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Understanding Your Executive Employment Agreement

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Work with your advisors and employment attorney to understand and negotiate compensation structures, restrictions and provisions for the unexpected.

Your employment agreement serves as the cornerstone of your relationship with your company. It establishes your responsibilities, rights and rewards. A well-crafted agreement provides clear terms, which avoids unintended consequences and unexpected surprises.

Employment contract negotiations can be challenging – and executive level employment agreements even more so. From the outset, focus on the aspects of the agreement that are most important to you – compensation, restrictions and unexpected events. Tailor your negotiation approach to ensure the rewards and protections are in place to provide a total compensation package that meets your needs, risk profile and time horizon. While your advisors can provide helpful input, you will also want to work with an employment attorney to understand and negotiate the agreement.

Understand Executive Compensation

Compensation will be front and center – from base salary to bonus structure to equity grants. Your first priority is to ensure the layers of your compensation package align with your expectations.

  • Work with your advisors and an employment attorney to understand your equity grants, including the vesting period, open window opportunities, stock option exercise price and whether any portion is eligible for accelerated vesting in the event of separation. Ideally the agreement will provide some degree of flexibility on the execution of options, prudent diversification, holding requirements and use of 10b51 plans.
  • Ensure you are comfortable with the mechanics of your performance incentive plan and whether bonuses are dependent on individual efforts, market conditions, company performance or at the sole discretion of the board of directors. While the primary metric used in determining your bonus is likely to be company share price, it can be beneficial if weight is also given to factors in your immediate control – for example, your performance, or sales and revenue.

Accept Restrictions - But to What Extent?

Restrictions on Company Stock

Blackout and other trading restrictions may impact your ability to transact in your company stock – including diversification, sales, wealth transfer and charitable gifting. Recognize that you will need to comply with SEC and other regulations involving your company stock and plan accordingly. Restrictive covenants, along with non-solicitation and confidentiality provisions, may influence strategy and activity around your company holdings. Strict or inflexible exclusivity clauses may result in the forfeiture of outstanding equity awards and supplemental compensation.

Restrictions on External Activity

Restrictions can impact whether and how you are able to allocate your time to external matters that are important to you. Explore whether your employment agreement permits you to serve on philanthropic boards of your choice, as well as for-profit boards of companies that are not in direct competition with your company. You may also want to advocate for the ability to teach at a university or present to industry and trade organizations.

Non-compete provisions

Advocate for a short and narrow non-compete provision so as not to create unduly burdensome post-employment limitations. Be aware of regulations and restrictions specific to your industry, company and professional licensing boards to ensure compliance with and offer protection against financial and reputational risk.

Address the “What If’s”: Separation, Disability and Change of Control

Life happens and business needs change as markets, the economy and industries transform. Ensure you understand what you are entitled to in the event of separation, mutual termination, physical disability or change of corporate control.

Separation - advocate for specific circumstances

Typically, an employment agreement will provide severance pay as long as you are not terminated “for cause.” Make certain your employment agreement clearly defines “for cause” and the grounds for which you may be terminated. Rather than agree to broad terms such as “breach of the employment agreement” or “failure to perform,” negotiate that specific circumstances be enumerated. This may include conviction of a felony, any act involving moral turpitude, embezzlement or theft.

Similarly, it is wise to insist that your employment agreement set forth situations and instances in which you may be entitled to severance pay in the event you resign. Companies generally omit such “good reason” provisions, but it is in your best interest to protect yourself if your role dramatically changes or you are required to relocate.

Disability – understand terms of compensation forfeiture

Nearly all employment agreements address the consequence disability has on salary, vesting and the continuation of benefits. But being disabled does not necessarily mean that you will be permanently removed from the workforce: What if you are unable to work for 6 or 12 months?

Understand how your company defines “disability” and consider its potential impact on your overall personal wealth plan. For example, under your company’s policy, benefits may continue for some period upon disability – but the policy may also mandate the forfeiture of equity grants and reduction of earnings and company-based savings opportunities. If your compensation package is mostly comprised of equity grants and deferred compensation, an unexpected event could have lasting effects.

Change of control – seek clear provisions

Assess your industry and the economic environment to determine the likely occurrence of a merger, acquisition, divestiture or other major reorganization during your tenure. You may find yourself in a situation where the leadership or management structure radically differs from what you originally agreed to. In such an event, change of control provisions ensure you are entitled to specified payments and benefits. Be aware that not all change of control provisions are deemed to rise to the level of a “triggering event” to offer protections. Some relate to acquisition of the company’s stock while others focus on changes in the board of directors. To avoid uncertainty and future disputes, seek change of control provisions that are not only favorable but clear and easy to apply.

Next Steps

  • Work with your advisors and an employment attorney to understand the agreement.
    Ensure you understand the various forms of compensation included and to what degree your performance incentive plan is based on share price and other factors. Drill down on questions such as how retirement is defined and the treatment of equity-linked compensation upon retirement – for example, if it’s vested or prorated.
  • Be aware of overly limiting restrictions and unfavorable separation, disability and change of control terms.
    Identify areas where there is room for negotiation. Within reason, work toward ensuring that you are not unduly restricted from new employment in the event of separation and that you have latitude to join the boards of your choice.
  • Prepare to compromise.
    Your negotiating strength is likely to depend on your expertise, experience and labor market conditions. Balanced measures of advocacy and compromise are a reflection of your skill and diplomacy as a leader.
Executive

Consult an Advisor

Our advisors can help you navigate your agreement.

THE NORTHERN TRUST INSTITUTE

Proven Advice for Moments that Matter

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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