Executives should expect to enter into an employment agreement when they start a new role. When reviewing the employer’s proposed agreement, executives should focus on the following.
1. Make sure the compensation is clear.
You can’t know if you are being compensated fairly if you don’t know what you are being compensated. The agreement should clearly identify each aspect of the executive’s compensation. This can include salary and benefits, bonuses, and equity awards. Executives should understand whether and how their salary could be adjusted (up or down), overall compensation potential (as well as the likelihood of reaching that potential), and the vesting requirements for any equity awards. If bonus or equity awards will be a key source of compensation, it’s reasonable to request copies of the underlying bonus or equity plans for your review before signing.
2. Understand how the relationship can be ended.
Executives, like other employees, can be terminated by their employer. How and when it can be done, as well as the termination’s effect on the executive’s bonuses and equity awards, should be spelled it in the employment agreement.
3. Severance is beneficial for both sides; know what triggers it.
Though for some employers it may seem counterintuitive to build a severance obligation into an agreement that describes the terms of an executive’s employment, doing so thoughtfully can help set the right tone for the employment, provide financial safeguards that persuade the executive to pass up other employment opportunities, and help minimize the chances of an acrimonious departure if the parties reach the point where they need to terminate the employment relationship. Employment Severance terms and termination terms go hand in hand, so focusing on their interplay in the employment agreement is key.
4. Be aware of non-competes.
Unless you are prepared to jump industries or retire, what the agreement purports to prohibit you from doing after the employment relationship ends could be the most important term of the agreement. Even if you have a severance package built in, it may not equate to your compensation if you were fully employed, and sitting on the sideline for a year or more could make it harder for you to land your next executive-level role. You should know what you’re agreeing to – and whether you actually agree with it – before you sign.
5. Be careful when relying on other promises.
Finally, the executive employment agreement’s integration clause may be the most important overlooked term of the agreement. It typically says something like, “This Agreement contains the entire agreement between the parties and supersedes any prior representations or agreements between the parties.” That clause should not be ignored, as it attempts to wipe away any promises or commitments the employer made while recruiting the executive that were not included in the agreement. Thus, if the employer claims it will do something, get it in the agreement.
It can beneficial to get good legal advice when entering into an executive employment agreement. If you have an executive agreement you are considering, we would be happy to discuss it with you, make sure you understand the terms, and advise you in the negotiation process.
