Employment Contracts: How to Cut the Best Deal

You've negotiated debt covenants, mergers, and supply contracts — but do you know what should be included, and struck, from your employment contract?

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.

Companies usually are keen to insert clawback protection into contracts. These generally state that the executive will forfeit all or some of the stock awards and any proceeds or shares received through vesting or exercise if the employee violates company loyalty pacts or is involved in fraud or misconduct — usually related to financial restatement.

What a candidate should remember about clawbacks is that you may be damned if you ask about them and damned if you don’t, says Poerio. Clawbacks aren’t always part of the main contract agreement, but rather part of a separate stock policy agreement. Asking about them during negotiations may prompt a company that doesn’t include them in contracts to investigate and add the provision. But not knowing what the policy is before signing the contract is not advisable either. The best way to handle the situation is to ask for a sample stock agreement before joining the company, says Poerio. In that way, you can negotiate from a position of knowledge.

The Departed

Compared to salary clauses, termination clauses contain much more nuance. The company typically inserts language about termination with just cause — what the grounds are and what happens if there is a just-cause firing. Usually, compensation and benefit accruals cease immediately, and stock awards and unvested benefits are forfeited.

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