Flexing Your Muscle

How to craft an employment contract that gives you the best deal.

While termination clauses can be especially delicate, it’s important to study other provisions as well. If you’re dealing with a public company, there’s a new Securities and Exchange Commission rule that requires it to disclose, in detail, the proposed compensation package. That means investors and other stakeholders will have to be placated — so don’t expect to make your getaway with a parachute of gold, especially these days.

How Long, How Much

The agreement usually starts off with a definition of the period it covers — generally in the range of one to five years — followed by a clause about automatic extensions that includes the caveat, “unless the board decides otherwise before the renewal date.” This is also an area that new hires often overlook, says Maria Hallas, an employment attorney with Greenberg Traurig. What at first appears to be a yearlong contract could include a provision allowing the executive to be axed with just 15 days’ notice and a month’s pay. Be aware, says Hallas, that what you’re being offered is “really a monthlong contract that is renegotiated year-to-year.”

Salary may also appear to be fairly straightforward. Nonetheless, candidates should benchmark salary and compensation packages against peer-company data to develop a sense of where their deal fits. Underpaid? Remind them, sternly, how lucky they are to have you. Overpaid? Remind yourself — under your breath, of course — how lucky you are to have snagged this new gig.

Compensation language starts with the base salary and should end with a clause about how annual increases will be calculated. 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 that trigger the formula.

Another tip: make sure any stock-option provision goes beyond noting the grant date and number of shares that a candidate has the option to purchase. Incoming executives should ask for details about options vesting and expiration as well as the possibility of cashless exercise (a method for converting options to stock without covering the strike price). It’s common for a CFO-level hire to receive restricted stock as a signing bonus. As Harry Graham, managing director at Smart Business Advisory and Consulting, a compensation and benefits firm, points out, while stock options and restricted stock are popular forms of executive compensation, some aspects of both have changed in recent years.

For instance, both types of awards now often have vesting schedules tied to performance rather than to time served, as a response to institutional investors’ demands that boards encourage accountability. 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 net settlement clauses be included.

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