By Robert A. Adelson
Without properly navigating the executive employment contract, a CEO or other C-level or senior executive can lose large sums of money or limit his/her career. Your skills, knowledge, reputation and experience can be critically valuable to the success of your new employer, and merit proper employment and compensation terms.
Oftentimes, CEOs, C-level and other senior executives are great negotiators for company financings, strategic transactions, and company commercial contracts, but they can be neglectful negotiating terms of their own personal executive employment contract. Sometimes, a prospective employer encourages your neglect, telling you the job offer is pretty standard, not much here to change or negotiate. That is just not the case. For the C-level or senior executive, your job offer or employment contract is not one size fits all, and it goes well beyond just base salary and bonus.
The best time to negotiate is before an offer is made or accepted. Negotiable contract terms include executive compensation, bonus structure, stock, options or long term incentives, relocation, tax gross-ups, severance terms and triggers and other key terms. These are all important issues, worth your time and consideration.
Below are ten critical areas that CEOs, C-level and senior executives should consider negotiable to assure fair financial treatment and to reasonably protect your job, career and reputation.
1. Signing Bonus
The provision of a signing bonus takes into account three considerations important to a C-level or senior executive considering a new position:
- Making the executive whole – You may well lose vesting options or other equity, bonus or other benefits in switching jobs. The new company needs to try to make the executive whole – to supply the golden key to unlock golden handcuffs that keep you on the job.
- Compensating the risk taken – You are leaving a place of comfort, a company where you have proved yourself, an executive suite and set of stakeholders that are familiar, all for the unknown and unforeseeable risks that may arise.
- Shared commitment – Finally, the signing bonus demonstrates a joint commitment and cements the legal/psychological bond between a potential recruit and the company.
What a company pays up front can vary, depending on need and perceived immediate value received by the company. Bonuses often include 15-25% of annual cash pay, and/or 10-30% vesting of options, stock or other equity or a retirement annuity and other considerations and combinations.
2. Meaningful Equity
To reward the CEO, C-level or senior executive for both company and individual achievements, the new hire should gain a real equity stake in the company. The stake needs to be sufficient in size and upside potential to justify the move. The company should structure stock, options, restricted stock units, profits interests or other equity or phantom stock comparable to industry standards. The offer can be further enhanced with a package of rights that can include anti-dilution, cash-out protections, vesting and change of control protections, extended exercise of options on employment termination, and/or loan terms to facilitate exercise. Meaningful equity should be sought by the executive in advance, but sometimes packages are developed and approved by both sides over time. This might occur in connection with negotiations over a retention agreement.
3. Tax-favored Equity
To leverage future payout, the company should structure equity taxed as low as possible and boost executives’ take-home pay. Here, the rule of thumb is: options are the best for high-value equity: stock is best for low-value equity. According to current federal tax laws, the best equity arrangement for both the executive and company is to maximize the executive’s potential use of qualified small business stock (QSBS) which offer the potential for zero capital gains taxation. Where QSBS is not possible, profits interests, restricted stock, RSUs or ISOs may offer the prospect over lower rate long term capital gains taxation on appreciation. Tax advice needs to assure the right mix of equity, including not just those equity interests mentioned but also non-qualified options, PSUs, UARs, SARs, or Phantom Stock arrangements. Each must be carefully structured to avoid ruinous “tax surprises” down the road.
4. Relocation Assistance
The company should assist the new hire by covering the cost of relocation. This includes out-of-pocket cash expenses of temporary living, storage, moving, dual mortgages and losses on home sale and costs of purchase. Companies can write executive contracts that avoid taxable income for the executive or that allow for tax gross-up, as needed. Increasing use of temporary living arrangements can benefit both executives and companies by allowing each to develop their relationship before the larger commitment by the company and executive becomes a permanent relocation.
5. Position, Duties, Support
To keep current and familiar in the industry, the executive needs to assure his or her authority and have visibility. For the interest of both parties, confirm officer and/or board positions, expected responsibilities, known performance targets, organizational authority and reporting structures right away. These duties and targets can be adjusted later, as needed. Company and executive should also discuss staff, facilities and budgets, and D&O insurance. As long as outside board and advisory positions do not present a conflict of interest, the company ought to allow these to the executive.
6. Expense Payments
Investing in the executive’s education and advancement can benefit the company as well by making the hire more valuable. In addition to reimbursement of business travel and normal job-related expenses, executives should assure company support to maintain M.D. and other professional credentials and memberships before signing an executive employment contract. Companies should also underwrite executive initiatives that will allow you to remain current, visible and connected in the field. These include time and support for speaking and attendance at national meetings, symposia and continuing education programs.
7. Non-competes and NDAs
Companies have a right to protect their existing and future trade secrets through non-disclosure agreements (NDA), and even with limited use of non-competes and non-solicitation terms. But that reasonable desire for IP protection for the company, should be calibrated for three concerns:
- the executive taking a position that directly competes with the company;
- soliciting customers, suppliers or partners; or
- raiding employees after having moved on to a new position in another company.
NDAs should not reach into your prior knowledge and connections, and even company trade secrets should be measured by expected shelf-life of confidential information. It is important that the restrictive covenants not be used as cudgel to keep the executive on a job he or she wants to leave, or as a way to stunt your career growth. The non-compete covenant can protect what the company owns and has itself achieved but cannot shield the employer against the executive leaving, and then using his or her own skills for a competitor who offers terms and an environment where the executive later to chooses to work.
8. Term and Termination
It’s better to provide for the unexpected when it comes to term of employment. Companies should provide a fixed term contract and mutual early termination clauses, with and without cause. That way the executive and company enter a relationship knowing the rules that will guide you when and if change occurs in the future. With-cause termination clauses should be based on matters under the offending party’s control.
For the senior executive, the contract should include his or her ability to trigger severance for Good Reason if the company breaches the agreement and fails to live up to specified terms the executive relied upon in taking the position. Without-cause termination should require each party to provide a notice and concede with-cause contract rights.
9. Severance Terms
Severance terms protects against the company’s normal right to terminate without cause and against the executive violating non-compete clauses on termination. These vary by position, six-month to one-year severance being common, often phased on period of service with the corporation. Robust severance terms would also include continuation of health benefits, bonus and equity considerations. Part of robust severance terms is to provide at least some cost and deterrent against termination of the executive who has made a move and career time investment in taking this position. This ballast, along with binding arbitration, English rule on attorney’s fees, and similar contract enforcement terms, strengthens the confidence that the contract will be followed.
10. Personal Fit Still Counts
A well-planned executive employment contract paves the way for a successful executive/company relationship. However, compatibility with company and fit of skills and personality, as well your own intelligence information on the company’s current business status and potential, are key to the success of the partnership. The company’s conduct in negotiating terms of executive employment can offer you valuable insight into the company’s decision-making process, motivations and flexibility, as well as your potential fit. Never fear the word “no” in negotiations. Avoid a job if your negotiations reveal traits that warn of a bad fit. A good contract does not make a good job. There is still no substitute for doing homework by each side on the other. But, by thoughtfully negotiating these “Top Ten” areas, both will learn insights into what the other is about. The resulting contract will reflect the above-board style and approach of both parties and lay a foundation conducive to getting the best from both sides. In conclusion, it is useful to remember, even when you feel there is a good fit as you go in, things can change and having a good contract is an important protection against your champion leaving the company or other unforeseen developments.