SHOULD YOU ASK FOR AN EMPLOYMENT CONTRACT?
Should you ask for an employment contract? We tell our clients, “If
you don’t ask, you don’t get.”
Michael Mooney of Boston’s Nutter McClennen & Fish finds that
there are three times when issues of employment contracts come up: prior
to accepting employment, during employment, and when employment is
terminated. It is far easier to negotiate employment terms prior to
employment. And it is in everyone’s interests that you do so.
Why is It In Everyone’s Interests?
The recruitment process is like a courtship. And the employment
agreement is the prenuptial contract. Both parties may be reluctant to
jeopardize the positive relationship built up during the courtship. But
such agreements help both parties. Attorneys Justin P. Morreale and Donald
Bruce-Adams of Bingham Dana & Gould argue that employment contracts
help employers in two ways. Such agreements:
- Provide key employees with a carefully designed set of incentives to
encourage them to remain with the enterprise.
- Provide investors with increased assurance that key people in which
it has invested will continue on their jobs...or at the least will not
be in a position to compete with the enterprise.
Who Provides Contracts?
Herb Crehan of Hay Associates in Boston reported on the results of a
survey of over one thousand companies. Nearly 40% of responding companies
provide employment contracts. Certain industries are more prone to
providing employment contracts, such as entertainment, media, and retail.
Insurance and banking sectors are less prone to provide such contracts.
The Hay Associates data is historical. Based on our consulting practice,
we suspect that the trend in insurance and banking is moving toward the
median.
Asking for a Contract
If a company sells stock on the public market, ask for a copy of the 10K
report. The appendix of the report sometimes lists key employment
contracts signed by the company. If the company is private and you will be
reporting to the President, it is appropriate to ask your prospective boss
if he or she has an employment contract.
"Don't You Trust Me??!!
Some prospective bosses will react with indignation at the notion of an
employment contract. If the person says, "We don't believe in
providing employment contracts to our people," you might gently (and
without sarcasm) ask if key employees are allowed to join the company
without signing non-compete and non-disclosure agreements. A company which
asks employees to sign such statements has employment contracts. The
issues should now focus on how the terms of the contract can be defined to
create a win/win situation between employer and employee.
Another way of making the argument for an employment contract is to ask
if the company is public or intends to go public in the future. Once
public, there is always the possibility of that company being acquired.
Once a company is in play, a public company must be careful about carving
out special employment considerations for the top management team. There
would be risks of shareholder law suits. The best way to avoid this
problem is to develop a contract now, far in advance of the event.
We advise our clients to stress that the purpose of the contract is not
adversarial. The purpose of the contract is to create a defined set of
win/win conditions for both sides. We recommend frequent use of the “win/win”
mantra as a way of setting-up the proper climate for discussions. Most
employment contracts at the senor level tend to be organized around the
following themes:
Job Description
This section spells out the scope of the employee's responsibility to
the company, including title. It is a good idea for the company to clearly
spell out what binding contracts the employee can enter into on behalf of
the enterprise without consulting with higher authorities. Such a clause
protects both parties in the event of future problems.
Outside Commitments
You should seek to get clarity regarding the company's position on
engaging in outside activities (e.g., serving on profit and nonprofit
boards, running for election). Clarity over these issues now will avoid
harsh feelings later.
The National Association of Corporate Directors' guidelines on the
evaluation of chief executives recommends those chief executives officers
be permitted no more than one outside Board where the CEO can serve. It
feels that sitting on one outside Board helps provide the CEO with
perspective. It is, however, possible for a senior executive’s
efforts to be distracted by excessive Board participation.
Compensation
Properly designed, this section should strive for a win/win framework
between employee and employer. Key issues in this section include cash
compensation (salary, bonus) benefits (health plan, disability insurance,
retirement, etc.), and equity compensation (stock).
Stock
More and more companies are providing stock as an incentive to bring key
people into the organization. Stock is also being used more frequently as
a major component of the total cash compensation picture. In a public
company, disposing of the stock is a relatively straightforward matter.
Bruce McLaughlin of The Survey Group of Wakefield, however, asks how does
one dispose of stock in a privately held company? Who assigns value to the
shares? McLaughlin argues that it makes sense to be specific regarding
buy/sell agreements regarding equity in private companies. Morreale and
Bruce-Abrams caution that grants of stock may place a financial burden on
the employee, when the stock to be transferred has significant value. The
tax consequences of stock transfer and who pays the tax should be thought
through in advance.
