Employment Law Attorneys

Executive Compensation It’s All In the Four Corners of The Contract

The golden rule of executive contracts mandates, if “it” isn’t in the four corners of the agreement-you lose, and no court of competent jurisdiction will rewrite the agreement for you. Now the “it” can refer to just about anything the executive or the company wanted to include in the contract, but never made it past the final execution of the agreement. For the executive, “it” can include a vital change-in-control provision with a 2x or 3x payout. The absence of such a provision can mean an instantaneous cashless exit out the side hatch in the face of a merger/consolidation or reorganization from bankruptcy.

If and when you face another contract negotiation, do your due diligence and review every aspect of the proposed employment agreement. Once you are familiar with the “first proposed draft”, then determine what the company is “not” offering. I say “first draft,” because no agreement is ever ratified based on the initial proposal. A somewhat recent trend indicates that companies are offering broad based boilerplate agreements. These agreements merely convey salary, bonus and long-term compensation, but do not include provisions for severance, change-in-control and protective “for cause” and “for good reason” definitions. You need to have a solid understanding of the various provisions that are used in executive agreements, if not-call the pros.

For our purposes here, lets assume you just received an offer from a publicly traded company. Your first stop on the due diligence tour is to hunker down with the public documents filed by the company at the SEC (SEC.gov). You need to pull out every single benefit and compensation plan the company administers for senior level executives. By the way, these plans are often amended periodically, so give yourself at least several hours to cull through the SEC files. Next, obtain recent employment and severance agreements that the company has previously entered into with key executives. These agreements contain language you may need to include in your agreement. If you do not see similarities between your agreement and those you find, the company may not value your position as much as other executives. Certainly, the golden hello is not so golden.

Your next stop is to determine what you are really worth as a human capital commodity. Yes, there is a price on your executive head. Weather you are a small or large market cap company executive, your position has a compensation price tag. You will need to conduct an extensive multivariable compensation comparison within your industry. This information is publicly available through proxy statements filed with the SEC. However, many vendor companies also provide the raw data, without analysis and for a fee. Remember, similar comparables do not necessarily have the same industry classification. Once you have determined the relative range of compensation amongst the peer group, write your “numbers” into the agreement. Strike out the low base rate, and insert the competitive base pay rate you think you are worth. If you do not ask, then you shall not receive. Do not be timid because of some excuse based on the economy or company financial news. If you are, then you have directly undervalued yourself to the company.

Now that you have all the requisite information, you can then go about the process of drafting your proposed modifications. You want to include every provision (those “it”‘s) you believe you require in order to be safely employed by the company. Remember, you may have to fall on your sword on a few items, but following this process will ensure you do not miss a critical element of the agreement. Finally, remember to incorporate other compensation agreements you will be entering into by reference, as if fully set forth therein.