6 Tips to a Better Employment Contract
- Jan 18, 2008
I recently received an e-mail from a CEO who was unceremoniously “asked” to resign by his board of directors. He asked me to author a piece on the value of employment agreements in hope of preventing other CEOs from unnecessarily subjecting themselves to a forced resignation scenario. So, in this week’s column I’ll outline a few items meant to help you protect your career longevity. At the senior executive level jobs are both harder to come by and harder to keep. There is simply more at risk by the time you reach the C-suite than at any other point in your career. Yet I never cease to be amazed at the number of executives that place themselves in jeopardy by operating without the benefit of a solid employment contract. In my opinion there is absolutely no reason to assume the duties, responsibilities and obligations that go hand-in-hand with an executive position unless you understand what you’re playing for, as well as what the ground rules are. The funny thing is, at no time is it easier to secure an employment contract then when you are in the greatest demand…before you begin work. There is no argument that every individual position certainly warrants terms and conditions that apply to the context and nature of the specific position at hand. That being said, at a minimum, you should attempt to insure that your employment contract includes the following provisions: 1. Job Description: Never accept a position unless a clearly defined job description has been incorporated into your employment contract. Roles, responsibilities, delegation of authority, reporting lines, performance expectations, etc., should all be outlined in great specificity. If you’re the CEO and you don’t ask for a board seat then shame on you. This is your chance to nail down the operating parameters under which you’ll be judged, so err on the side of removing any ambiguity that does not favor your position. 2. Term: Make sure and set yourself up for success, and not failure, by giving yourself enough runway to get the job done. The bigger the challenge, and the more that is at stake, the longer you’ll need to get the job done. I wouldn’t accept a C-level position without a minimum of a two year, non-cancellable agreement in place. Moreover, in many situations a 3 – 5 year agreement would not be overreaching. 3. Compensation: Be sure that your employment agreement clearly spells out fixed and variable compensation, as well as any executive perquisites. It is usually the subtle nuances of compensation that are not well defined. Therefore, whether it is the accrual of PTO, the terms of a sabbatical, bonus hurdles, vesting schedules, relocation constraints, strike prices, etc., you need to be very specific. The best rule of thumb is to consider anything not in writing as being non-existent. 4. Indemnification: In today’s litigious and compliance oriented world it is critical that the company indemnify you against reasonable risks that you assume in the performance of your duties. Among other things you should seek a hold harmless provision against all judgments, fines, penalties, and any amounts paid in settlements in connection with any threatened, pending or completed action to which you might be named by reason of your employment. Additionally, you should require the company to defend you in such actions while maintaining your right to provide for your own defense if you believe it is in your best interests. Lastly, don’t forget to have the company maintain E&O, or professional liability insurance on your behalf if it is available. 5. Termination: It is likely that your tenure will come to an end at some point in the future, so it is important to have a clear understanding of all aspects surrounding termination. Make it a point to clearly define what constitutes termination for cause vs. termination for non-cause, as well as any compensatory items relating thereto. Make sure that there is absolute clarity in regard to what constitutes a default or breach of your contract. In that vein, you should not only provide for reasonable notice provisions, but also for a lengthy right to cure provision in the event of an alleged notice of default or breach. Remember that the key to avoiding early termination is to make it less expensive for the company to let your contract expire, than to pony-up for termination penalties, break-up fees, golden parachutes or liquidated damages. 6. Winding Up Provisions: If and when your contract eventually comes to an end, make sure to have clearly delineated winding-up provisions in place in your agreement. These provisions should include (unless prohibited by law or regulation) a gag provision on the circumstances surrounding your termination. The gag provision should contain a non-slander provision, and provide for a positive reference. Additionally, no external media announcements about your termination should occur without your prior consent and approval. Lastly, some form of transition should be provided for as well. These options could include a short-term consulting assignment, an entrepreneur in residence provision, and/or a year of outplacement services. Bottom line: Pay attention to your future going into a new position and when the inevitable occurs, you’ll have few regrets on the back side.