Supplementary Employee Retirement Programs (SERPS)
Morrill Koslow & Associates of Danvers designs SERPS for senior
executives in the financial and health care sectors. According to D. John
Gagnon of Morrill Koslow, SERPs “are common today as a way to provide
senior executives with reasonable retirement packages in light of the fact
that many qualified plans have compensation and benefit caps which limit
the amount of retirement income senior executives can receive.” If
you can, ask for a SERP program. Have an expert review with you the
security, vesting, and funding alternatives of SERP agreements. Watch Your
STEP. Some of our clients contemplate assignments in volatile situations.
Typical examples:
- What happens to me if the company is acquired?
- What happens to me if the company goes bankrupt?
- What happens to me if the owner suddenly dies and non-friendly
relatives of the family business take over?
David Isaacson of Waltham based First Financial Resources notes that
Section 419A (f) (6) of the Federal tax code allow companies to establish
a severance trust executive program. This Trust would be protected from
creditors; payment is tax deductible and growth is tax deferred. A Section
419A trust is a welfare benefit plan. It provides benefits in the event of
dismissal for reasons other than cause, involuntary termination of
employment, disability, or death. It is structured as a Multiple Employer
Trust, which allows for prefunding through employer contributions on a tax
deductible basis. Isaacson also counsels corporations on setting up SERPs.
Indemnification
. Indemnification refers to compensation of the executive for legal
expenses associated with performance on the job. Unless specified in the
employment contract, you want to ask that indemnification would survive
the end of the termination agreement. Mike Mooney argues that it is
possible for you to be sued for a corporate action ten years after the
action has taken place. Don’t accept the assurance that
indemnification issues are spelled out in the corporate bylaws. Those
governance terms can easily be amended by future Boards once you are no
longer with the company. You have a stronger position, if the
indemnification provisions are spelled out in the contract. Protection of
Intellectual Property This section is for the benefit of the employer
only. It includes discussions about non-competition, trade secret
protection, solicitation of current or former customers and employees.
Termination
When does the employment contract terminate? If there is no provision
for rolling terms, then you may need to renegotiate the entire package at
the end of the term. That negotiation is not conducive to positive
relations between you and the Board. Go for rolling terms. When does your
employment terminate and how? Attorney Chip Morse, Jr. of Morse,
Barnes-Brown Pendelton,P.C. of Waltham argues that this section may be the
most important part of the entire agreement. The interests of both parties
are clearly in conflict. Morreale and Bruce-Abrams caution the parties to
keep in mind the ultimate purpose of this section:
Employers want to (1) obtain adequate notice from employees who desire
to leave (2) maintain flexibility to remove employees (3) avoid an
employment contract which locks them in to keeping an employee they would
rather not have.
Employees want to obtain protection against financial hardship resulting
from unanticipated interruptions in compensation.
Severance pay arrangements need to be spelled out in the document. Key
issues will revolve around (1) how much notice an employee must provide,
should the employee seek to terminate the contract and (2) how much notice
the company provides in the event it decides to terminate employment. And
would those arrangements differ if the decision is for cause or for the
convenience of the company?
You would want termination to be based on a “supermajority”
vote of the Board....66%. You would feel bad if your termination was based
on the vote of only one Board member.
You want the termination benefits spelled out in advance. These options
should include your right to select your own retained search consulting firm.
It is, after all, your career. You should decide who is the best counselor
for you.
How Binding?
David Ellis of Boston’s Foley Hoag & Eliot suggests that you
ask for the contract to be binding on “successors and assignees.”
In the absence of such a clause, you may have to renegotiate the entire
contract or accept employment-at-will status if your company is acquired.
Who Pays
In most cases, both parties can structure a win/win contract. It is
prudent, however, to consult with a legal advisor. Look for someone with
(1) experiences in negotiating such contracts for both side (2) who
understands your industry (3) and who has dealt with executives at your
level. Assuming no major problems, you can obtain from the attorney an
expectation of the range of professional fees involved. You can ask that
these attorney fees be reimbursed to you by the company as part of the
employment contract.
Laurence J. Stybel and Maryanne Peabody are co-founders of Stybel
Peabody Lincolnshire, a corporate-sponsored retained search consulting firm
based in Boston. Its focus is senior level professionals. Their website is
called THE BOARD LEVEL CAREER
RESOURCE CENTER and can be found at HTTP://WWW.CAREERLINC.COM. They
may be contacted at stybel@aol.com or
781/736-0900
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