Executive Contracts: What’s Common and What to Look For

For both employers and executives, having a well-drafted executive employment agreement is key to defining the relationship between an employer and one of its most important employees. The contract also sets the parties’ expectations for the executive’s eventual exit (hardly anyone stays at one company their entire career any more).

This contract is not a one-size-fits-all agreement, and one should consider the following before drafting an executive employment agreement: size of the employer, state(s) where the employer does business, and state where the executive will be based. State law differs widely, and determining choice of law and venue provisions will make a difference in how many contract provisions, such as non-competition provisions, are interpreted.

Compensation is often what executives are most interested in negotiating. Apart from base salary, executives may seek compensation such as a bonus, incentive plan, car or apartment lease payments, change in control benefits (whether or not upon termination), life insurance policy, deferred compensation, and equity interests such as stock options or profit sharing.

In many cases, the agreement will be for at-will employment, even for the most senior executives. In some agreements, the parties may agree to a term of years, which may be subject to certain conditions allowing for an early termination or which remain “at will.” In either case, the parties negotiate over the definitions of “cause” and “good reason” to determine when an executive is entitled to severance upon termination. The following are some common reasons that may be included under “cause” definitions:

• An act constituting a felony or the arrest for a felony
• A felony or misdemeanor that was intended to result in an executive’s monetary gain or personal enrichment at the expense of the company or any of its affiliates or related entities
• Act of material and intentional dishonesty or disloyalty in the conduct of company business
• Any misuse or misappropriation of the company’s assets
• Misconduct on the part of the executive that is intended to or is likely to injure the business or reputation of the company in a material way
• Material violation of company policies or directives from the board
• Habitual misuse of alcohol or drugs
• Any wanton, willful, or intentional dereliction of duties by the executive
• Breach of the employment agreement or any other agreement between executive and the company

Frequently, executives will negotiate a notice period with the opportunity to “cure the reason” for a potential termination for cause. Sometimes, an executive will negotiate an opportunity to appear before and be heard by the board before being terminated for cause.

On the other hand, agreements that provide an executive the opportunity to terminate for “good reason” almost always have a requirement that the executive give the employer notice that a good reason condition has occurred, then require a cure period before the executive’s termination takes effect. Some common definitions of good reason include:

• Material diminution of the executive’s duties, authority, or reporting structure
• Material reduction in the executive’s base salary or bonus opportunity, other than in the case of across-the-board reductions for similar employees
• Change in the executive’s work location by more than 30 miles
• Breach of the employment agreement between the executive and the company

When drafting the termination provision of an executive employment agreement, it is common to include termination in the event of death, disability and corresponding inability to work for an extended period of time, for cause, for good reason, and without cause or good reason. In contracts that include a term, employers should include a provision describing what happens if the parties allow the term to expire. Failing to include such a provision may mean that the expiration of the term is viewed as a termination without cause and could trigger severance obligations when that was not the employer’s intention. In the same vein, an agreement for short-term employment may include a “notice” provision for either party to provide advance written notice of their intent not to renew the agreement.

Employers should also be sure to include the executive’s obligations in order to be paid severance in the event of termination without cause or for good reason. Such obligations might include the return of company property, non-disparagement, compliance with post-employment restrictive covenants, cooperation with the company with respect to litigation, audits, investigations, or other proceedings of which the executive may have knowledge. Most important is that the executive should sign (in a timely manner) a separation agreement containing a release of all claims in order to receive the severance.

Almost always, executive employment agreements contain restrictive covenants governing post-employment obligations, such as non-disclosure of confidential information, non-compete, non-solicitation of both clients and employees, and covenants not to interfere with important relationships of the employer. These are critical provisions for both the executive and the employer, and the parties will want to carefully define the length of the restrictions, the geographic area of the restriction, and the scope of the restriction, including a definition of a “competitive business” or a “client.”

Other provisions that parties may want to consider including in the agreement include:

• Change in control
• Successorship
• Assignability
• No other agreements
• Amendments must be in writing
• No representations other than in the agreement
• Signing electronically and in counterparts
• Choice of law
• Venue
• Disclosure to future employers required
• Notification by employer to potential employers permitted
• Mediation and/or arbitration (or waiver of jury trial)
• Tax issues: Section 409A

Often, these provisions are viewed as “boilerplate,” and a party might skim over this part of the agreement. However, it is important to understand each of these provisions and how they impact the rights of both the employer and the executive. For example, with a notification of a potential employer’s provision, an executive may not realize that the employer has the right to send a prospective employer a copy of their agreement, which includes compensation information and the non-compete.

The bottom line in drafting an executive employment agreement is that parties must take care to ensure that the agreement reflects their deal, and that each party understands their rights in the event of an exit.