Companies Gain the Upper Hand In Today's Executive Contracts
Published: Mar 10, 2009
You've been asked to relocate from California to Michigan to take a director-level job to help with a restructuring. You'd like an employment contract that guarantees tenure and severance pay but you're told the company doesn't provide such contracts. Instead, you're asked to sign an agreement saying you won't work for a competitor or hire away any employees for two years after you leave.
Scenarios like this are becoming more common. "It's very rare to see employers willing to give [severance] contracts, except at the very top level and where they need just the right person for a specific position," says Mike Freccero, Western region managing director of Spherion Inc.'s Human Capital Consulting Group, which does executive coaching and outplacement. "General managers, finance and human-resources people are at the whim of employers. That's a big change from a couple of years ago."
Executive Employment Contracts
Traditional employment pacts offering income and employment protection are being offered only to select senior executives. The agreements also state what both parties can expect of each other, says New York employment attorney Robert Benowitz of Rick, Steiner, Fell & Benowitz LLP.
He recommends that agreements "provide a great deal of specificity," including provisions stating:
- a specific term of employment,
- description of duties and responsibilities,
- budgetary authority,
- reporting and staffing responsibilities,
- bonus arrangements, and
- the frequency and methodology for determining increases, promotions, office location and travel expectations.
Contracts also should cover procedures for resolving disputes and describing directors' and officers' insurance coverage and corporate indemnification from liability, says Mr. Benowitz. Termination and severance provisions should spell out conditions under which executives can be terminated. Without them, you may be an employee "at will" and subject to termination at any time with or without cause.
If you can't get it all, choose your priorities, says Laurence Stybel of Stybel Peabody Associates, a Boston-based career-consulting firm. He recommends seeking indemnification in the event of a lawsuit. "You can be sued for actions you took as an executive of a company not only while you're there, but three years after you leave," he says. In that case, "who's going to pay those legal fees?"
Another priority: severance provisions in case you're terminated. As a rule, senior U.S. executives typically receive one month of pay per year of employment as severance, says Geoffrey Boole, executive vice president for career-transition services at Right Management Consultants. At the director level, severance is likely to end after six months. Senior managers also should request financial-planning assistance during the severance period, says Mr. Boole, while most executives can negotiate continuing health-insurance benefits. Other perks to request include keeping the company car and club memberships while you're collecting severance pay.
Discuss what the company will pay you if it's acquired or has a change of control, particularly if you help implement those changes. "You want to get a good idea of the company's exit strategy," says Dr. Stybel. "If the strategy is to grow the business and then be acquired, you have to anticipate being out of a job if you succeed."
Employers prefer contracts to be general, but executives should seek specificity, says Loren Allison, an employment attorney in Ft. Wayne, Ind. "I don't want you determining that I can be terminated," he says. "I want it determined that I can be terminated if I don't follow Policy No. 5." He notes that most companies have policy handbooks which often serve as de facto contracts but "which they sometimes don't follow." Executives should learn what's in the handbooks, he says.
Noncompetition and Confidentiality Agreements
These pacts may restrain a departing employee from working for a competitor, disclosing information gained at the company, hiring company employees, or soliciting company customers for a certain period of time. Top sales and marketing executives often are asked to sign noncompetes, as well as employees in high-tech industries where intellectual property is a significant asset.
Court interpretations vary, and different state courts take differing positions on noncompetes. Some court systems are more willing than others to enforce the agreements. However, most courts are reluctant to enforce agreements that hinder someone's ability to make a living. Mr. Allison tells his corporate clients that noncompetition or nondisclosure agreements should be good for 12 to 18 months and cover a limited, well-defined geographic area. Nondisclosure pacts should be for truly confidential information, he says.
Noncompetes were once rare, then became commonplace, but companies didn't enforce them, says Dr. Stybel. Nowadays, companies enforce noncompetes and candidates often feel they need to sign them. "When everything else is negotiated, the person is apt to say, 'I don't want to screw this deal up' and just sign it," he says. "In most cases, it's probably the thing to do." He cautions executives to be sure they can live with the terms of such agreements.
Negotiating a Pact
Negotiations should be between you and your prospective boss, since he or she is "the one who's going to be paying for your services, the one who really wants you, the one who wants to make an exception," says Dr. Stybel.
The best time to negotiate is when you're desirable. Research a prospective employer to learn what's previously been offered. In fact, he adds, "if you're a senior executive and this is important to you, have your lawyer do research for you."
If an employer won't agree to severance or indemnification terms, ask for nonmonetary rewards, such as liberal health and disability-insurance benefits or outplacement services for as long as needed after termination. If you're asked to sign a highly restrictive noncompetition contract, "it's probably not enforceable in many states," says Dr. Stybel. "Your choice is to shut up and think, 'Thank God they've got a dumb attorney,' or say, 'Let's sit down and carve out something the courts can enforce and I can live with.' "
Brookfield, Wis., executive recruiter Jude Werra says having a good employment attorney is a wise investment. He or she should be a legal coach, not a litigator. The lawyer is likely to stay in the background, but it's sometimes wise to let him or her make your requests, says Mr. Benowitz. "Assuming you get the position, you have to live with the people," he says. "Lawyers can say things that their clients can't and can take the blame for raising the points the clients want them to raise."
A lawyer also can help with issues that arise later. "Say the division you're with will be sold, and they want you to stay through the sale. What [questions] do you want to ask? You'll want that good advice before you create an adversarial situation," says Mr. Werra.
Below the vice-president level, you'll probably receive a letter describing the terms of employment, which you'll be expected to countersign, says Mr. Benowitz. The letter is likely to say you're an employee at will and can be terminated at any time for any or no reason (subject to antidiscrimination laws) and that your employment will be governed by the terms of the employee handbook. It's sometimes possible to negotiate a severance agreement or include a provision in the letter stating that termination can only be upon notice and for cause, he says.
If you're presented with a severance and noncompete agreement, try to make their terms concurrent, says Mr. Benowitz. If your noncompetition term is a year, ask for a year's severance. It benefits both sides, as the agreement may allow the company to withhold payments if you breach its terms.
Should You Walk Away?
It's possible that you may not be able to strike a fair deal. In that case, you may have to walk away. When a California company recruited one of Mr. Benowitz's clients as president but refused to give him an employment agreement, "we advised him to walk away if he didn't get a two-year term," the lawyer says. "When you're relocating your life and family and incurring relocation expenses, it's reasonable to expect some kind of guarantee." But the executive's wife took a job in the area, so he accepted the offer against the lawyer's advice.
Dr. Stybel sees negotiating as a way to explore a company's culture. If you make a few discreet, respectful suggestions but the employer doesn't budge, "the reaction tells you about the company and its values," he says. "It's not a reason to turn a job down, but it's a diagnostic tool. There's often a tremendous gulf between what is espoused in a job interview and what happens when you show up for work Monday."
He suggests not signing anything unless you're comfortable. "As a practical matter, you can't go back. If you're hired because of your decision-making ability and then try to renegotiate, you may as well pack up."