Things to Consider in Employment Agreements for Executives
Individuals in executive roles have more responsibilities and obligations than other employees. They also tend to have more complex compensation packages. Template offer letters and employment agreements that are intended for general employees should be modified to reflect these differences.
Bonuses and long term incentives (ie. stock options, RSUs and PSUs) make up a larger proportion of an executive’s total compensation package than they do with typical employees. This makes it very important to be explicit about the conditions that need to be satisfied in order for the executive to receive the incentive compensation. What individual and company targets must be met? How much discretion will there be in the amount awarded? Will the compensation be paid immediately or over time? If the compensation is earned over time, what happens if the executive’s employment ends before they have received the full payment?
If the executive will be eligible for different benefits than other employees this should be clear. Common examples of additional benefits include: supplementary pension or retirement savings plans, executive medical packages, car allowances, club memberships, etc. The tax treatment of these types of benefits should also be clear in the agreement.
Change of Control
Change of control clauses are common in executive employment agreements. They allow an executive a choice to leave an organization with a severance package if certain criteria are met. The criteria vary but they usually include a merger or acquisition, a change in ownership of a majority of voting shares, or a turnover of a majority of the board of directors. In many cases, a reduction in the executive’s responsibilities or compensation is also required along with the change of control in order to trigger a right to leave with a severance package.
Indemnity and Insurance
Executives who also act as officers or directors of a corporation can, in some circumstances, be held responsible for income taxes, payroll taxes, and wages owing by the corporation. They can also be ordered to personally pay fines and penalties for breaches of environmental, health and safety, and other regulations. Because of these additional risks and responsibilities, most companies will give executives an indemnity and purchase insurance to cover these potential liabilities. The amount and type of insurance and the circumstances where an indemnity will be provided should be as clear as possible in the agreement.
Many companies want to place limits on an executive’s ability to work for a competitor or to solicit business from its clients if the executive leaves for any reason. If non-competition and non-solicitation clauses are carefully written they can be very effective. If they are not properly drafted they can be held to be unenforceable.
If you have questions or would like assistance, the Employment Law group at Carbert Waite LLP would be pleased to create an Executive Employment Agreement tailored specifically for your situation.