Whether because of a change in control, greener pastures beckoning, or just a desire to do something different, job change may become imminent for a CFO. What are some of the key considerations around making a decision?
While compensation normally is the first focus in considering a new position, there are other important areas you should not overlook. If you are moving on, following are five points to check about the terms of your new employment. These points also are worth checking if you are staying put.
Aside from salary, bonus, and incentive compensation, the inclusion of a non-compete agreement in your existing employment terms may be the single most important point to consider, as this could limit your choices for what is “next.”
Some would argue that, given the nature of the role, a CFO should not even have a non-compete. But with the CFO so familiar with the entire business, that argument may not prevail. It is important to understand the terms of a non-compete, and to be cautious about how sweeping its application could be.
For example, a non-compete that restricts a CFO from providing services to any entity in the company’s industry for a period of one year after termination could prevent a desirable move. Although CFO skills are transferable across industries, you may desire to stick with an industry you know.
One compromise could be to agree not to work for specific named competitors for a specified period post-termination (to assuage the company’s concerns about loyalty and its secrets). Another compromise could be an agreement that the non-compete would not apply if the company terminates you without cause or you leave for “good reason.”
Since with a change in control there is often CFO turnover, another thing you might ask is for the non-compete to terminate if there is a change in control. Finally, another compromise could be to reduce the length of a proposed non-compete (say, to six months) and severance pay for that period.
Although each new relationship starts out with optimism, it’s wise to consider what could happen if your employer terminates you without cause or you leave more or less involuntarily (for “good reason”).
If your employment is “at will” and there is no severance policy or negotiated severance, then you are at risk if the company decides to let you go. Often, executives negotiate for the length of a severance period to match the length of a non-compete, so that if they are prevented from working by the terms of a non-compete, they are compensated during that period.
In addition to continued base salary for a certain period (or in a lump sum), executive-favorable severance terms may include a bonus equivalent (or pro-rated bonus), continued health coverage for the severance period, and accelerated vesting of stock options. Note that it’s typical for severance to be conditioned on a release of claims. Seek to have the release attached to your agreement as an exhibit so that you can negotiate the terms in advance.
If you have a right to compensation that will (or may) be paid later than the year in which it is earned, you need to make sure that it does not violate the deferred compensation rules of Section 409A of the Internal Revenue Code.
These rules can impact everything from bonuses to severance and incentive compensation. The penalty for violating Section 409A falls on the executive (not the company) and includes a 20% penalty tax, interest, and early inclusion of amounts in income.
At its most basic level, Section 409A requires that the parties specify a form (lump sum or installments) and time of payment. Only certain payment “times”/events are permitted for compensation that is deferred. Certain exceptions apply, including the frequently used “short-term deferral” exception for compensation that is paid no later than two and one-half months after the end of the year in which it vests (normally March 15).
To the extent that it’s possible to rely on an exception to Section 409A, this may be preferable in terms of allowing more flexibility and less risk. For example, acceleration of payments is often possible if the arrangement is exempt from Section 409A but usually is not possible if it’s deferred compensation subject to Section 409A.
The role of CFO brings with it risks of liability relating to service, as well as litigation risks. These risks were underscored in September 2015, when the Justice Department outlined new policies prioritizing the prosecution of individual employees who are involved in alleged corporate crimes.
As a result, it is more important than ever for CFOs to have protection for acts taken in the course of duty. Officers (and directors) often enter into indemnity agreements with their employers, particularly in the public company context. These agreements normally require the company to indemnify the individual for events related to the scope of services (including direct expenses and related liabilities, such as penalties and fines, net of amounts covered by insurance), and to advance expenses.
Regardless whether such an agreement is possible in your case, ask to see the indemnification provisions for officers in the company’s organizational documents (charter and bylaws if it is a corporation), and make sure you are indemnified to the maximum extent permitted by law.
Directors and Officers Insurance
Indemnification and insurance go hand in hand. It is essential for CFOs to understand the nature and extent of their company’s D&O coverage. As with all types of insurance, the devil is in the details when it comes to a D&O policy.
Here are six high-level tips. First, it is important to know how much coverage you have and how the company determined that the coverage amount was appropriate. Second, you should understand who else is covered by your policy, because D&O policy limits are shared among many individuals and claims against multiple insureds can quickly erode available coverage.
Third, you should determine whether your policy “advances” or “reimburses” defense costs, the former being far preferable to the latter. Fourth, particularly in view of the DOJ’s recent targeting of individuals, you should ascertain whether your policy covers regulatory inquiries, pre-suit investigations, and the cost of responding to subpoenas.
Fifth, because some policies impute the conduct of one insured to all insureds, you should be aware of whether and how another individual’s actions can impact your entitlement to coverage. Finally, it pays to be proactive when it comes to D&O insurance, because policy terms and conditions can often be improved.
Christine Osvald-Mruz is a partner in the employee benefits and executive compensation group, and Christopher Loeber a partner in the insurance recovery group, at Lowenstein Sandler LLP.