An Executive Compensation Agreement is an agreement between a company and a potential executive whom the company would like to hire for employment. These agreements lay out the terms of an executive’s employment, including but not limited to provisions covering the executive’s compensation, including a bonus structure, scope of employment, grounds for termination, and severance package available upon termination. Specifically, when drafting an Executive Compensation Agreement, be sure to include the following provisions:
1. Opening Recitals. Be sure to first include the date of the agreement, the name of the company and the executive (and any abbreviations of the names that will be used throughout), the address of the company’s headquarters, and general purpose for the agreement. This recital can be as simple as: “Company and Executive are forming this agreement for executive to provide company with services as __________”, and list the title of the position.
2. Terms and Conditions. The first few provisions should lay out the terms and conditions of the agreement. This should include the title of the position. It should also include the length of the term of employment, and whether or not the term is renewable by either party or upon mutual consent.
3. Scope of Duties. The scope of the executive’s duties and the expectations of the company should be laid out in detail. In exchange for compensation, what is the executive being hired to do? Will he be required or expected to meet certain financial goals? How many employees will he be managing? These questions should be answered in detail. If describing these duties takes up several pages, it may be advisable to create an attachment and refer to it in the agreement. If this is the case, the provision could read: “In consideration of receiving compensation, executive agrees to perform the position, duties and office outlined in Attachment A.”
4. Compensation and Benefits. The executive’s compensation and benefits package should also be covered in detail. This should include annual salary, bonus opportunities for achieving certain goals, and stocks and stock options. His benefits package should be covered, listing his vacation time, health benefits, travel reimbursement, 401(k), pension (if applicable), disability pay, etc. Again, if the drafter prefers, he or she may want to draw up this information on a separate document, attach it to the agreement, and simply refer to the attachment.
5. Termination. Usually an executive is subject to termination under certain circumstances or upon certain events. These grounds for termination must be described in this provision. There are several scenarios that may be in play:
a. If the executive is to remain an “at-will” employee, then management can terminate the executive’s employment at any time, for any reason. If this is the case, the executive should be able to do the same.
b. In the alternative, the company may be allowed to fire the executive for any reason, but must provide the executive certain notice, usually in writing. An executive may be able to negotiate for as much as twelve (12) months written notice. Again, here the executive might be required to do the same.
c. Alternatively, the company may only be allowed to terminate the executive for “good cause”. If so, the term “good cause” must be defined. Usually good cause is defined as the failure to achieve modest financial targets or if the executive commits a bad act against the company, such as theft, or violates his fiduciary duty, duty of loyalty, or duty of confidentiality.
These are the most critical provisions that must be addressed in an Executive Employment Agreement. Provisions covering compensation upon termination, covenants regarding inventions and copyrights, protection of confidential information, covenant not to compete, severability, and governing law should also be included. For more information or to read actual clauses from Executive Employment Agreements, please visit the agreement section of this website.
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