Key Takeaways

  • An executive contract includes detailed terms like compensation, duties, severance, and termination provisions.
  • Restrictive covenants such as non-compete, non-solicitation, and confidentiality clauses are common in executive contracts.
  • The contract should clarify post-termination rights, dispute resolution methods, and potential clawback clauses.
  • Negotiation of executive contracts is critical to balance employer protection and executive autonomy.
  • Severance packages, misconduct provisions, and termination for cause vs. without cause are key areas requiring clear terms.

An executive contract can spell out any number of things for those people who serve in an executive capacity within a company; typically as a senior-level employee, such as a Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Marketing Officer, and the like. The challenge is that an executive may want the contract, but the company does not.

Many companies do not like to have executive contracts in place, in fact, sometimes, they even refuse to have them. The reason as to why so many companies (specifically, the board of directors) do not want to create executive agreements essentially comes down to control: the company wants to be in control of their relationships, and by putting something in writing and essentially creating a legal document that can be enforced, they are giving up a certain amount of control. The fewer promises or assurances that are provided, in writing, the better, as far as the board of directors is often concerned. 

Another reason as to why many companies do not like to instill executive contracts is due to not wanting to deal with the negotiation process. Many companies may be highly adept at, and familiar with negotiating commercial or business contracts, but negotiating an executive contract is far more personal.

From the standpoint of the executives, however, executive contracts are important to ensure that their expectations are being met, as well as those of the company, while also defining certain entitlements, such as bonuses and stock options. Some of the expectations that an executive may want spelled out in an executive contract, may include:

  1. Power or authority they have regarding the company and other employees
  2. Resources needed to do their job (for example, the ability to hire an administrative or executive assistant)
  3. Performance-based incentives, such as bonuses

Many executives will also want their executive contract structured in such a way that the company is expected to shoulder some of the burden of responsibility, should the employment not work out long-term.

The Basics of an Executive Agreement

While there are any number of things that an executive agreement may include, the primary points are:

  1. How the executive is to be compensated. Basically, what their salary is to be, what the payroll schedule is, whether or not there is any type of commission involved, etc.
  2. Policy regarding the reimbursement of out-of-pocket expenses. For example, if the executive goes on a out-of-town business trip, does the company only pay for coach airfare, are there restrictions as to how much a hotel room may cost, etc. Additionally, it should include information regarding the repayment process.
  3. Specific job responsibilities of the executive
  4. Any information regarding non-disclosure agreements or non-compete clauses.
  5. Information regarding fringe benefits, such as health insurance and paid vacation time.
  6. Details regarding any probationary period within the employment.

Additionally, even though your executive is probably being paid over minimum wage, it is customary to include information regarding your state’s minimum wage and overtime laws in the contract.

Common Clauses in Executive Contracts

An executive contract typically includes more expansive and tailored terms than standard employment agreements. Common clauses found in these contracts include:

  • Duties and responsibilities: Clearly outlines the executive’s scope of authority and expected deliverables.
  • Executive compensation: Covers base salary, bonuses, incentives, stock options, and other performance-based rewards.
  • Fringe benefits: Details healthcare, retirement contributions, paid time off, and other perks.
  • Term of employment: Specifies the contract’s duration, renewal conditions, and review periods.
  • Termination provisions: Defines conditions for termination with or without cause, notice requirements, and termination procedures.
  • Severance terms: States the amount, eligibility, and payout structure for severance packages.
  • Restrictive covenants: May include non-compete, non-solicitation, and confidentiality obligations that apply during and after employment.
  • Dispute resolution: Identifies arbitration or mediation as preferred methods for resolving disagreements.
  • Clawback provisions: Allows the company to reclaim bonuses or incentives under certain conditions, such as misconduct or financial restatements.

Benefits to the Company

While often avoided by employers, there are a number of benefits to the company to utilize an executive contract, including:

  1. Demonstrating to the potential executive that you are committed to their success and meeting their needs. This is far more important than many companies realize, as employees want to trust the companies for which they work. By having an executive contract in place, as the company, you are providing assurances to the executive that you are wanting to act in their best interest.
  2. It ensures that the company and the executive are on the same page, regarding expectations around job performance and the company’s return on investment.
  3. It can ensure that all of the members of the board of directors are on the same page regarding their expectations of the executive-level positions within the company, as it will all be spelled out in a written document.

Legal Considerations and Risk Management

An executive contract serves not just as an employment agreement but as a risk management tool for the company. Legal considerations include:

  • Compliance with employment laws: Ensuring the contract aligns with federal, state, and local employment regulations.
  • Avoiding overly broad restrictive covenants: Courts may strike down unreasonable non-compete or non-solicitation clauses.
  • Protecting trade secrets: Confidentiality provisions must be clearly drafted to withstand legal challenges.
  • Clear “cause” definitions: The contract should specify what constitutes termination for cause to avoid wrongful termination claims.
  • Notice requirements: Both parties should understand the process and timeline for resignation or termination.

A well-drafted executive contract reduces litigation risk and provides a clear roadmap for the employment relationship.

Severance Pay and Packages

Another key point in the executive contract is the issue of severance pay, and by creating an executive contract this can be addressed, and both the company and the executive can be in agreement as to the terms. Some of the terms may include:

  1. The amount of the severance package
  2. Whether or not the severance is based upon length of employment, and if so, the formula used to determine the amount of payment
  3. How the severance is paid out
  4. Any reasons under which the severance package may not be paid, such as illegal activity on the part of the executive

Post-Termination Rights and Restrictions

Executive contracts often extend obligations beyond employment termination. Common post-termination provisions include:

  • Non-compete clauses: Restrict the executive from working with competitors for a specified time and geographic area.
  • Non-solicitation agreements: Prevent solicitation of former colleagues or clients for a set period.
  • Non-disparagement clauses: Prohibit public criticism of the company after departure.
  • Confidentiality obligations: Require executives to maintain confidentiality of proprietary information indefinitely or for a defined period.

Executives should negotiate these clauses carefully to avoid unnecessarily limiting their career opportunities post-employment.

Frequently Asked Questions

  1. What is typically included in an executive contract?
    An executive contract usually includes compensation, duties, severance, restrictive covenants, termination clauses, and dispute resolution terms.
  2. What are restrictive covenants in an executive contract?
    Restrictive covenants limit the executive’s actions post-employment, such as non-compete, non-solicitation, and confidentiality obligations.
  3. How is severance determined in an executive contract?
    Severance terms are negotiated upfront and may depend on factors like tenure, reason for termination, and contractual formulas.
  4. Can an executive contract be terminated without cause?
    Yes, but the contract will outline notice requirements, severance eligibility, and any penalties or conditions for such termination.
  5. Why do companies include clawback clauses in executive contracts?
    Clawback provisions allow companies to recover bonuses or incentives if the executive commits misconduct or if financial results were misstated.

If you need help with an executive contract, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.