VideoAmong the first things to think about when reviewing a new job offer is what's going to happen when you leave the job. To be sure, termination clauses are often the most-negotiated elements of employment contracts. They can also be deal busters.
Consider a recent situation that pitted a highly sought-after CEO against a hard-nosed chairman of a real estate development firm. They had a hand-shake agreement for the CEO to leave his current job and join the developer. The coveted executive was regarded as the number-one candidate in the entire region, and potentially a key driver of the company's future success.
The chairman, who prided himself on being a savvy negotiator, told lawyers to include a harsh termination clause in the employment contract that was being drawn up for the new CEO. By the chairman's lights, the clause would serve as a bargaining chip he could use to whittle down his original lucrative offer. Among other things, the chairman had promised the future CEO a huge supplemental retirement benefit because he was leaving a lot of money on the table at his existing job.
The lawyers balked at the idea as risky and unnecessary, but they eventually acquiesced to the boss's demand. As a result, the contract included under just causes for termination vague "failed to meet board of directors' standards."
After receiving the contract, the CEO candidate refused to return the chairman's calls and killed the deal, says J. Mark Poerio, an employment practice partner at Paul, Hastings, Janofsky & Walker, who recounted the story. The CEO considered the overly aggressive clause a show of "bad faith" by his potential future boss. "It is fine to want to protect corporate interests, but not to the point of sending signals of mistrust," opines Poerio.
While termination clauses can raise hackles on both sides of the negotiating table, other contract provisions are less controversial, but still important to review. Indeed, executives employment contracts, which typically run 10 to 20 pages, are packed not only with standard compensation and termination provisions, but also plentiful nuances that a candidate should understand before signing on the dotted line.
Perhaps even more important, experts say, candidates that are negotiating contracts will feel the effects of the new Securities and Exchange Commission rule that requires public companies to disclose, in detail, the compensation packages of top executives. Employment contracts are receiving "a lot more scrutiny" from investor and other stakeholders, says Harry Graham, managing director at Smart Business Advisory and Consulting, a compensation and benefits outfit. "Everything is the proxy statement in black and white."
How Long, How Much
The agreement usually starts off with the contract period, generally a set number of years in the range of one to five, followed by a clause about automatic extensions with the caveat, "unless the board decides otherwise before the renewal date." Before settling on a term, candidates should check industry data to see what peer companies are offering. This is also an area that some new hires overlook, opines Maria Hallas, an employment attorney with Greenberg Traurig. It may be a year-long contract on its, she explains, but if it includes a provision that says the executive can be fired with 15 days notice and a month's pay, "that's really a month-long contract that is renegotiated year-to-year."
Salary is also a fairly straightforward item, and in fact is considered "the easy part," says Graham. Nonetheless, candidates should benchmark salary and compensation packages against peer-company data to develop a sense of whether they are being underpaid or overpaid.
Compensation language starts with the base salary, and should end with a clause that says something about how the amount is subject to annual increases — companies will want that increase to be at the board's discretion, and candidates should argue for as much detail as possible, says Poerio. For example, negotiate a written commitment from the board that it will develop a compensation formula by a specific date for doling out cash bonuses, stock option grants, and restricted stock. In addition, the provision should include details about performance goals and targets linked to the formula.
Another tip: make sure any stock option provision goes beyond just noting the grant date and number of shares that a candidate has the option to purchase. Incoming executives should ask for terms related to options vesting and expiration, cashless exercise, and net settlement.
It is not uncommon at the CFO level to receive restricted stock as a signing bonus. From the corporate perspective, it's a better retention device than cash, says Graham. He also points out that stock options and restricted stock are still both popular forms of executive compensation, but candidates will see some changes regarding each.
Increasingly, both types of awards have vesting schedules tied to performance rather than time, as more institutional investors are demanding that boards include pay-for-performance criteria in employment contracts. That is especially true for restricted stock, which must be booked at its fair market value and could turn out to be a drag on earnings if a company is struggling financially. When stock awards appear in contracts, however, candidates should insist that vesting periods and a net settlement clauses be included.
Reader Comments» Post a comment