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?

Just cause usually means serious infractions, such as an indictment or conviction on a felony involving fraud. It also can refer to any material harm done to the company or investors arising from inappropriate use of company funds or property, general misconduct that soils the company’s image, intentional malfeasance, gross neglect, and impaired judgment caused by alcohol or drug abuse. Further, most executive employment contracts include a statement warning that any breach of material provisions of the contract itself constitutes just cause.

In general, the executive wants the “cause” for termination to be “as heightened and narrow as possible,” advises Hallas. The description should be minimal to the extent that it avoids ambiguous definitions, such as moral turpitude, discredit to the organization, or deficient performance. Instead, get specific. A contract could note, for example, that a CFO must meet the financial goals established at the beginning of the year, which will be measured by tracking account receivables and payables, merger deals, clean audits, or other quantifiable objectives.

Pay As You Go

Leaving empty-handed is no way to leave an executive position. Executive contracts should contain some language guaranteeing that compensation and benefits will be paid through the agreement’s expiration date if the CFO dies, becomes disabled, is dismissed without a just cause, or resigns for “a good reason” — which can include a demotion, an office relocation farther than 50 miles from the current address, or a cut in salary. Further, incoming executives should argue for accelerated vesting on stock awards, although the company may need to be nudged on that issue.

Severance payouts vary, but usually range between one and three times the current year’s compensation, depending on company policy. Sometimes, to avoid basing the payment on a year that included a big bonus, companies insist on a two-year look-back period and take an average.

Change-of-control is another event that falls under the “good reason” to resign category. The change can relate to a merger or acquisition, a significant change in board members, or an investor buying up an unusually large stake. In any case, clauses dealing with such change should be clearly spelled out.

Also consider that a private company likely will demand that its executives surrender ownership shares regardless of the reason for departing. So candidates should negotiate for language that states if they have to surrender shares, the termination payout will be based on the fair market value of the stock. This is also the place to indicate how the shares will be appraised — by a third party, for example — and whether the payout will be provided in a lump sum or installments.

It is also crucial to review non-compete agreements before accepting a position. These are loyalty pacts that keep departing executives from working for competitors or similar industries for a period of time. Many times, non-compete agreements are not enforceable, says Poerio, but candidates should not point that out to the employer. “Keep that card in your hand in case you have to play it later,” counsels the attorney.


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