The Lacy Employment Law firm

The Lacy Employment Law firm

What to Look for in an Executive Employment Agreement

What to Look for in an Executive Employment Agreement

This might be your first time entering into an executive employment agreement.  Or maybe you have done this for each job you have had.

You may not have given these agreements much thought.  These agreements, however, are not form contracts.  You have the ability to negotiate terms.  And terms are more than just compensation.

Shouldn’t you have someone advocating for you?  Your company will.  The attorney that drafted the agreement for your company likely went to a great law school and works at a large firm.

Does it not make sense for you to have your own lawyer who can even the odds?

How do you Negotiate an Executive Employment Agreement?

Most employers do not bother with employment agreements for their employees. There are reasons for this.  Sometimes employers do not want to mess with the status quo.  The status quo is that employment is at will.

For those that do not know, at-will employment means that you can be terminated at any time for any reason. Why would any employer want to rock that boat?

Well, executives are in a position to bargain.  And they normally bargain for the terms of this agreement.

When you’re negotiating, you have to remember the leverage you have and the leverage you do not have.  

Are you in a field where you are easily replaceable?  Who else can do your job?  If the answer is that there are a lot of people that can do your job, you obviously have less leverage.

If there are not, well, feel free to negotiate every term and your entire compensation package.

But even if there are people that can do your job and you have less leverage, don’t give up on negotiations. 

Total compensation package might be off the table.  That’s the term that you want most and your employer probably wants to give up least.  

But there are many other terms to consider.  If you’re in the technology field, for example, you might want to consider negotiating your non-compete agreement.  

You may have an interest in moving to a competitor if your employment does not work out. Your employer might want to lock you into a longer non-compete.

Sometimes they do this to lock in talent at a discount price.  If you outperform your contract, you would certainly want to leave.

Sometimes employers worry about the loss of trade secrets.

Either way, if your employer is not budding on compensation, it might budge on the scope of a non compete.  If you do well at your job, you might command a higher market salary when you want to exit.

And if you negotiate favorable non compete terms, you  might be able to negotiate your compensation later by pitting your employer against offers that competitors are now making.

An employment lawyer can help you negotiate this and other terms of your employment agreement.

The Terms and Conditions of an Executive Agreement

An executive employment agreement will set forth certain terms and conditions.

Upon receiving an executive employment agreement your position will be defined.  That definition will likely include the below key terms:

  • Employing Entity;
  • Job Title;
  • Reporting Line;
  • Location;
  • The effective date that the agreement shall commence;
  • Job duties and responsibilities;

These provisional terms are the first piece of an executive employment agreement.   They set the stage.  And they are actually important. 

For example, companies are more likely to contract with employees during mergers. The start date becomes an important term.  Do you start before the sale, after the sale, or some time long down the road?  What if there is a hold up with the sale?  

This is something your new employer needs to worry about, but it’s important.   For an employee, you may have more bargaining power if you realize that the company needs to contract with its employees.

An employment lawyer can help you identify if the timing of your employment negotiations is advantageous.

Further, there are six key provisions that will almost always appear in your executive employment agreement.

1. Compensation  

Your employment agreement will outline your compensation.  CEO employment agreements are the most infamous.  They make millions of dollars and a lot of that money is derived from bonuses,restricted stock and restricted stock units.

But these types of salaries are not limited to c-suite employees.  Lower management employees often receive stock options on top of their salary.

You should consider whether you want to negotiate for a larger base salary or more stock options.

2. Target Annual Bonus v. sales commission:  

Target bonus means that the employee, under the employment agreement, earns a certain percentage of his/her salary.  Sales commission, however, is the amount of commission earned on sales.

3. Sign-on bonus:  

Your employer may give a bonus simply for signing on the dotted line.  This is an incentive for coming under the employ of the new company.   

These sign-on bonuses are not all they are cracked up to be.  They normally have repayment terms.  This means that if you leave the company prematurely, you have to repay the signing bonus.

You will want to consider if negotiating for a higher base salary and lower starting salary makes sense.  Perhaps you’re going to a start up and you are worried about the company’s eventual viability.

In this case, you would want a lower sign on bonus so that you could leave the company more easily.

4. Retention Bonus: 

This bonus is designed to keep the employee with the company.  You will have to meet certain performance expectations.  Once those expectations are met, you may be entitled to a retention bonus.

From the employer’s perspective, they want to keep good employees.  And they want to make sure they perform well.

This bonus incentives both.

5. Exemption status: 

This is salary vs. hourly employment. 

For example, if an employee is coming over in a merger, sometimes, the previous company designated an employee as hourly when the employee should have been exempt. 

The employer will likely include terms to make this distinction clear.

6. Equity or Equity-Related Awards:  

If you’re a big shot, you might get some equity with your employment.  This equity usually vests over a certain period of time.  This means that you have to stay to receive your stock.

7. The Term of the Employment 

The executive employment agreement will also outline the terms of the agreement.  This basically means the length of time the executive/employee will be employed.  

The best-case scenario for the employee is a fixed term that is not at will.  This means that the employee can only be fired for cause.  In other words, you will only be fired if your job performance is not satisfactory. 

The worst-case scenario is an at-will term.  This means, as you may remember, that your employer can fire you at any time.

This provision is obviously important.  You will want a fixed term contract.  And your employer will want to fire you for any reason.  

Usually, ceos, coos, and other executives are able to negotiate for fixed-term employment.  Lower-level employees may not have this option.

Your contract will specify the initial term.  The initial term is the period of time in which your employment is guaranteed, absent firing for cause. 

You will want to contract for a renewal provision. This means that your executive employment agreement will renew automatically.  

8. Change in Control Provision

A change in control provision refers to your rights should the company come under the control of new ownership.  This occurs through a merger or acquisition of a company. 

You may have the right to rescind the contract, certain incentive payments, or a golden-parachute package. 

A golden-parachute package compensates high-level executives in the event that they lose their job during the merger.  This is typical.

Companies that acquire another usually want their leadership at the top.  

 The board of directors normally have similar provisions written into their executive agreements. 

9. Termination Provisions

Lastly, an executive employment agreement will outline the provisions for termination of employment.

Of course, you will want to clearly outline how your employment with the company will end.  How will you define the cause provision?  You want the company to have to provide a good reason for ending the agreement. 

You will also want to outline what the company shall pay if it breaches the provision of this agreement.  This means that your company fired you without cause.   

Two important provisions — for the employee — are the severance and restrictive covenant provisions.

Restrictive covenants such as non-compete provisions are also important.  There’s a ton of law about non competes.  So, we’re not going to get into it here.  

But you should know that noncompetes may restrict your right to work. So, you want to make sure that you have someone guiding you and negotiating this provision.

Severance means how much you get paid if you’re fired.  I’m sure you get why this is important.  CEOs often negotiate million-dollar packages when they leave a company.  

You want to make sure that the provisions of this agreement clearly outlines you potential termination by the company.

Conclusion

These are the basic nuts and bolts of an executive employment agreement.  This blog post certainly doesn’t cover everything. 

There are entire legal practice areas devoted to just this topic.  But, if you’re in a situation where you’re offered an employment contract, keep an eye out for the above terms and conditions.

Remember, it’s always advisable to have an employment lawyer represent you in these negotiations.  

Are you in the position to negotiate an executive employment agreement?  How will you handle your negotiations?

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