as an equity holder – liquidity and anti-dilution protections.
Severance and Termination
You may not be thinking about separation while you are negotiating a new executive job offer. But this is the time when you have the most leverage to do so. Your executive severance terms need to focus on two separate concerns – first defining from your viewpoint as executive what events would trigger severance, and second, if you are fired without cause or if you quit for good reason, what additional executive compensation and equity items are included in your severance compensation package.
Your employer may attempt to restrict you from working for competitors after termination through the use of non-disclosure/confidentiality, non-competition, and non-solicitation provisions in your executive employment agreement. Non-disparagement terms may also be added that apply to both you and your employer. These items need to be reviewed and negotiated, so that your ability to move to a new position in your industry is retained in case this position does not work out or you are otherwise ready to move on.
How do you achieve success in these negotiations?
It is possible that you can do this by yourself and achieve the results this article suggests you should strive for. However, generally speaking, the better course is to retain the counsel of an experienced executive employment attorney. The attorney can play an advisory role, providing critical insights when you need them, negotiating the executive contract on your behalf or aiding you behind the scenes in your negotiations.
To achieve success, whether you use the attorney or not, it is best to strive for a reasonable deal. You always want to put forward rational arguments for your positions and come across as fair and reasonable.
Sometimes you succeed and win many of the points you seek, sometimes not. That can often be a function of your relative bargaining position. However, even when you do not succeed on many of your points, there may come a time in the future after you have proven yourself, when the Company very much needs to retain your services that each of the items lost in the first negotiations may be “revisited” in a retention agreement negotiation.
So, how to achieve success in a final word? Be rational and reasonable in your presentation. Do not burn bridges and close the deal if given all the circumstances, the deal makes sense for you at the time.
And, as we conclude, once again… congratulations on getting that offer to be a newly-minted CEO or C-level executive! Good work!
Written by Robert Adelson. Have you read?