Just as the rich are different from you and me, so too are executive employment agreements different when compared to agreements between employers and middle management employees. Fundamentally, “C” level employees have the negotiating leverage that other employees lack. While the employer may believe, rightly or wrongly, that mid-level employees are fungible and can be presented with form “take it or leave it” contracts, employers usually take a different approach with senior management. Thus, executives often have opportunities to negotiate specific terms and conditions in their employment agreements that are simply not available to lower level employees. Understanding such negotiable terms, and acquiring the necessary skill set to negotiate them, can help you close the deal on the most favorable terms possible.
The most important distinction in executive contracts – and something to make sure you have in yours – concerns the term of the agreement. Rather than “at-will” employment, most executive employment agreements are for a term of years. This type of employment contract requires “cause” to terminate the executive, and thereby provides some degree of protection for the executive while at the same time helping the employer attract and retain key management employees critical for the company’s success. In addition, provisions relating to compensation and benefits provide additional incentives for the executive to stay with the company for an extended period of time and to exert best efforts in developing and expanding the company’s business.
As a prospective executive, your leverage in negotiating an executive agreement will be affected by a variety of factors, including your skill set and experience, industry norms, and the size of the company you are joining. Dismal economic conditions in recent months have given rise to new legislation restricting executive compensation in certain situations. Familiarizing yourself with these new laws will help you to understand and strengthen your bargaining position before entering into and concluding a contract negotiation.
The basic building blocks of an executive employment agreement are: the executive job description; compensation; benefits and perquisites; grounds for termination and associated economic consequences; change in control of the company; confidential information and restrictive covenants; and dispute resolution. Frequently, the negotiations will focus heavily on compensation and exit arrangements, and it is easy to prepare for such negotiations by determining in advance what constitutes a competitive compensation and fair exit strategies. For example, you can find representative executive employment agreements used by publicly traded companies filed online with the Securities Exchange Commission. Furthermore, reminding the employer that favorable exit arrangements ultimately will protect both party’s interests upon termination by avoiding costly litigation.
It is also important to consider new legislation that could potentially affect your executive compensation package. First, the Emergency Economic Stabilization Act (EESA) of 2008, which included the Troubled Assets Relief Program (TARP), allows the Department of the Treasury to purchase or insure “troubled assets” and have a “say on pay” regarding those financial institutions that sell troubled assets to the Treasury. In 2009 President Obama signed the American Recovery and Reinvestment Act (ARRA) into law, directing the Secretary of the Treasury to set appropriate standards for executive compensation and corporate governance for companies receiving TARP funds. President Obama has recently repeated his opinion that pay structures at financial firms encouraged and even rewarded excessive risk taking, ultimately leading to the current recession and crisis in the financial industries. Sooner rather than later, we can therefore expect “pay czars” to be reviewing executive compensation at more than just those companies receiving TARP money.
Finally, state laws regarding executive compensation may affect executive employment agreements. For example, California recently passed the Higher Education Governance and Accountability Act, which requires: (1) all executive compensation packages at the University of California and California State University to be voted on in an open session of the full board, and (2) full public disclosure of the proposed executive compensation with the accompanying rationale for that compensation. We can also expect states and local governments to continue to interpose themselves into the compensation paid to executives in their jurisdictions.