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Checklist for Drafting Executives’ Contracts

by Peter M. Panken

Drafting executive employment contracts requires attention to myriad details. The higher up the executive, the more likely there will be detailed negotiation of the terms. And when negotiating with an incoming CEO, CIO, or CFO, an HR executive is faced with tough negotiations with a future boss.

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Here’s a checklist of the questions that need to be answered when putting the deal together.

1. Applicable law. Which state law will apply in case of a dispute?

2. The parties. Defining the employer is key — is it a parent corporation, a subsidiary corporation or both? Can the employer assign the contract?

3. Contract length. Most executive employment contracts are for a specified term – one, two, three, or more years. But it’s important to know whether your state law implies an automatic renewal absent a specific term in the contract. You may want to include such a term if necessary.

4. Executive’s duties. This is most often described by the executive’s title (e.g., the duties of a vice president of operations or controller). But flexibility is important so the description should include other duties that may be assigned by the employer from time to time. Otherwise, a change in duties or title may be considered a breach of the contract by the employer.

5. Full-time employment and best efforts. The executive should agree to give full-time employment and “best efforts.” Any exceptions should be limited and carefully articulated.

6. Conflict of interest and abiding by the rules. The executive should agree to avoid conflicts of interest and to abide by conditions such as the employer’s rules, regulations, and bylaws.

7. Compensation. Compensation includes items such as salary, commissions, bonuses (when and how earned, by performance or longevity), incentive compensation, stock options, and deferred compensation. Be careful to have a tax specialist review deferred compensation terms for compliance with Section 405 of the Internal Revenue Code.

8. Benefits. Benefits include pension or profit-sharing, stock options, and severance benefit plans as well as vacations, holidays, and sick leave.

9. Contract termination. Premature termination results if an executive quits or is terminated by the employer. It is important to spell out whether and under what conditions the executive is entitled toas a severance benefit as a result of termination caused by death, disability, “cause,” or “ good reason” to resign. Is notice of non-renewal required before the end of the contract term? Short of bankruptcy, can the employer terminate the contract because of its own economic problems? What happens if the employer is acquired by another company? Does a change of control trigger a right to severance benefit?

10. Defining “cause.” Most states have very little precedent for defining a cause that would allow an employer to terminate an executive’s employment contract. Therefore, it’s important to define “cause” in the contract itself. Executives negotiate these issues fiercely. Some examples of cause might include conflict of interest, failure to meet the job’s goals, insubordination, failure to cooperate in a company investigation, disloyalty, acts of moral turpitude, and unethical conduct. Similarly, the executive will want to negotiate what is good reason for resignation with severance, including significant change in rank or duties.

11. Noncompetition agreements and restrictive covenants. Most states (but not all) allow employers to require that an employee not compete with his former employer for a reasonable time within a reasonable area after leaving employment. But most states do allow restrictions on revealing trade secrets and solicitation of customers and other employees to leave the employer while the executive is still employed.

12. Representations that employment won’t violate agreements with former employers. No employer wants to buy a lawsuit by employing an executive who is bound by a restrictive agreement from the executive’s former employer.

13. Intellectual property. It’s important to spell out who owns the inventions and other intellectual property  an executive or scientific employee produces while employed.

14. Dispute resolution. If there’s a dispute, will it be settled by arbitration or in court? Where will the venue be? Even if arbitration is the preferred venue, the employer may want to be able to go to court to get injunctive relief against violations of the restrictive covenant’s rules.

Bottom line
Every employment contract is tailored to the specific terms agreed to by the parties after negotiating. The foregoing issues must be dealt with when structuring a deal with the executive with the goal of providing the utmost protection for the employer. In negotiating with the new CEO, the more attractive the candidate the more the employer will be willing to compromise.