Flexing Your Muscle

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

Companies are usually keen to insert “clawback protection,” which enables them, under specific circumstances, to take back the goodies they have given you. Broadly, these provisions state that the executive will forfeit all or some of the stock awards and any proceeds or shares received if the employee violates the company’s loyalty pact or is involved in fraud or misconduct, usually related to a financial restatement. Should you ask about clawbacks if you don’t see them spelled out? Probably, even though it may prompt a somewhat naive company to investigate adding them. Otherwise, you could set yourself up for some ugly surprises, particularly if clawback details are buried in a separate stock policy agreement rather than in the main contract.

The Departed

Compared with salary clauses, termination clauses contain much more nuance. The company typically inserts language about termination with “just cause” — describing the grounds for it and how the procedure works. Usually, compensation and benefit accruals cease immediately and executives forfeit any nonvested stock awards and benefits.

“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, or 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 employee 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. Instead, insert specifics. A contract could note, for example, that a CFO must meet certain financial goals to keep the job. Sound tough? Sure, but you don’t want the just-cause standard to feel arbitrary or unfair.

New hires should also keep an eye out for clauses that relate to claims release. “It is a critical company protection,” maintains Poerio, who says that if it is not included in the contract, “don’t mention it.” A claims release provision promises candidates a set payout *#8212; usually a multiple of salary — if they agree not to sue the company for firing them without cause. Companies often attach claims releases to the contract, and stipulate that if the law changes, it has the right to rework the agreement. “Say no,” insists Poerio.The deal at the time you sign the employment contract should remain in place until the contract expires.

Pay As You Go

No executive should exit empty-handed. Executive contracts ought to 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 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. And then nudged some more. Severance payouts usually range between one and three times current annual compensation, or sometimes the average of those two sums.


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